Does the Welfare Bill really make work pay?

There is much to be said in favour of the coalition’s welfare reform bill. Perhaps its main achievement is that it greatly diminishes the uncertainty and risk associated both with entering the labour market and progressing in it. In the current system, both decisions represent a gamble. Taking up a job effectively means replacing a secure form of income with an insecure one. If the job does not last, people have to go through the lengthy benefit application process again. Also, once somebody works for a few hours and is faced with the decision to add some more, the variability of effective marginal tax rates can make it difficult to predict what the payoff will be. Uncertainty promotes inertia: in a minefield, the safest bet is not to move. The Universal Credit (UC), with its single application process and single taper rate, will end this absurdity. Two cheers for that.

However, when the government presents the Welfare Bill as a massive boost to work incentives, this should be taken with a pinch – in fact, a big ladle – of salt. What the UC really means, in terms of work incentives, is this: in the present system, there is a gap between out-of-work benefits and in-work benefits. People who work for a small number of hours (what ‘small’ means depends on the household type) usually see the former tapered away pound per pound, but do not yet qualify for the latter. So there is no point entering the labour market unless you jump over that gap in a single leap. The UC will close this gap, because it will end the distinction between out-of-work and in-work benefits. But for people who already do qualify for in-work benefits in the present system, there will be no dramatic effect on work incentives. Currently, tax credit recipients typically lose 71p for every extra £1 of gross earnings, courtesy of income tax, NIC and tax credit withdrawal. In the new system, they will lose 76p for every extra £1 of gross earnings: 20p in income tax, 12p in NIC, and 44p in UC withdrawal.

So the government’s claim that it will always pay to work under the Universal Credit has to be qualified: it will always pay to work for a small number of hours. But it will not pay a lot to move onwards from there. Since Mr Duncan Smith seems to be most concerned with welfare recipients who have not spent a day in paid work for many years, this is fair enough. But if the ultimate aim is a situation in which most working-age households earn most of their own income during most of the time, then the Welfare Bill alone will not get us there.

While a great improvement, the welfare reform bill is not a match for the workfare-reforms in Wisconsin, where welfare rolls fell by 80% within five years. A workload not too far away from a full-time job was expected from welfare claimants – even from single parents with young children. It must have been a tough transition for many. But once the reforms had taken off, surveys showed that a majority of the previous welfare recipients judged the changes favourably.