Opposition Day Debate: A Motion relating to Universal Credit and Working Tax Credit

This briefing has been prepared in advance of an Opposition Day debate on the future of the currently temporary £20 a week uplift to Universal Credit (UC) and Working Tax Credit (WTC). The debate is due to take place on Monday 18 January 2021. The motion to be debated is as follows:

That this House believes that the Government should stop the planned cut in Universal Credit and Working Tax Credit in April and give certainty today to the six million families for whom it is worth an extra £1,000 a year.

An accompanying 14 January Labour Party press release notes:

Labour will force a vote in the House of Commons on Monday demanding that the Government scraps its planned cut to Universal Credit and Working Tax Credits that will see families lose over £1000 a year.

This follows the Prime Minister’s appearance at the Liaison Committee yesterday where he confirmed that he still intends to cut Universal Credit by £20 a week, or £1040 a year, for 6 million families in April. The cut is equivalent to the cost of an average family’s annual electricity, gas and internet bills combined.

Labour has repeatedly called for the Prime Minister to change course and provide certainty to millions of struggling families who face a triple blow of council tax hikes, frozen pay and a cut to Universal Credit.

Child Poverty Action Group have stated that the £20 uplift is essential to ensure “low-income families with children receive the support they need”. The Joseph Rowntree Foundation has warned that the cut could see another 200,000 children pushed into poverty.

This short briefing provides:

• Background on the uplift to UC and WTC
• Commentary on the impact uplift and the possibility of it being withdrawn in April
• Cost estimates
• Parliamentary materials
• Further reading

A full briefing on the issues relating to Universal Credit during the pandemic, including discussion of the uplift, can be found in Coronavirus: Universal Credit during the crisis, Commons Library Briefing Paper CBP-8999, 15 January 2021.

The accompanying Excel download contains the latest numbers of households and people on Universal Credit and families on Working Tax Credit in each constituency in Great Britain, sourced from the DWP and HMRC.

1. Background on the uplift to UC and WTC

On 20 March 2020, the Chancellor introduced the Coronavirus Job Retention Scheme and, at the same time, increased the level of some working-age, means-tested benefits:

• Universal Credit (UC)
• Working Tax Credit (WTC)
• Local Housing Allowance (LHA)

The announcement stipulated that the increases would apply “for the next 12 months.” The Secretary of State for Work and Pensions has also stressed “that the increase to working tax credits and universal credit is only temporary —until 12 months from when it was applied.”

This did not include any other benefits. There was no increase to income-based JSA or income-related ESA (or the contributory versions of JSA and ESA), extra-costs disability benefits such as Personal Independence Payment (PIP), or categorical benefits like Child Benefit. But people claiming these may also receive the benefits which have been increased.

UC standard allowances have been increased by £1,040 per year. The WTC basic element went up by £1,045 per year compared with the previously announced rates for 2020/21.

The LHA is used to calculate how much housing support people in the private rented sector can receive. The LHA had been frozen since 2016, but has now been set at the 30th percentile of market rent in each broad rental market area. The LHA caps for each category of accommodation have also been reset to the equivalent of the maximum outer London 30th percentile market rent with an added 20%.

Concluding its statutory annual review of benefit and State Pension rates, the Government announced that 2020/21 LHA rates will be maintained in cash terms, though they will not be uprated and no link with rental prices will be re-established. Decisions about the uplift to UC and WTC were separate from the statutory review and will be assessed in the new year, taking into account the “economic and health context.”

The announced rates of Universal Credit standard allowances and WTC basic element from April 2021 onwards are based on the original (pre-uplift) values for 2020/21, plus a 0.5% inflation-linked increase in line with the Consumer Prices Index (September 2020).

The announced rates for 2021/22 are between 14% and 34% lower than the uplifted values of these payments in 2020/21, as shown below:

The full list of benefit and tax credit rates for 2021/22 as announced by the Government at the end of 2020 are available here:

• DWP, Benefit and pension rates 2021 to 2022 on Gov.uk
• HM Treasury, Proposed Child and Working Tax Credits, Child Benefit and Guardian's Allowance Rates 2021-22, Deposited paper DEP2020-0811

2. Commentary on the impact uplift and the possibility of it being withdrawn in April

The uplift was welcomed across Parliament and by welfare rights organisations. The Child Poverty Action Group (CPAG) noted that “[t]his represented the biggest increase in working-age benefits for decades, and immediately provided some financial relief to families affected by the pandemic.”

Campaigning organisations and think tanks expected that decisions about the future of temporary benefit increases might be made alongside normal benefit and pension uprating decisions and the Spending Review last Autumn. Many made a case at that time for retaining the increases and extending them to other benefits which were not included in the original uplift.

