The key driver of the welfare reforms introduced since 2010 was that work is one of the surest routes out of poverty. Not only does it provide an income, it is also proven to improve people’s self-esteem, and their physical and mental health. Long-term worklessness drives poverty in the United Kingdom, furthermore, staying out of work for a long time has been found to cause increased difficulties for individuals getting back into work. Moreover, a child in a workless household is almost three times as likely to be in poverty as a child living in a family where at least one adult works.
The welfare reform programme has hugely contributed to the success at enabling more people into employment (the Bank of England Monetary Policy Committee acknowledged this connection in 2014).As a result, the unemployment rate has fallen to 4.9 per cent, the lowest it has been for 11 years, and 11 per cent of children are growing up in workless households, compared with 19.8 per cent when records began 20 years ago.
The Prime Minister has been right to highlight the importance of supporting those who are just about managing. Those in relatively low-paid work, but with little job security. People who have felt the squeeze, year on year from weak income growth and rising costs, in areas such as childcare, housing and utilities.
Universal Credit is, I believe, the best way to deliver on that pledge. Universal Credit, which is steadily rolling out across the country, combines six welfare programmes – income-based JSA, income-based Employment Support Allowance, Income Support, Child Tax Credit, Working Tax Credits and Housing Benefit – into one benefit. Strong work allowances and a simple taper were always a fundamental part of the design, and the evidence so far shows that it is working as more people move into work faster. They also stay in work longer and earn more. A Department for Work and Pensions study, supported by independently reviewed data from the IFS, found that Universal Credit claimants when compared with JSA claimants were, in the first nine months of their claim:
The same report showed that UC will boost employment by 300,000, in large part because of the work incentive it provides.
At present, the 2016 Budget’s plan to reduce UC work allowances will not be the most effective way of controlling welfare expenditure and, moreover, it goes against the key principles. The planned reduction will affect more than three million people, reducing their income by an average of over £1,000 per year. This will reduce people’s incentive to move into work. Moreover, in November 2015 the previous Chancellor decided to reverse the reduction in working tax credits, increasing the pressure on UC as it created an artificial disincentive to move to UC from Tax Credits.
Whilst accepting that the Government needs to continue to control costs and reduce the deficit to put the country on a stable financial footing, this should be done in a way that gives people every opportunity to make the most of their potential. At the heart of this is the need to ensure that work always pays. I am not therefore arguing for just ‘more spending’ but wiser spending.
For example, the current Government policy is to increase the income tax personal allowance from £11,000 to £12,500. Estimates of the cost of doing so depend highly on the level of inflation and the speed with which the threshold is changed, but regardless it will be significantly more than what was saved from the UC work allowance cuts. The objective of raising the tax threshold was always to help the lowest paid by lifting them out of tax but that has become a limited outcome. In raising the income tax personal allowance, an estimated 72 to 75 per cent of the gains will be received by people in the top half of earners in this country, whereas some 70 per cent of the bottom five income deciles will be on UC. UC work allowances will go directly to people who are doing the right thing and trying to work, yet still struggling. Whereas as little as 25 pence of every £1 invested in increasing the income tax personal allowance will go to this group.
For someone who has been out of work for a while, work can seem a long way away from what they feel able to do. They need to be encouraged and supported to make this transition in a way that helps them stick in work. Moreover, those in relatively low-paid work need to receive appropriate support. This is precisely what UC is doing. The fact that the work coaches stay with the claimant as they go into work right up until they leave the benefit system through full time work, helping to guide them, complements the financial support available through the work allowances and the simpler taper.
I hope the Government will therefore consider what I propose and re-instate the work allowances to UC. Whilst this could cost up to £3.4 billion by 2022, this could be afforded by adjusting the planned increases in the income tax personal allowance or even by slowing down the planned increases, which should generate sufficient savings and better target the money.
The strengthening of UC work allowances is an extremely efficient way of supporting the people who need it most, and more than three million people would feel this change directly in their pocket. What is more, they would be rewarded for doing the right thing and working hard to provide for themselves and their families – a very Conservative principle.
Iain Duncan Smith is a former Secretary of State for Work and Pensions, founded the Centre for Social Justice, and is MP for Chingford and Woodford Green.
This article originally appeared on ConservativeHome.