1. 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

2. Encourages dependency
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

3. To work or not to work To work more or to work less
Two decisions
To work or
not to work
To work more or
to work less
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
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

4. Participation Tax Rate
Lone parent with two children: income from work and benefits
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Of which £1.32 in tax/NI and £3.58 in benefits is withdrawn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
70% MDR (tax credits & taxes withdrawn together)
95.5% MDR (benefits, tax credits & taxes all withdrawn together)
Net Income
100% MDR
(IS withdrawal)
16 Hrs p.w.
at min wage
Tax Starts
Gross annual earnings

5. Marginal Tax Rates
Marginal Tax Rate today (ex -One-earner Couple with Children) 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100% £0
£10,000
£20,000
£30,000
£40,000
Household Annual Earnings
MTR
Tax and National Insurance
Withdrawal of benefits

6. Levers available to achieve reform objectives
Financial levers
Administrative levers
Benefit withdrawal rates
Earnings disregards
Benefits levels
Benefit structure
‘Front-end’ administration
‘Back-end’ administration

7. 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Support withdrawn rationally via a ‘single taper’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

8. 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.

9. An outline structure for a Universal Credit
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
Consolidation of main out-of-work benefits and tax credits, with payments for housing, disability and children
Benefit income
Earnings

10. Unemployed: what does it mean for them?
Single customer, no children, NMW, Renting (£80 rent, £15 council tax)

11. Participation and Marginal Tax Rate created perverse choices
Summary
The system is no longer achieving its aims: it has three fundamental problems: dependency, complexity and cost
Participation and Marginal Tax Rate created perverse choices
We have limited levers to achieve change
There are three main options from here
Universal Credit is both cheaper and better value than the alternatives
Universal Credit demonstrably makes work pay for the poorest?

12. Official contact: adam.taylor@dwp.gsi.gov.uk 02074497669
Questions?
Official contact:
Consultation address: