THE BLOG

Universal Credit's Future Depends on Whether It's the Economics or the Politics That Comes First for the Treasury

04/12/2015 13:41 GMT | Updated 04/12/2016 10:12 GMT

Incentives matter. That was one of the central assumptions behind the creation of Universal Credit.

As well as creating a simpler benefits system (a good thing in and of itself), the purpose of the new benefit is to drive up employment by providing a clearer financial incentive to enter and progress in work.

But incentives matter for government departments deciding on policy, not just for people deciding on work. And behind the scenes something big changed on those incentives last week when it comes to the Treasury and the roll-out of Universal Credit (UC).

It's old news that the Treasury is sceptical about UC. That's partly because it doesn't quite share the faith in the transformation it will bring. But it's mainly because it can count.

From its inception UC has brought with it a serious price tag. The new benefit, once fully in place, was set to be £2.3billion more expensive than the six benefits it replaced. Indeed versions of the policy early in the last Parliament were even more expensive. This was based on both expected higher take-up of a simpler benefit and the fact that it was more generous to some groups - particularly low income working couples with children.

Every time the Treasury was looking at a roll-out plan for Universal Credit what it saw wasn't the success of a benefit reform being delivered, but a bill for the hit to the public finances that came with it. That bill was the equivalent of an extra £300 a year in benefit spend on average for each household eventually claiming UC. It was also concerned about the political risks of anything so reliant on a new IT infrastructure. Anyone involved in the early 2000s expansion of tax credits would be.

So the Treasury had both financial and political incentives for slow, almost glacial, progress in the last parliament as they chipped away at reducing that cost. This is not unrelated to that fact that today Universal Credit hardly exists in the real world. In 2015-16, 4.5million households were meant to be receiving it. But in reality only 140,000 people - mostly singles without children - are currently on it, despite expectations that UC will be operational (for simple cases at least) in all Jobcentres by April next year. The fact that it exists at all is a testament to the perseverance of Iain-Duncan Smith, the Secretary of State for Work and Pensions, and to the fact that there are some big policy attractions from implementation.

But after last week's Autumn Statement something big, and unexpected, has now changed in the Treasury's incentives regarding UC. For the first time the balance has tipped and putting UC into place will actually save the Treasury money, over £2billion a year once fully in place. That's equivalent to around £400 per household eventually claiming UC on average (though that loss is driven by both reduced generosity and a smaller number entitled to any UC at all).

This is largely a side-effect of the decision to reverse planned cuts to tax credits, but press ahead with very similar cuts to UC. New OBR figures published earlier today shed more light on the expected savings from reversing tax credit cuts but going ahead with the £3bn cut to UC associated with reducing the income level at which those entering work start to lose some of their benefits. A succession of smaller cuts, such as those affecting the self-employed on which expect more from us shortly, have also built up.

The move to UC was always a complicated picture, with some people better off and others worse off. That picture remains complicated, but the average impact has firmly moved to being a net positive for the public finances.

You might think this fiscal saving meant that the Treasury would now be whole heartedly supportive of UC. But the incentives are actually much more complicated than that. All of the previous political worries about UC remain, but they have been compounded by the Autumn Statement. Now rolling it out involves making real the losers from the (Treasury's) decision to push ahead with cuts to UC, while having changed course on tax credits, not just presiding over a potential IT calamity. And it involves doing so in the run up to a Conservative Party leadership election and then general election.

It's worth noting that transitional protections are in place for households being transferred onto UC, so as to avoid overnight cash losses. But as today's OBR figures confirm, transitional protection will have almost no impact on these losses during the course of this Parliament - providing just £200m protection for the fact that £3bn has been cut from UC (with the tax credit cuts now-reversed). That's because new claimants - and existing ones whose circumstances change - will not be protected and instead be considerably worse off (up to £3,000 a year in some cases).

All taken together that means that the economic and political incentives for the Treasury on UC are now pointing in totally opposite directions - which one dominates the Treasury's thinking will probably determine the future of Universal Credit.