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The system no longer achieving its aims

The system no longer achieving its aims. “Want is one only of five giants on the road of reconstruction; the others are Disease, Ignorance, Squalor, and Idleness.” 5m working age people in receipt of out-of-work benefits 1.4m (28%) for nine of the last ten years.

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The system no longer achieving its aims

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  1. The system no longer achieving its aims • “Want is one only of five giants on the road of reconstruction; the others are Disease, Ignorance, Squalor, and Idleness.” • 5m working age people in receipt of out-of-work benefits • 1.4m (28%) for nine of the last ten years. • 2m children are growing up in households where no-one works • Children who grow up in poverty are more likely to fail in education • Worklessness is associated with poor health and premature death • Worklessness is associated with crime

  2. It has three fundamental problems • Encourages dependency • Gains to work slight • Lack of transparency and certainty • Work as risk rather than reward • Is too complex • 30+ benefits • 4 agencies • 10,000 pages of guidance • Costs too much • £3.5bn to administer • £5bn a year is lost to error and fraud • £95bn forecast for working age spending in 2010-11

  3. Two decisions • To work more or • to work less • To work or • not to work • Driven by the real increase in disposable income gained by leaving benefits for a job • This is the Participation Tax Rate: the proportion of gross earnings lost by tax and benefit reductions • Driven by the real increase in income from every extra £1 of gross earnings • This is the Marginal Deduction Rate – the proportion of any increase in earnings taken away by reduced benefits and increased taxation

  4. Participation Tax Rate Lone parent with two children: income from work and benefits Lone parent example: Jane, with 2 children, works 28 hours per week Gross wage £8 per hour Of which £1.32 in tax/NI and £3.58 in benefits is withdrawn Net income from employment– £3.10 per hour worked 61% of wage lost in tax and benefit withdrawal 70% MDR(tax credits & taxes withdrawn together) 95.5% MDR(benefits, tax credits & taxes all withdrawn together) Net Income 100% MDR (IS withdrawal) 16 Hrs p.w. at min wage TaxStarts Gross annual earnings

  5. 100% 90% 80% 70% 60% MTR 50% Withdrawal of benefits 40% 30% Tax and National Insurance 20% 10% 0% £0 £10,000 £20,000 £30,000 £40,000 Household Annual Earnings Marginal Tax Rates Marginal Tax Rate today (ex -One-earner Couple with Children)

  6. Levers available to achieve reform objectives • Financial levers • Administrative levers • Benefit withdrawal rates • Earnings disregards • Benefits levels • Benefit structure • ‘Front-end’ administration • ‘Back-end’ administration

  7. The major options for reform • Universal Credit • Reduces initial work barriers • Increases flexibility • Support withdrawn rationally via a ‘single taper’ • Simplifies system • Foundation for a real-time system • Single Unified Taper • Patches current system with a single taper rate • Retains Tax Credits in their current form • More expensive that Universal Credit • Mirlees Model • Single taper rate withdrawn by tax system • Retains Tax Credits

  8. Can we afford Universal Credit without creating unacceptable losers? • Not the aim to reduce the levels of support for people in the most vulnerable circumstances. • Extensive modelling on impacts of different disregards and taper rates • Confident that there is a cost neutral model with: • a reasonable taper rate of 65% • improved earnings disregards for some groups • Gainers and losers broadly balanced out • But significant losses for some people. • A version with more generous disregards to reduce losses could cost between £1 and £2billion. • These are static costings – not taking account of any savings from dynamic effects.

  9. An outline structure for a Universal Credit Impacts Substantial admin savings Extra take-up Structural error and fraud savings Transitional protection could mean there will be no initial losers earning less than £30k 2m gainers, mostly low earners Consolidation of main out-of-work benefits and tax credits, with payments for housing, disability and children Benefit income Earnings

  10. Unemployed: what does it mean for them? Single customer, no children, NMW, Renting (£80 rent, £15 council tax)

  11. Summary • The system is no longer achieving its aims: it has three fundamental problems: dependency, complexity and cost • Participation and Marginal Tax Rate created perverse choices • We have limited levers to achieve change • There are three main options from here • Universal Credit is both cheaper and better value than the alternatives • Universal Credit demonstrably makes work pay for the poorest?

  12. Questions? • Official contact: adam.taylor@dwp.gsi.gov.uk • 02074497669 • Consultation address: benefit.reform@dwp.gsi.gov.uk

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