Universal Credit in Northern Ireland: what will its impact be, and what are the challenges?
Citation:
James Browne and Barra Roantree, Universal Credit in Northern Ireland: what will its impact be, and what are the challenges?, IFS Report, R77, Institute for Fiscal Studies, March, 2013, 1 - 74Download Item:
Abstract:
This is the first of two reports examining welfare reform and poverty in
Northern Ireland, funded through a research call from OFMdFM in their remit
as the department with policy responsibility for equality and social need in
Northern Ireland. A subsequent report will produce projections of poverty
rates for children and working age adults in Northern Ireland from 2010 to
2020 and investigate how these are affected by tax and benefit reforms,
particularly Universal Credit.
A major reform to the welfare and tax credit system, integrating six of the
seven main means-tested welfare benefits and in-work tax credits for those of
working age into a single programme, to be known as Universal Credit, is set
to be introduced throughout the UK. This represents a significant
simplification of the benefits system as a whole.
Universal Credit will lead to a small reduction in aggregate benefit
entitlements in both Northern Ireland and the UK as a whole. The total
reduction in benefit entitlement as a percentage of income in Northern
Ireland is slightly larger than in the UK as a whole. However, because
Universal Credit is a simpler scheme, it is anticipated that take-up of means-
tested support will increase as a result of its introduction, which in practice is
likely to lead to higher total expenditure on benefits, despite the small
reduction in entitlements.
Although benefit entitlements will fall very slightly overall in both Northern
Ireland and the UK as a whole, this disguises significant winners and losers
from the reform. In Northern Ireland, around 9% of families will gain and 9%
of families will lose from the introduction of Universal Credit, ignoring
transitional protection. Both of these figures are larger than in the UK as a
whole: as Northern Ireland is a relatively low-income part of the UK, more
people are entitled to means-tested support, and hence affected by reforms to
means-tested benefits.
The main losers from Universal Credit’s introduction will be: low-income
couples where one person is aged above the female State Pension Age (SPA)
and the other is aged below, who will no longer be entitled to the more
generous Pension Credit; families with significant amounts of unearned
income or capital, as these are treated more harshly in the Universal Credit
means test than in the means tests for tax credits; and those on Disability
Living Allowance claiming the severe disability premium in means-tested
benefits, which will be abolished when Universal Credit is introduced. As
receipt of Disability Living Allowance is higher in Northern Ireland than in the
UK as a whole, this partly explains the slightly larger reduction in benefit
entitlements in Northern Ireland.
The main winners from the introduction of Universal Credit will be single-
earner couples with children. This group will gain more from the introduction
of Universal Credit in Northern Ireland than in the UK as a whole, mainly
because gains are focused on those with lower incomes and incomes are
lower on average in Northern Ireland.
By increasing support for single-earner couples while reducing support for
workless families on average, Universal Credit will strengthen the incentive
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for one member of a couple to do paid work rather than none. Universal
Credit also strengthens work incentives for single people without children. However, because means-tested support is withdrawn more quickly when the
second member of a couple enters work under Universal Credit, the reform
weakens the incentive for both members of a couple to be in paid work rather
than just one. This effect is particularly acute in Northern Ireland, as lower
average earnings levels mean that a greater proportion of single-earner
couples are entitled to means-tested support, meaning that those not in paid
work who have a partner in paid work are more likely to face withdrawal of
Universal Credit if they were to enter paid work.
By replacing a jumble of overlapping means tests with a single one, Universal
Credit will go some way to ensuring overall effective tax rates cannot rise too
high. Thus, some those who face the weakest incentives to increase their
earnings under the current system will see their incentives strengthened.
However, those previously not entitled to means-tested support who will
become entitled to Universal Credit (mainly single-earners in couples with
children) and those in two-earner couples tend to see weaker incentives to
earn more.
Two of the main advantages of Universal Credit, then, are that it simplifies the
benefits system and rationalises work incentives. However, these benefits
could be undermined by the decision to leave support for local taxes (Council
Tax in Great Britain and domestic rates in Northern Ireland) outside
Universal Credit. As domestic rates in Northern Ireland are lower on average
than Council Tax in Great Britain, support for local taxation is a
correspondingly smaller component of the overall benefit system in Northern
Ireland, and so this issue is less important in Northern Ireland than in the rest
of the UK. Nevertheless, keeping support for domestic rates separate from
Universal Credit will definitely make the overall benefits system more
complicated than it could be, and could lead to the reintroduction of the very
high overall withdrawal rates that Universal Credit was supposed to
eliminate. How much this happens in practice will depend on decisions made
by the Northern Ireland Executive surrounding the design of the proposed
rate rebate replacement scheme.
The introduction of Universal Credit also raises issues around the
administration of rate rebates. Currently, more than 70% of claimants of the
rates component of Housing Benefit are ‘passported’ to a full rebate through
receipt of other benefits that are being abolished when Universal Credit is
introduced. There is no obvious alternative passport in Universal Credit that
could be used to identify these people, and if they all had to go through a full
means test to receive support, the burden on both claimants and
administrators would increase substantially. Ways around this problem
include merging the administration of Universal Credit and rate rebates,
allowing claimants to claim both with the same form, or transferring
information on Universal Credit claims to the appropriate authority
responsible for the administration for rate rebates so that claimants would
not have to submit the same information twice.
Similar issues arise around other non-social security benefits that use a
passport based on receipt of other benefits to identify who is eligible. The
introduction of Universal Credit offers an opportunity for the Northern
Ireland Executive to consider the rationale for providing benefits in kind
rather than in cash and, if these benefits should continue to be provided,
whether their provision should be means tested or offered universally. For
those benefits that it was decided to retain as means-tested benefits in kind,
the most obvious solution would be to give these benefits only to families
with incomes below a certain threshold. This would, however, create ‘cliff
edges’ that would make some people worse off after a pay rise. A longer-term
solution would be to allow claimants to choose which benefits in kind they
wish to receive, and make a deduction against that claimant’s Universal Credit
award which would depend on their income. This would be more
administratively complex, but would avoid the ‘cliff edges’ inherent in
alternative approaches.
In short, the UK Government and Northern Ireland Executive have taken a
welcome big and radical step forward by proposing the introduction of
Universal Credit. But many of the advantages it will bring could be
undermined by the decision to keep support for local taxes separate from
Universal Credit. Decisions to be made by the Northern Ireland Executive
around the design of a rate rebate replacement scheme and other non-social
security benefits will therefore be crucial in determining the extent to which
these benefits are realised.
Author's Homepage:
http://people.tcd.ie/broantreDescription:
PUBLISHED
Author: Roantree, Barra
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Institute for Fiscal StudiesType of material:
ReportCollections
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IFS Report;Availability:
Full text availableSubject (TCD):
Inclusive SocietyDOI:
https://doi.org/10.1920/re.ifs.2013.0077ISSN:
978-1-909463-05-9Metadata
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