The Joseph Rowntree Foundation (JRF) has coordinated open letters calling on the Chancellor to “keep the lifeline”, and warning that it “would be a terrible mistake to cut the £20 uplift to Universal Credit.” These have been signed by dozens of charities, campaigning organisations and religious figures. To support its case, in response to the 25 November Spending Review, the JRF estimated the impact removing the Uplift from April 2021 would have:

Our new modelling shows that if the lifeline of the £20 uplift to Universal Credit is whipped away in April, 6.2 million families will see an overnight loss of £1,040 next year and around half a million more people, including 200,000 children, will be pulled into poverty.

Several organisations have published analysis focusing on the impact on households of retaining or reversing the benefit increases. In its October 2020 “Green Budget,” the Institute for Fiscal Studies (IFS) used its tax-benefit microsimulation model to estimate impact of the uplift on household types and income deciles. It found that:

Not surprisingly, the policy is clearly progressive: on average, it increases the income of the poorest 10% of households by 5%, with a fairly rapidly declining impact on each decile above that.

In January 2021, Citizens Advice described the uplift as “one of the government’s most successful pandemic policies” and noted the impact that the withdrawal of the temporary increases might have on people they help with debt problems who rely on benefits for some or all of their income. It commented:

At Citizens Advice, we’ve helped over 300,000 people with a Universal Credit issue since then. Most striking has been the impact for those we’ve helped who have a ‘negative budget’ — people whose necessary outgoings exceed their income. They look at their bank balance at the end of the week and they simply don’t have enough to make ends meet.

One of the main factors holding back financial ruin for many of these families is the uplift. If it was removed, we’d be seeing a much higher rate of Universal Credit and Working Tax Credit claimants not being able to afford basic necessities — increasing from 43% to 75%.

The Resolution Foundation provided a distributional analysis outlining estimated income losses for richer and poorer households of withdrawing the uplift:

[The] increase helped to offset – at least on average – the initial fall in incomes caused by the labour market effects of the virus for the lowest-income households. Now, the Government risks undoing this protection for the poorest families at a time when they need it most.

[…]

This benefits increase, costing £7 billion this year, is an expensive policy. But the case for continuing with it is very strong. The cut to UC this coming April will see over six million families worse off by £1,000 per year – that is almost twice the number of families that would have been affected by the, eventually reversed, tax credit cuts planned for 2016 […] our current forecast [is] that poorest families will suffer a huge 7 per cent fall in income if the £20 per week increase is removed in April.

3 Cost Estimates Estimates of the cost of the uplift this year (2020-21)

In their November 2020 Economic and fiscal outlook, the Office for Budget Responsibility (OBR) estimated a cost of £8.3 billion for the Government’s coronavirus-related welfare support measures in 2020-21, £6.1 billion of which is accounted for by the uplift to UC and WTC. It observed:

• Welfare spending measures have contributed £8.3 billion to the overall cost of virus-related support measures in 2020-21 and £12.9 billion in total over the forecast period:
  • The largest measure is the temporary £20 a week increase in the standard allowance of universal credit (UC). This costs £4.6 billion in 2020-21, which is £0.9 billion lower than we assumed in the FSR, reflecting the smaller rise in the UC caseload than we assumed then. The possibility that this measure (and its equivalent in tax credits) is extended rather than being withdrawn next April poses a risk to our spending forecast.
  • The increase in the basic element of working tax credits (WTC) by the equivalent of £20 a week costs £1.5 billion in 2020-21, similar to our FSR estimate. The £20 additional earnings disregard in housing benefit measure ensures the majority of WTC claimants do not lose housing benefit as a consequence of their higher WTC awards.

The report goes on to provide costings for other crisis-related welfare measures (pp178-179).

Estimates of the costs of maintaining the uplift after the 2020/21 tax year

The House of Commons Library estimates the total cost of continuing with both uplifts in 2021/22 (compared to a baseline of not continuing with these after March 2021) to be around £5.8 billion a year. This estimate was calculated using the UKMOD microsimulation model (version A2.0+, developed by the Institute for Social and Economic Research (ISER) at the University of Essex) and data from the Family Resources Survey.

Chapter 8 of the Institute for Fiscal Studies Green Budget from 9 October 2020 looks at the temporary benefit increases beyond 2021, including the temporary uplifts as well as the suspension of the Minimum Income Floor (MIF). Their analysis found (our emphasis):

Choosing instead to make the increase in the standard allowance permanent would, in the long run, cost the government £6.6 billion per year (in today’s prices), adding roughly 10% to the annual cost of UC, though undoing only a fraction of the cuts to benefits implemented since 2010. This would represent a bigger increase to the entitlements of out-of-work claimants without children than has been seen over the whole of the past 45 years. Nonetheless, the UK’s system of support for out-of-work claimants would remain very thin by international standards.

It should be noted here that “in the long run” refers to a situation in which Universal Credit has been fully rolled out, with all legacy benefit claimants having moved to the UC, and where “the labour market will look similar to its pre-crisis state in terms of the distribution of earnings across different types of individuals.” This means that the costing accounts for any increase to WTC beyond April 2021 only insofar as many of those claimants will ultimately be on UC, and does not account for economic disruption which might continue into the next financial year.

