Rishi Sunak’s ‘retreat’ on universal credit is no such thing

As the prime minister refuses to say he could live on £118 a week, John Rentoul looks at the reality of a partial U-turn

The chancellor may increase the benefit in the Budget (AFP/Getty)

Rishi Sunak, the chancellor, and Therese Coffey, the work and pensions secretary, are understood to be in talks about a plan to increase universal credit in the Budget next month, as a way of softening the blow of losing the £20-a-week uplift.

I would guess that the prime minister is keen on the Treasury doing something to try to buy off discontent among Conservative MPs on this subject, having avoided taking the risk of putting the £20-a-week cut to the vote in the House of Commons.

The compromise is politically ingenious, in that it can be presented as increasing incentives to work and to work longer hours, while costing relatively little. You can tell it is clever, because it was proposed a month ago by Jonathan Reynolds, Coffey’s Labour shadow. He was looking for a way to move the argument on after the cut came into effect, knowing the opposition’s strong instinct for “bring backery” – he wanted to avoid locking the party into a position of simply arguing for the £20-a-week uplift to be restored. He knows that once the £20 has gone, the best way of using extra resources in the benefits system is not necessarily a flat increase on the basic rate of universal credit.

So he proposed what Sunak and Coffey and now considering, which is to make universal credit slightly more generous for those in work, by allowing claimants to keep more of their extra earnings if they get a pay rise or work longer hours. Under the present rules, universal credit is withdrawn at the rate of 63p for every extra £1 earned, which is higher than the top rate of income tax (45p in the pound on incomes over £150,000 a year).

The government plan under discussion is to reduce the rate at which universal credit is withdrawn from 63p in the pound to 60p. That may not sound generous, but it still costs a significant amount of money – about £1bn a year, compared with the £6bn a year of the £20 uplift – mainly because it extends upwards the level of earnings at which workers continue to qualify for universal credit.

This is useful for the government because it holds firm on most of the savings from ending the £20 uplift, while allowing MPs about to be besieged with stories of hardship to say that the scheme is being made more generous – and in a way that “makes work pay”. For some months now, Boris Johnson has been responding to complaints about ending the £20 uplift by saying that he believes work – rather than higher benefits – is the cure for poverty. This drives anyone who understands universal credit round the bend, because 40 per cent of claimants are in work and will also lose out from the cut. But now the prime minister could be able to say that the system is being tweaked to their advantage and to improve work incentives.

The change would do nothing, however, for the 60 per cent of universal credit claimants who are not in work. Talking to journalists on his trip to the US, Johnson repeatedly dodged the question about whether he could live on £118 a week, which drew attention to how low universal credit was before the coronavirus crisis.

I fear that the prime minister is banking on most people not understanding the benefits system, and failing to realise that most of the gains from the change will accrue to those who are already relatively better-off – people who are still low paid, by definition, but the extra money will go to those who are earning enough to have their universal credit phased out. Indeed, much of the extra spending will go to people who are currently not on universal credit at all because they earn just above the upper limit.

The other important fact to bear in mind is that the rollout of universal credit is only 62 per cent complete, which means that there are millions of people on benefits who have not had the £20-a-week uplift – their benefits are too low too, and any attempt to make the system fairer should also recognise them.

Indeed, any attempt to make universal credit more generous should be welcomed, but there is no easy way around the means-test trap, which means that low-paid workers are going to face what are in effect high marginal rates of tax as credit is withdrawn. It is interesting that Reynolds concluded that it was better to focus additional resources on that problem, when most of the Labour Party would probably want to use any extra money to raise the basic rates of benefit for everyone on universal credit, in or out of work, and those on legacy benefits as well.