It’s been 13 years since the introduction of Universal Credit (UC), which was designed to simplify benefits and make work pay, yet the welfare system is more bloated than ever. The rollout of UC was only meant to take four years, but it is still not complete. It has been delayed by courtroom battles, bureaucratic inertia, disruption from the pandemic and intense pressure from the poverty lobby. This delay has left a jumble of schemes that dispense welfare alongside regular benefit payments.
As part of my research at the thinktank Onward, we can now reveal that there are more than 20 different schemes that sit alongside Universal Credit, handing out welfare separately. This is the hidden world of ‘passported benefits’: discounts, freebies and extra payments that are unlocked by being on benefits. Claiming Universal Credit gives you a master key to unlock thousands of pounds in extra effective income.
Much of this income is provided in kind: free school meals, free holiday clubs, free transport to school, free prescriptions, free dental treatment, free legal help, free childcare hours, free home insulation and more. Then there are the extra cash benefits: pregnancy grants, healthy food cards, cold weather top-ups, generous savings accounts and discretionary payments that claimants can spend however they like.
There are discounts and rebates for council tax, energy bills, broadband contracts, water tariffs, education bursaries, court fees and funeral expenses. On top of that, there are local schemes offering everything from discounted mini-golf to spa facility use, beach huts, e-bike hire, theatre workshops and cinema tickets. All of this is accessible to people already receiving tens of thousands each year in Universal Credit payments that are intended to cover essential living costs.
Together, the bill for these schemes is a staggering £10 billion, and that is just for those claiming via Universal Credit or legacy working-age benefits. Each passported benefit might appear well-meaning and reasonably cheap on its own, but it is only adding to a benefits bill that is expected to reach £100 billion by the end of the decade.
It is easy to see how these passported benefits are introduced. They are often politically irresistible to embattled ministers who struggle to get grand reforms signed off by party whips or the Treasury, but can squeeze through an extra £50 million or £500 million to show they still care.
Underneath the veneer of kindness is an altogether more uncomfortable truth: paternalism is destroying the aspiration to come off benefits. For millions of claimants today, working comes with a triple penalty. Benefits are tapered at a rate of 55p for every pound earned. Earnings then start being taxed, creating a steeper marginal effective tax rate, with almost two thirds of working claimants losing more than 60p for every extra pound they earn. On top of that, they will start to lose access to some passported benefits at arbitrary earnings thresholds, such as free prescriptions, Healthy Start cards or legal aid. And then, once they are finally earning enough to taper off Universal Credit altogether, there will be a cliff edge where they will lose thousands of pounds, and sometimes tens of thousands of pounds, overnight as they lose this ‘passport’ to all the other benefits.
Even without counting the impact of all this on the incentive to work, which is clearly serious, many schemes are failing on their own terms too. Bursary cash for disadvantaged teenagers to stay in college results in lower earnings and higher benefit dependency by their late twenties. Pregnancy grants fail to improve outcomes for mothers or babies. Online forums openly discuss how Healthy Start cards can be used to buy alcohol, tobacco and PlayStations. Savings top-ups leave claimants paying into government-backed accounts for special bonuses rather than paying off their debts, which continue to accrue interest.
Online forums openly discuss how Healthy Start cards can be used to buy alcohol, tobacco and PlayStations
Overall, this shadow welfare system is sabotaging the entire purpose of Universal Credit. When the cumulative result is that claimants do not believe that working more will make them better off – when they risk suddenly losing access to extra benefits along the way – these side schemes are harming the life chances of the very people they are supposed to be supporting.
The only way to restore confidence in work as the best route out of poverty is through an act of great political courage: abolishing most of these schemes and consolidating them into regular Universal Credit payments or one-off crisis support. Dispersed schemes spread across almost every domestic policy department in Whitehall and every council in the country need to be brought firmly into the grip of the Secretary of State for Work and Pensions.
It will take discipline to avoid the temptation to constantly tack extras onto the benefits system rather than fixing its foundations. The prize, however, is a welfare state that is cheaper to administer, simpler to explain – and most importantly – easier for claimants to leave behind.
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