Covid gives us the chance to choose how generous benefits should be

Amongst the welter of tens and hundreds of billions of pounds of extra spending announced this year, the £9 billion or so increase in the generosity of working-age social security payments has gone largely unremarked. Deep economic recession also has led to a very sharp increase in the number of claimants, despite all the government support through the furlough schemes. Put these together and total spending on working-age welfare is likely to rise to record levels, up by as much as third in a single year and perhaps reaching £140 billion.

On the plus side, the much-maligned universal credit has managed the huge increase in demand incredibly well. There were single days back in the spring when 100,000 new applications were being made, and the system coped. Thank goodness it did: the consequences of failure would have been awful for many facing serious hardship.

The pandemic has brought other, less positive aspects of the system into sharp relief, though, not least its relative lack of generosity. Our benefit system is much less generous than that of many other advanced economies. For average earners, replacement rates — the fraction of earnings that the benefit system replaces — are astonishingly low, only 13 per cent for single people and 20 per cent for couples, against international averages of above 50 per cent for many.

The steep rise in numbers experiencing life on benefits may put the government under pressure to change the system. It certainly will face some sharp choices about what to do about the temporary changes that it instituted in response to the coronavirus outbreak: allow them to expire, or make them permanent.

The biggest change has been a simple increase in the generosity of universal credit, increasing the basic rate of the benefit by £20 a week for all and hence benefiting more than four million families.

This is an especially big deal for those without children. In fact, it is a change of historic proportions. While the last Labour government massively increased benefit rates for families with children, it did little for those without. The result is that basic rates of benefits for those without children were much the same in real terms when we entered the pandemic as they were 40 years ago, a period during which average earnings doubled. That £20-a-week increase eclipsed 40 years of stagnation.

The choice here is straightforward: keep the more generous — and £6 billion more expensive — system or return to the status quo. It will be hard to do the latter. However much the government may protest that this was only ever intended as a temporary measure, simply reverting to the previous system next April would cause real difficulties for millions of the poorest people in the country. That said, £6 billion a year every year is a lot of money to commit to accidentally if you’d genuinely intended merely a short-term boost.

The other changes to the benefit system implemented this year are rather subtler. Deciding whether to continue with them will involve finer judgments.

The first is a change to the way in which universal credit treats the self-employed. This affects nearly half a million households. There was something in the universal credit system called the minimum income floor, or MIF. It was new to universal credit. There was no similar provision in the old tax credit system. It essentially meant that anyone who had been self-employed for more than one year and claiming universal credit would be treated as though they had been working full-time at the minimum wage, even if they had been reporting earnings below that. The majority of self-employed claimants fell into this category.

That may sound rather harsh, but there were good reasons for it. It reduces fraud — it is much easier for the self-employed to declare earnings lower than they really are — and it reduces the incentive to claim to be self-employed on zero or very low earnings as a way of avoiding the job search requirements faced by the unemployed. So a return of some form of MIF probably is appropriate.

There is, however, an opportunity to improve the system. The MIF operated on a monthly basis, but many self-employed people have incomes that fluctuate month-to-month and season-to-season. It would be much better and fairer to apply the MIF to annual earnings.#

Finally, this year has seen a change to local housing allowance, the rent rebate system for those in private rented accommodation. Again, this is big stuff. Support for the housing costs of private renters costs a whopping £10 billion a year. Until earlier this year, the amount you were entitled to depended not on the rent in your local area but on the rents in your local area back in 2011. So if you happened to live in an area in which rents had risen quickly, you would have less of your rent covered than would someone living somewhere where rents had grown slowly. It’s extremely hard to think of a good excuse for such a bizarre system. For this year, and supposedly for this year alone, housing support is set at the present 30th percentile of rents in your local area. It is surely inconceivable that we will move from where we are back to a system based on what rents were a decade ago. If not, then the government will need to decide whether to live with the additional £1 billion-a-year cost of the policy implemented this year or find some more rational way of paring back on costs.

Choices over benefits policy are never easy. There are unavoidable trade-offs between cost, generosity and incentives. This year offers an opportunity to improve what we’ve got and to make a conscious choice over how generous we want the system to be.

This article originally appeared in The Times and is used here with kind permission.