The Joseph Rowntree Foundation has also costed their policy recommendations of retaining the uplifts and extending them to legacy benefits. It found:

Our new estimates suggest keeping this lifeline for families on UC/WTC will cost around £6.4 billion in 2021/22, in line with the OBR’s latest costing of £6.2 billion, and a further £1.9 billion to extend it to legacy benefits. The legacy benefit cost will fall over the coming years as most people on legacy benefits migrate to UC, but for families struggling to stay afloat, the need is urgent.

The actual costs will vary significantly dependent on uncertain economic conditions and benefit caseloads.

4 Parliamentary materials

Select Committees

• Work and Pensions Committee, DWP’s response to the coronavirus outbreak, 22 June 2020, HC 178
• Work and Pensions Committee, Universal Credit: the wait for a first payment, 19 October 2020, HC 204, pp42-43
• Lords Economic Affairs Committee, Universal Credit isn't working: proposals for reform, 31 July 2020, HL 105, pp38-39

Government statements

The future of the uplift has been a matter of concern for MPs, campaigning organisations and the media for several months, so numerous Government statements have been made. Recent examples include:

Thérèse Coffey, Secretary of State for Work and Pensions, Written Statement on Social Security Benefit and Pension Up-rating 2021/22 (HCWS600, 25 November 2020):

[…] The statutory annual review is separate from the temporary £20 per week uplift to Universal Credit and Working Tax Credit, which was announced by the Chancellor as a temporary measure in March 2020, and enacted for one year under different legislation to support those facing the most financial disruption as a result of the public health emergency. As the Government has done throughout this crisis, it will continue to assess how best to support low-income families, which is why we will look at the economic and health context in the new year.

The Chancellor’s 11 January 2021 Economic Update:

Alison McGovern (Wirral South) (Lab) [V]

[…] Now that the Chancellor is with us, can I ask him, if he thinks there is so much unity of purpose, does he really stand by the plan to cut £20 a week from universal credit and to maintain the cruel two-child policy? I give him the opportunity to make an announcement and do something today to make sure that his appearance before us in the House today is not a total waste of time.

Rishi Sunak [Chancellor of the Exchequer]

At the beginning of the pandemic, we put in place a temporary uplift in universal credit, which lasts all the way through to the end of this year. Of course, future tax and welfare decisions will rightly be made at the Budget.

[HC Deb 11 January 2021 c34]

The Government’s response to the Work and Pensions committee recommendation to maintain the uplift. Work and Pensions Committee, Universal Credit: the wait for a first payment: Government Response to the Committee’s Third Report, 12 January 2021, HC 204, p8:

Recommendation 15

The Department should commit to maintaining the increases in support that have been provided during the pandemic. This should include keeping Local Housing Allowance at the 30th percentile and conducting an annual review of rates to ensure they remain appropriate for each area. It should maintain the £20 a week increase in standard allowance for UC and Working Tax Credit, with annual inflation-based increases thereafter.

The Government introduced a package of temporary welfare to help with the financial consequences of the COVID-19 pandemic. This included the £20 weekly increase to the UC Standard Allowance rates as a temporary measure for the 2020/21 tax year. It also includes an increase in the Local Housing Allowance (LHA) rates for UC and Housing Benefit claimants to the 30th percentile of market rents. This increase will benefit over 1 million households in the private rented sector, with an average gain of £600 this year. The LHA rates in April this year will be maintained in cash terms in 2021/22. For households who need additional help with housing costs we have also provided £180m in Discretionary Housing Payment funding to Local Authorities to support vulnerable claimants with housing costs in the private and social rented sector in England and Wales for 2020/21. As the Committee would expect, the Government will continue to assess how best to support families and the economy against the national picture, as we have done throughout the pandemic. Decisions will be made at the appropriate fiscal event and we will ensure Parliament is updated as necessary

5 Further reading

Commons Library papers

• Coronavirus: Universal Credit during the crisis, Commons Library Briefing Paper, CBP-8999 15 January 2021 – explores the role of UC during the pandemic as well as debates around the uplift.
• Coronavirus: Withdrawing crisis social security measures, Commons Library Briefing Paper, CBP-8973, 8 December 2020
• Coronavirus: Increases to benefits payments, Commons Library Insight, 27 May 2020

Think tanks and campaigning organisations

• Resolution Foundation, Safe harbour? Six key welfare policy decisions to navigate this winter, 7 October 2020
• Institute for Fiscal Studies, The temporary benefit increases beyond 2020-21, 9 October 2020
• Joseph Rowntree Foundation, The £20 weekly uplift must be extended to legacy benefits, 18 November 2020
• Child Poverty Action Group and the Church of England, Poverty in the pandemic: An update on the impact of coronavirus on low-income families and children, 14 December 2020
• Citizens Advice, The Chancellor has an important decision to make — he must keep the lifeline, 15 January 2021