James Heywood: A £20 blanket uplift in Universal Credit would miss an opportunity for better targeted change

25 Jan

James Heywood is the Head of Welfare and Opportunity at the Centre for Policy Studies.

One of the iron laws of politics is that it is very easy to give things away and extremely difficult to take them back again. That can prove a particular problem when a government has had to put in place unprecedented levels of support to cope with a pandemic.

This week, for example, the Labour Party has been loudly claiming that the Chancellor is planning to “slash Universal Credit in the middle of a pandemic”. It is transparently disingenuous to claim that ending measures which were clearly intended to be temporary amounts to a ‘cut’, but it is also very easy to do so. As a result, it looks like ministers may be forced into another embarrassing and expensive U-turn.

It’s all too easy to say, with the wisdom of hindsight, that the Government should have made the £20 increase to Universal Credit a separate payment to help alleviate hardship during the pandemic, rather than simply increasing the standard rate.

But there is still an extremely good case that, while legitimate concerns have been raised, a policy which may have made sense as an emergency measure would make no sense as a permanent one.

Apart from anything else, a blanket cash uplift is an incredibly blunt policy instrument. In particular, the £20 increase was worth a lot more, as a proportion of overall income, to claimants who don’t also have children to support. The standard allowance for a single claimant under 25 increased by 36 per cent, compared to 19 per cent for a couple over 25.

The critics are right that it would clearly be unreasonable to cut off this extra support in April, when restrictions will still be in place and furlough is due to end. The idea being floated by the Treasury of instead giving claimants a one-off £500 cheque is slightly bizarre, and would be inherently unfair when claimants are constantly flowing in and out of Universal Credit (although mainly in at the moment, for obvious reasons).

But extending the £20 increase indefinitely will add more than six billion pounds to the annual welfare bill – and do so in a way that is far from optimal.

A better option, as set out by the Centre for Policy Studies this week, would be to replace the £20 uplift from April with a separate Coronavirus Hardship Payment, with the same value and same eligibility criteria so claimants do not see a fall in income while Covid is still overshadowing the economy. This should be clearly defined as a six-month measure, with a further three months at £10 to phase out the support.

It might sound like semantics, but it is much easier to explain why a Coronavirus Hardship Payment is not being retained forever than it is to explain why you’re reducing benefits. What matters is not whether the money is still being spent in three, six, or nine months’ time, but that it doesn’t become a permanent additional liability for the Exchequer.

This move could be accompanied by a much more generous uprating of the standard Universal Credit allowance. It is currently only set to rise by 0.5 per cent in April. If instead a one-off rise of 2.5 per cent (the same rate being applied to the State Pension) were to be applied, this would amount to around an extra £100 a year for a single claimant over 25.

Crucially, all of this should be accompanied by reforms which would meaningfully increase the generosity of Universal Credit – but in a way that would be much better targeted than the £20 blanket uplift.

Currently, if you enter work you lose 63p of benefit for every £1 you earn, once you exceed any “work allowance” you might be entitled to. This acts like a hefty tax on the people we most want to encourage into the world of work. Cutting that rate to 55p, and introducing a new £1,000 work allowance for childless claimants (who are set to lose most proportionally from the £20 being phased out), would mean the lowest paid could take home a lot more of the money they earn. In polling on welfare by YouGov for the CPS, the public were clear that they thought the benefit system should prioritise making it easier for people to get back into work: this would deliver that.

Something clearly needs to be done to address this issue before it becomes a major political sore and forces the Government into a policy it knows would be both bad and hugely expensive. The package I’ve just set out would cost roughly half of what the £20 uplift would cost if it was kept permanently. It could allow ministers to phase out the uplift while highlighting the fact that the Universal Credit system overall will still be more generous post-Covid than it was going into the pandemic – and significantly better at rewarding work.

James Heywood: The case for public sector pay restraint is founded on fairness

21 Nov

James Heywood is a Senior Researcher at the Centre for Policy Studies.

We may be eight months into this pandemic, but we have barely begun to see its full impact on the labour market. The unemployment rate, which has already risen from 3.9 to 4.8 per cent compared to a year ago, is expected by the Bank of England to rise as high as 7.5 per cent, and other forecasts put it much higher still. Wages fell over the summer and wage growth is expected to remain subdued for some time.

The figures from the Office for National Statistics (ONS) show the worst month for wages was June, with a decline across the economy as a whole of 1.6 per cent compared to 12 months before. Within those June figures, however, there is a huge disparity between the public and private sectors; earnings in the private sector were down nearly 3 per cent, while the public sector actually saw growth of 4.5 per cent.

In fact, pay growth in the public sector is now higher than it has been for over a decade. Private sector wages have improved a little since June, but even that bounce back in the late summer as restrictions were lifted was far outpaced by earnings growth in the public sector. A recent survey of employers found that more than half of private sector employers expect to freeze pay over the next 12 months, compared to average expected rises in basic pay of two per cent by public sector employers.

The setting of public sector wage rates has to take into account what is going on in the rest of the labour market. With the labour market tightening in recent years and wages picking up, the Government has found it necessary to ease up on public pay policy to keep pace with the private sector and prevent problems with recruitment and retention. It is right that pay policy should reflect what is happening elsewhere in the labour market. Now that the private sector is suffering a sudden shock, it is reasonable, fair and prudent to adjust pay policy in the public sector.

Public sector workers, on average, receive a pay premium compared to their private sector counterparts, even once factors such as types of role and levels of qualification have been accounted for. This gap is wider still once the generosity of pension provision in the public sector is factored in. In the public sector 86 per cent of workers receive implicit employer pension contributions worth 10 per cent of earnings or more, compared to just 10 per cent of private sector workers. Employees in many areas of the public sector also benefit from incremental pay rises in addition to the uprating of basic pay levels, meaning their pay increases automatically unless they are already at the top of their pay band.

The ONS have modelled the differential in earnings taking all these factors into account, including pensions. While public sector pay restraint after 2010 has narrowed the gap somewhat, the ONS estimate that the public sector earnings premium in 2019 was still seven per cent. This gap has only narrowed by three percentage points since 2011, and has been rising since 2017. Now that private sector earnings are stagnating, it may quickly widen again significantly unless the Government alters pay policy.

The Centre for Policy Studies published a paper yesterday which looks at comparisons of pay in the public and private sectors and explores the Chancellor’s options for pay restraint. Limiting average pay uprating to one per cent each year for the next three years could deliver a reduction in annual expenditure of nearly £6 billion and ensure private sector workers are not being left behind unfairly. Not only is it unfair on workers facing pay cuts and the threat of redundancy to continue widening the gap between public and private sector remuneration, it also distorts the labour market.

We should be clear: this is not a simple argument about public sector ‘fat cats’ or top civil servants with gold-plated pensions, and we should not pretend otherwise. Most of the public sector workers we are talking about, including no doubt some of the people reading this, do not earn huge salaries, and some work in high pressure or dangerous jobs.

The Government will need to think carefully about how any change to pay policy is presented, and the approach should be nuanced and flexible. Pay restraint is not about a political assault on the public sector – not only would that be unfair, especially after the year our NHS has experienced, it would also be terrible politics. It is simply about making a reasoned case that pay policy should reflect developments in the wider labour market and should be fair to all workers and all taxpayers across the UK.