Welfare reform and flexible working

A speech by Lord David Freud, Minister for Welfare Reform.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Rt Hon Lord Freud

The Government made a commitment to promote family friendly working practices.

We recognise that more flexibility at work is better for people, for families and for business.

Of course, I don’t need to tell the people in this room about the benefits of flexible working.

But the labour market is on the cusp of a major change.

One that will be an opportunity for employers to draw upon a new pool of talent, freed up to take up flexible working.

And the challenge for employers will be to make the most of this new potential.

Today, I wish to outline for you how the Government’s reforms to the benefit system are going to radically alter the UK’s work force.

Our reforms will free up more people to work flexibly, expand potential talent pools and reduce benefit dependency.

Let me start by briefly outlining how the current system works.

Existing rules don’t just prevent people from working flexibly but actually prevent people from working altogether.

We currently have two separate systems to support people with little or no income.

Firstly the welfare system.

Benefits in this country are enormously complex, with people receiving different amounts of money from different parts of the system, paid separately and often to different timescales.

Secondly, the tax credit system.

Entitlement to tax credits is based on a different set of criteria and level of payments is dependent on age, number of hours worked and other circumstances, such as the number of children someone has.

These two systems are operated completely independently, by two separate Government departments and there is little to smooth transition between them.

This has led to a gaps opening up between those who rely on state benefits and the working majority.

For example, benefits are paid weekly or fortnightly, whilst most employees receive a monthly salary.

This may sound like a small issue but when you are trying to shift from managing a weekly budget to a monthly one it can become another barrier and a real problem.

The way we currently support people makes it more difficult to leave benefits and get a job or increase your hours and become more self-sufficient.

In fact it’s not just difficult, it’s a real risk.

The current system does not respond quickly to change.

If someone does find work for more than 16 hours per week but low paid they need to end their benefit claim and potentially submit a new claim for tax credits, depending on their circumstances.

In fact under the current system any change of circumstances has to be notified to numerous authorities and benefits must be recalculated each time.

Under the new Universal Credit people will simply claim benefit and we will get the information we need about their earnings, real time from HMRC, and adjust their benefit payment accordingly.

They won’t need to contact us at all.

Under the current system each change of circumstance is processed separately, to different timescales.

This can lead to gaps in household income, making the shift into work a real struggle.

The risk is if it doesn’t work out and people have to leave work and reclaim benefits they have to restart a claim, often leaving people reliant on crisis loans whilst their claim is processed.

In this environment less permanent employment isn’t attractive.

Equally part-time jobs of just a few hours a week fall into the trap of not being enough to qualify for tax credits, but too much in terms of benefit entitlement.

Neither system is particularly flexible and neither does a particularly good job of supporting people to work variable hours or short term jobs.

Let me give you a couple of examples.

The current Jobseeker’s Allowance system means you need to work 16 hours or more to come off benefit and see a real increase in your income.

However, for those remaining on benefit and working less than 16 hours, anything they earn over £5 if they are a single person, slightly more if they are a lone parent or disabled, will result in their benefit being reduced pound for pound.

This means someone over 25 can’t work for even one full hour per week at minimum wage without seeing an instantaneous fall in benefits.

Different benefits contain different cliff edges - arbitrary points at which the level of earnings or hours tips the balance resulting in total loss of income.

This makes it more difficult for people to calculate what their income would be if they took a job.  

For some there is little incentive to work - and the economic and social cost of dependency deepens.

For example, a lone parent dinner lady was offered four more hours of work a week. Yet it took the Jobcentre Plus Adviser three quarters of an hour to work out if it was viable using the earnings calculator.

Of course, it’s entirely right that the more people earn the less they should receive in benefits.

But the current system is clunky and slow, it does not respond well to change.

This makes it particularly risky for disabled people who want to work, particularly those with fluctuating health conditions.

Who would expect a rational person to abandon a carefully and painfully constructed benefit package and go to work when they might fear that their condition will come back two months later and they would have to start a benefit claim all over again.

The inflexibility and uncertainty of the current system makes people too afraid to take part-time or temporary work for fear of ending up worse off.

This situation isn’t just bad for people, locked into set hours or indeed out of work altogether.

It is also bad for businesses, forcing people to be inflexible, and shrinking the potential recruitment pool.

Employers face stretching part time jobs to 16 hours to enable them to recruit people claiming tax credits.

This approach locks both employer and employee into a 16 hour contract which may not meet the needs of either.

The only criterion satisfied is the arbitrary one set by the benefits system.

This situation embodies the current problem with welfare in the UK.

The only thing adequately served by the current system is the system itself.

Unemployed people don’t get the support they need to move into work.

Those in work are limited in what they can do by the support they rely on.

Employers are restricted by a rigid set of rules which stifle flexibility.

Between 1997 and 2010 the numbers on out of work benefits has remained stubbornly high (between four and six million).

Yet during the same period over half of all growth in employment was accounted for by foreign nationals.

