The Treasury manages public spending within two ‘control totals’ of about equal size:

  • departmental expenditure limits (DELs) – mostly covering spending on public services, grants and administration (collectively termed ‘resource’ spending) and investment (‘capital’ spending). These are items that can be planned over extended periods.
  • annually managed expenditure (AME) – categories of spending less amenable to multi-year planning, such as social security spending and debt interest.

Social security and tax credits together are the biggest source of AME spending. Once fully rolled out, universal credit (UC) will combine and replace six working-age welfare payments worth around £60 billion a year – equivalent to around a quarter of total welfare spending and second only in size to the state pension.

Our January 2018 Welfare trends report described UC and how it differs from the existing benefits and tax credits that it will replace, and detailed how we forecast the effect of UC on welfare spending.

The payments replaced by UC are known as the ‘legacy benefits’ and include:

UC combines many features of these means-tested benefits, with entitlement varying by number of children in a household and whether they have any disabilities, capability for work, carer status, housing and childcare costs. A single, unified benefit should mean that take-up of some elements will be higher than it is in the legacy benefits system, since a claimant completing the application form in full will automatically receive all the elements to which they are entitled. Entitlement is then tapered with net income at a single rate of 63 per cent. For some cases this tapering begins at the point income exceeds a monthly work allowance; others will have their award tapered from the first pound of income.

Many of the differences between UC and its predecessors are operational, including the introduction of monthly reporting, increased conditionality, and the imposition of a ‘minimum income floor’ for some self-employed claimants.

UC was originally planned to have been fully rolled out by 2017-18, but the full rollout is currently expected to complete by 2022-23. At present, we produce our forecasts for the benefits affected by UC by first assuming a no-UC counterfactual (i.e. the legacy benefits continue as before) then adding a forecast for the marginal cost of UC in each year. In outturn years, in order to enable monitoring of monthly spending against our forecasts, we switch to an ‘actual cost’ presentation of spending showing legacy benefit spending net of the impact of the UC rollout and the amount actually spent as UC.

In our latest forecast, actual spending on UC is estimated to have reached around £3 billion in 2017-18 and an initial forecast of actual spending in 2018-19 is around £8 billion, reflecting the gathering pace of the rollout. The marginal saving from the introduction of UC – representing much larger gross costs and offsetting gross savings – is forecast to be around £0.2 billion in 2018-19. It rises to £1.0 billion in 2022-23, which comprises a £2.5 billion net saving due to differences between UC and the legacy system being partly offset by a £1.5 billion cost of transitional protection payments to cases that are migrated to UC at DWP’s discretion and that would otherwise lose out when they move onto UC.

  • Latest forecast

    The marginal saving from UC is forecast to rise from £0.2 billion to £1.0 billion between 2018-19 and 2022-23 as the UC rollout progresses. This net saving is the sum of large gross costs and offsetting gross savings that arise from different features of the UC policy design. These gross costs and savings increase in scale as the UC rollout progresses.

    Universal credit: marginal cost forecast

    ucmarg

    Our March 2018 forecast revised down the marginal saving forecast by £0.1 billion on average between 2018-19 and 2022-23 relative to our November forecast. Updates to the underlying modelling of the marginal saving were the key drivers of these changes, with corrections to the treatment of Autumn Budget 2017 policies accounting for the remainder. Actual spending on UC in 2017-18 was revised down by £0.2 billion following lower-than-expected spending and caseload volumes in the latest monthly outturn data.

    Universal credit: changes since previous forecast

    UC

     

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  • Previous forecasts

    Over time, our estimate of the net effect of UC on spending relative to the legacy system has moved from a net cost to a relatively large net saving and more recently to a smaller net saving. A key driver of these swings has been Government policy. In particular, the main explanation for the shift from net cost to net saving is that the Government cut the work allowances in UC and the income thresholds in tax credits in Summer Budget 2015, but then subsequently reversed the tax credits cuts before implementing them in November 2015. As a result, UC is on average now less generous than the legacy system. The contribution of work allowance policy changes to revisions to our UC marginal cost estimates was described in a box in our 2018 Welfare trends report.

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  • Policy measures

    Since our first forecast in June 2010 the Coalition and Conservative governments have announced around 15 policy measures directly affecting our forecast for UC spending, with many policies relating to legacy benefits also having a knock-on effect on UC. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook.

    Some of the largest measures include:

    • Limiting the child element of UC to 2 children for new claims (July Budget 2015).
    • Removing the family element in UC for new claims (July Budget 2015).
    • Reducing the income disregards and work allowances in UC (July Budget 2015).
    • Updating the UC delivery schedule (Autumn Statement 2015).
    • Uprating the Minimum Income Floor with the National Living Wage (Autumn Statement 2015).
    • Reducing the taper rate to 63 per cent (Autumn Statement 2016).

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