1 the system no longer achieving its aims “want is one only of five giants on the road of...
TRANSCRIPT
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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
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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
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Two decisions
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
To work more or to work less
•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
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Participation Tax Rate
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Of which £1.32 in tax/NI and £3.58 in benefits is withdrawn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
£10,000
£15,000
£20,000
£0 £5,000 £10,000 £15,000
16 Hrs p.w. at min wage
Gross annual earnings
Net
In
com
e
100% MDR
(IS withdrawal)
70% MDR
(tax credits & taxes
withdrawn together)
95.5% MDR(benefits, tax
credits & taxes all withdrawn
together)
TaxStarts
Lone parent with two children: income from work and benefits
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
£0 £10,000 £20,000 £30,000 £40,000
Household Annual Earnings
MT
R
Tax and National Insurance
Withdrawal of benefits
Marginal Tax Rates
Marginal Tax Rate today (ex -One-earner Couple with Children)
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Levers available to achieve reform objectives
Financial levers
• Benefit withdrawal rates
• Earnings disregards
• Benefits levels
Administrative levers
• Benefit structure
• ‘Front-end’ administration
• ‘Back-end’ administration
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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
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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.
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An outline structure for a Universal Credit
Benefit income
Earnings
Consolidation of main out-of-work benefits and tax credits, with payments for housing, disability and children
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
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Comparison of Income Under UC and Current System
0
50
100
150
200
250
300
0 5 10 15 20 25 30 35 40 45 50
Hours Worked
Ne
t In
co
me
(£
)
UC net income
Current net income
UC benefit
Current benefit
Unemployed: what does it mean for them?
Single customer, no children, NMW, Renting (£80 rent, £15 council tax)
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Summary
1. The system is no longer achieving its aims: it has three fundamental problems: dependency, complexity and cost
2. Participation and Marginal Tax Rate created perverse choices
3. We have limited levers to achieve change
4. There are three main options from here
5. Universal Credit is both cheaper and better value than the alternatives
6. Universal Credit demonstrably makes work pay for the poorest?
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Questions?
Official contact: [email protected]
02074497669
Consultation address: [email protected]