UK households 'ill-prepared' for new universal credit
by Ryan Shorthouse
19 September 2012
We are only a year away from the British government's 'universal credit' going live, but questions are being asked about how viable the benefit scheme really is and how it will impact the eight million households who will be eligible, says think-tank
On Monday we published research which shows that many low income households in the United Kingdom will be ill-prepared for the significant changes they will face when the universal credit is introduced. Ours is the first study to evaluate how this enormous change to benefit and tax credits will affect the budgeting decisions of benefits recipients.
We interviewed 30 families from across the country, asking them about their experiences of budgeting on a tight income, particularly during the economic downturn, and their opinions towards the changes to benefits. The research shows that many households face financial difficulties. The economic downturn led to job losses and reduced hours, which alongside inflation, was exacerbating financial problems for many households.
Despite these troubling circumstances, most households deployed various techniques to manage their money: using online banking, direct debits, and switching between accounts. Parents strongly prioritised spending on children. Most were optimistic for the future and eager to find work, but a lack of suitable employment and affordable and flexible childcare was preventing this.
When asked about the changes that universal credit would bring in, most households were against receiving their benefit payment monthly as opposed to weekly or fortnightly as at present. This is not really surprising: a recent Department for Work and Pensions survey revealed that four in 10 of those on benefits and tax credits would find it harder to budget on a monthly basis.
Households believed more frequent payments acted as a psychological boost and there would be a real danger of running out of money before the end of the month, especially with the competing demands on their finances. One interviewee said: "When you're getting such a smaller amount, you can't be going for a whole month, stretching that out".
Many households were strongly against the idea of housing benefit being paid to social tenants rather than direct to the landlord: "Everyone is going to be in arrears. It's just going to end up costing the government more money," said one. Indeed, when local housing allowance – housing benefit for those in the private rented sector- was changed so it paid to the claimant rather than the landlord, a pilot evaluation revealed the rate of arrears increased from 3 per cent to 7 per cent. universal credit will make revenue for Housing Associations less stable, affecting their credit rating and their ability to build more houses.
Another change under the universal credit will be that payment of the benefit will be paid to one nominated bank account rather than different awards going to the 'main earner' and the 'main carer'. The government will have the power to split payments if the relationship is proven to be abusive. But this may be inadequate where imbalances in power over household finances are more subtle, and gender equity and expenditure on children could be jeopardised.
The move to a fixed monthly benefits assessment also looks likely to risk pushing people into debt. Our analysis found that people who lose their jobs could go for over a month with no income at all under the move to fixed monthly assessments. This could be even longer if employers struggle to meet the new reporting requirements. A single payment also means claimants lose the labelling of different benefits, which helps people apportion and nudges them towards desirable expenditure.
Our research suggests that the government is expecting significant behavioural change from claimants but without giving them the necessary tools to adapt. Instead of a sink or swim approach, we propose that claimants could opt-in to an online portal where they could request more frequent payments, direct payments to different accounts, even to landlords or childcare providers, and even initiate automated savings.
This would be a cost effective policy that would ensure the universal credit can help people on low incomes to help themselves as they grapple with the biggest change to benefits for a generation.
Ryan Shorthouse is a researcher at the Social Market Foundation think-tank
On Monday we published research which shows that many low income households in the United Kingdom will be ill-prepared for the significant changes they will face when the universal credit is introduced. Ours is the first study to evaluate how this enormous change to benefit and tax credits will affect the budgeting decisions of benefits recipients.
We interviewed 30 families from across the country, asking them about their experiences of budgeting on a tight income, particularly during the economic downturn, and their opinions towards the changes to benefits. The research shows that many households face financial difficulties. The economic downturn led to job losses and reduced hours, which alongside inflation, was exacerbating financial problems for many households.
Despite these troubling circumstances, most households deployed various techniques to manage their money: using online banking, direct debits, and switching between accounts. Parents strongly prioritised spending on children. Most were optimistic for the future and eager to find work, but a lack of suitable employment and affordable and flexible childcare was preventing this.
When asked about the changes that universal credit would bring in, most households were against receiving their benefit payment monthly as opposed to weekly or fortnightly as at present. This is not really surprising: a recent Department for Work and Pensions survey revealed that four in 10 of those on benefits and tax credits would find it harder to budget on a monthly basis.
Households believed more frequent payments acted as a psychological boost and there would be a real danger of running out of money before the end of the month, especially with the competing demands on their finances. One interviewee said: "When you're getting such a smaller amount, you can't be going for a whole month, stretching that out".
Many households were strongly against the idea of housing benefit being paid to social tenants rather than direct to the landlord: "Everyone is going to be in arrears. It's just going to end up costing the government more money," said one. Indeed, when local housing allowance – housing benefit for those in the private rented sector- was changed so it paid to the claimant rather than the landlord, a pilot evaluation revealed the rate of arrears increased from 3 per cent to 7 per cent. universal credit will make revenue for Housing Associations less stable, affecting their credit rating and their ability to build more houses.
Another change under the universal credit will be that payment of the benefit will be paid to one nominated bank account rather than different awards going to the 'main earner' and the 'main carer'. The government will have the power to split payments if the relationship is proven to be abusive. But this may be inadequate where imbalances in power over household finances are more subtle, and gender equity and expenditure on children could be jeopardised.
The move to a fixed monthly benefits assessment also looks likely to risk pushing people into debt. Our analysis found that people who lose their jobs could go for over a month with no income at all under the move to fixed monthly assessments. This could be even longer if employers struggle to meet the new reporting requirements. A single payment also means claimants lose the labelling of different benefits, which helps people apportion and nudges them towards desirable expenditure.
Our research suggests that the government is expecting significant behavioural change from claimants but without giving them the necessary tools to adapt. Instead of a sink or swim approach, we propose that claimants could opt-in to an online portal where they could request more frequent payments, direct payments to different accounts, even to landlords or childcare providers, and even initiate automated savings.
This would be a cost effective policy that would ensure the universal credit can help people on low incomes to help themselves as they grapple with the biggest change to benefits for a generation.
Ryan Shorthouse is a researcher at the Social Market Foundation think-tank
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COMMENTS
What happens to employees when employers don't bother to make the reports?
Kay Fabe - Surrey
