A speech by Lord Freud, Minister for Welfare Reform.
Firstly I would like to thank Policy Exchange for hosting today’s event, and you all for coming.
I hope today can be an open forum about a new and exciting opportunity thrown up by the introduction of Universal Credit.
Today’s event brings together a group of people who are already thinking deeply about the UK’s welfare system or who we hope can offer fresh perspectives…
… perhaps bringing insights from the world of technology, industry or academia.
Last year marked major milestones in reforming Britain’s welfare system, and 2013 will be no different.
This year is about making reform a reality.
We are on track to do so:
- Universal Credit, starting with a pathfinder in April
- Personal Independence Payment also starting to roll out from April
- the beginning of local council tax support schemes
- the implementation of the Benefit Cap
To name just a few of the programmes the Government is implementing.
This change cannot come soon enough.
For it isn’t just about changing systems - it is about changing lives, and changing them for the better.
A complex system
For too long, those in need of state support have had to rely on an outdated and overburdened system.
The current mess of benefits and tax credits includes over 30 different out of work payments.
These are set alongside chaotic in work supplements - some paid at 16 hours, some 24 and some at 30…
… and each with separate rules and rates… some means-tested, others linked, many overlapping.
It is a system of byzantine complexity.
Work doesn’t pay
Worse still, the current system creates the clear perception that work simply does not pay.
Let me explain why.
When a person finds a job, the split between out of work benefits and in work tax credits means they find it impossible to calculate if they would be better off or not.
Some of their benefits are withdrawn at 40% as they progress in work, some at 65%, some at 100%…
…some net, some gross.
It is this factor which stops the person’s journey back to work in its tracks,
They cannot take that positive step for fear of losing out.
Progression doesn’t pay
Those already in employment, but who could work more, face a similar problem.
They have no obligations on them to increase their hours in work, and the system offers no incentives either.
Feed all the rates and disregards into a complicated computer system - because no normal person can calculate what it all means for their income - and something extremely damaging happens.
People on low wages lose up to 96 pence in every pound they earn as they increase their hours in work.
In other words for every extra pound they earn, 4 pence goes in their pocket and the rest goes back to government in tax and benefit withdrawals.
So suddenly you have a system that is incomprehensible to those that use it, except for one thing that seems clear - it’s not worth the risk of working, nor working more.
Waste of potential
As a result, employers tell us that people’s working patterns cluster around the hours at which they start to receive tax credits…
… meaning they can’t move onwards and upwards.
B&Q - a major national retailer - have even experienced people asking not to work more hours so that their benefits aren’t affected.
This isn’t just bad news for growth and productivity.
It’s also a real waste of people’s potential.
The introduction of Universal Credit is a real opportunity to focus interventions on progression in work, not just getting people into a job.
We know that training provided by employers rather than by government is more beneficial to the individual. That is why combining a focus on skills and training for in-work claimants with reforms including the removal of the 16 hour rule is an exciting opportunity for this group.
As a nation we are at a competitive disadvantage due to a weak medium level skills base, so this is something to really build on under Universal Credit.
Changing this is what Universal Credit is all about.
Starting with the pathfinder in April this year, and rolling out gradually from October…
…. Universal Credit will replace all work-related benefits and tax credits with a single, simple, payment.
It provides work allowances that are up to 12 times more generous than the existing system, meaning people who move into work will see the rewards before their benefit is tapered away.
And it will be withdrawn at a single, constant rate, so that people know exactly how much better off they will be for each extra hour they work.
This rate will be significantly lower than the current average, meaning work will pay at each and every hour.
1.5 million people will keep more money as they increase their working hours, on average seeing an extra 14 pence in their pocket for every single pound earned.
More people in work
Once Universal Credit is fully rolled out, we estimate up to 300,000 more people will enter work…
**…. **and between 1 and 2.5 million extra hours will be worked by those already in employment.
All this, through improved financial incentives alone.
As my colleague, the Minister for Employment, will explain shortly, we are looking at how to build on these new incentives…
… doing more to encourage and support progression for those already in some work.
In steady-state, we expect there to be 11 million individuals on Universal Credit, of which 5 million are expected to be in work.
Unlike now, the majority of DWP’s claimants will already have a job.
This is a radically new context for delivering benefits.
It is right that we think radically about how what this means…
… including for our employment services, and the contact we have with a new group of claimants relying on our support.
To tell you more, I’ll now hand over to the Minister for Employment.