In our latest forecast, universal credit (UC) is assumed to roll out slowly during 2014-15 and 2015-16, with the pace increasing in 2016-17 and 2017-18 – by which time 5.8 million people are assumed to be on UC. But the forecast is based on a continuation of the legacy benefits regime, with UC added into the forecast as a marginal cost relative to the legacy system. This top-down approach is the best we can do until there are sufficient data to allow us to construct a bottom-up forecast of the rise of UC and the fall in the legacy benefits.
The rollout of UC has been subject to significant delays, related to well-documented challenges in developing an effective IT system. Designing a single IT system that can cope with the complex and frequently changing circumstances of widely differing households across different benefits is a significant challenge. The early experience with tax credits and the recent reforms to incapacity benefit/ESA and DLA/PIP illustrate the potential impact of such delivery challenges.
Using a top-down approach reduces some of the UC-related uncertainties in the forecast, since the marginal cost of UC relative to legacy benefits is estimated to be relatively small – less than £½ billion in any year. So the forecast is relatively insensitive to changes in the speed at which UC rolls out. It is, though, important to note that the estimated marginal cost of UC is the net effect of much larger gross costs and savings.
Increased generosity and assumed increased take-up under UC act to increase expected welfare spending in 2018-19 by around £3.5 billion. These increased costs are offset by:
- error and fraud savings worth an estimated £1.4 billion in 2018-19 (relating mainly to the use of real-time information tax data);
- the introduction of a minimum income floor for self-employed claimants, estimated to save around £1.1 billion in 2018-19;
- abolition of the income disregards currently in tax credits, worth an estimated £1.2 billion in 2018-19; and
- a number of other smaller policy changes, which together result in around £0.8 billion of estimated savings in 2018-19.
Transitional protection of claimants’ awards temporarily increases the net cost of UC by around £0.6 billion in 2018-19 ahead of the system being assumed to reach steady-state in the 2020s.
To the extent that delays in rolling out UC and problems in developing effective IT solutions affect these estimated costs and savings by different amounts, the estimated marginal cost of UC could be significantly higher or lower than we currently estimate. We will revisit the assumptions underpinning our estimates of the marginal cost of UC ahead of our December 2014 EFO, which will have to continue to be based on a top-down approach for the time being.