The simple truth is migrant workers can be more flexible than people worried about losing their benefits.

This Government’s welfare reforms will change the system for the better.

I am currently taking the Welfare Reform Bill through the House of Lords.

This Bill will sweep away existing complexity, it will remove the cliff edges and fixed points of entitlement and deliver a new single income replacement payment, Universal Credit.

Key to the development of Universal Credit is that work should pay.

Universal Credit will replace both benefits and tax credits for people of working age.

It bridges the gulf that has opened up between unemployment and work and delivers a benefits system that is flexible and responsive.

By removing the fixed points at which people gain and lose their entitlement to benefit and replacing different deduction rates

Universal Credit will deliver a simpler more effective system of welfare payments.

As part of these reforms we are developing a system which will allow us to access real time tax and benefits information.

This will mean we can deliver a much more reactive system of support based on actual earnings, making the transition between benefits and work much easier.

There has been some coverage in this morning’s papers about the development of these systems.

Universal Credit is running to time and to budget.

There has not been and is not any question about the DWP’s ability to deliver the required programmes that will support Universal Credit when it starts in 2013.

Clearly getting the IT to support the development of Universal Credit right is an absolute priority for the Government.

There are essentially two systems involved in delivering Universal Credit.

The first is run by HMRC and will monitor the level of earnings flow and will allow the correct PAYE to be charged. It will also allow us to assess the correct level of Universal Credit to be paid.

The second system, DWP is developing. It is a single interface for making a Universal Credit claim, which will incorporate a rule engine and allow us to make the correct payment based on real time current earnings of the individuals involved.

The new system will work like this, welfare payments will be reduced at a steady rate so the more people earn the less they will need to rely on benefits.

The real time system will allow us to adjust benefit payments against real time earnings information.

So people will be able to work 20 hours one week, 25 the next, 30 the next, if that’s all they are able to do and the benefit payment will simply be adjusted to make up any short fall.

Of course we will expect people to work enough to support themselves to leave benefits altogether.

But what the new system will do is give low earners the freedom to arrange their working pattern in a way that suits them best.

These changes will be particularly valuable for people with fluctuating health conditions allowing them to work more when well enough and less when their condition deteriorates.

The benefits system will fit around them rather than the other way around.** **

For particular groups, such as people with children and disabled people we will allow them to keep more of the money they earn before applying the taper.

The Universal Credit payment then tapers off as earnings rise, delivering a more stable system and allowing for a gradual move to full time work.

This will provide people claiming benefits and those on low incomes with some certainty around what they are entitled to and how much they will receive.

It means families can budget on the basis of a guaranteed minimum income.

It will deliver predictability to a system that for too long has been ruled by inconsistency.

Most families budget as a household rather than as individuals so payments will be made per household to replicate the experience of receiving a wage.

This does mean we will take into account the full amount brought into the home by second earners and will not apply a second earner disregard.

The majority of existing or potential second earners do not see their work incentives affected by the Universal Credit.

The blunt truth is we cannot afford to introduce a second earner disregard at the moment.

In the longer term we may look at this again, if we can afford to do so.

The key point is that Universal Credit increases the options open to families to strike the right work-life balance for their own circumstances.

This is the fairest way to ensure support is given to those who need it most.

These changes combined with more effective back to work support through the Government’s flagship employment scheme - the Work Programme - will help people claiming benefits into work.

We want to make sure that a life on benefits does not become the most attractive choice for people who are able to work.

It is an illness in society for people to see others not trying when they could.

It breeds a sense of unfairness.

People question why they are working so hard to support themselves and their families and then have this additional burden placed upon them.

For the people who have given up trying their sense of self worth, their very identity is undermined.

We see that most clearly in the rising levels of mental health problems among people who are dependent solely on benefits.

Our aim is to dramatically push back the level of dependency.

We want to see people in full time sustainable, flexible, work.

But we realise part-time, temporary jobs can be part of that journey back into work.

One of the implications of Universal Credit is that we will have to introduce a much more flexible conditionality regime.

Our expectations of how much work people take on will have to be driven by personal circumstances in a very different way to the way the 16 hour rule operates.

We don’t want people to be able to use the benefit system to top up their income because they choose to work part time, so there will be conditions to claiming benefits that restrict that choice.

But we do want to provide a safety net for those who can only work part time for genuine reasons, or who are working part time as a means to move closer to full time work.

It is much better for people to do some form of work, however small, than fall out of the labour market completely.

This is something I have asked Jobcentre Plus to look at further, and advisers are now promoting “mini-jobs” as a valuable way to gain experience and begin to get back in touch with the labour market.

The changes we are making to the welfare system and the support we are putting in place to help people into work will come together to radically change the labour market.

People claiming benefits will, for the first time, be free to work flexibly.

Ultimately this will create a more active, more engaged group of people looking for work.

So, as I said at the start, the challenge for employers is to be flexible enough to get the most from this newly liberated work force.

Published 26 September 2011