In Chapter 4 of our December 2012 EFO, we discussed the fiscal outlook for 2012-13 to 2016-17. In this box, we discussed changes to the provisional universal credit forecast that was included in our March 2012 EFO. Changes to the forecast were due to a number of factors, including policies announced at Budget 2012 and finalisation of policy parameters in universal credit as well as .refinements to the methodology and assumptions used to forecast universal credit. We also discussed the main uncertainties in the forecast, which largely related to the unpredictability given the scale of the policy. The analysis in this box has since been superseded by developments in the universal credit forecast, though many of the key uncertainties remain.

This box is based on DWP universal credit forecast data from December 2012 .

In March we included provisional estimates of £1.8 billion in 2015-16 and £2.5 billion in 2016-17 for the additional costs of universal credit. With many of the policy parameters still to be decided, the 2015-16 figure was based on our provisional analysis in the July 2011 Fiscal sustainability report, and the 2016-17 figure was a ceiling on the additional costs agreed by the Treasury and the Department of Work and Pensions (DWP) at the time of the last Budget.

The policy design for universal credit is now much firmer and we have been working with DWP, HMRC and others to produce a more robust bottom-up estimate of the costs. Table E shows our latest estimate and the change since the estimates and assumptions we made in March. Further details are provided in the policy costings document published by HM Treasury alongside the Autumn Statement. A number of factors have contributed to this change, including:

  • changes in OBR’s economic assumptions;
  • policies announced in Budget 2012, which changed the baseline social security and tax system forecast onto which the additional costs of universal credit have to be added. Some of these also had knock-on effects on the incremental costs of universal credit;
  • a number of policy parameters within universal credit which have been finalised since March and are now included in our forecasts; and
  • refinements to the methodology and assumptions used for the universal credit forecasts.

The Government has announced a number of other welfare policy decisions in this Autumn Statement, and the impact of these policy decisions are estimated on a baseline which includes our estimate of the costs of universal credit.

Although the latest estimate is more robust, there remain a number of significant uncertainties. This is a very complex policy change which affects virtually all working age benefit recipients. Particular uncertainties include:

  • any further changes to policy parameters. If these change when the policy is implemented then they will affect the costs. For example any further changes to the assumed timing of transitions from existing benefits to universal credit would affect the costs for the transitional protection component of the policy. We will update the costing at future events as these policies are finalised;
  • the behavioural responses of social security recipients. For example, the single taper rate within universal credit could have an unexpected effect on individuals’ choices of working hours;
  • the scale of the policy change. It is particularly difficult to draw lessons from previous policy costings, as the structure of universal credit represents a significant departure from the existing social security system. Assumptions on certain factors, including take-up and inflows, are based on the behaviour and characteristics of existing social security recipients who will migrate to universal credit in the future; and
  • error and fraud savings. These are subject to significant uncertainty, particularly during the transition period. It is inherently difficult to anticipate new opportunities for fraud and error that a policy change of this scale may create. We believe the estimated savings are reasonable on the basis of DWP’s view that the new Real Time Information system can be delivered on time and is immediately effective. If this was not achieved then substantial savings would probably be lost.

The additional costs of universal credit for 2015-16 onwards are currently included within our forecast for social security in AME. For 2013-14 and 2014-15, these costs will be met from DWP’s DEL, and are therefore included within our forecast for PSCE in RDEL.a Table A shows the total movement in the estimate of the additional costs of universal credit. The costs shown here were those agreed before the further policy changes announced in this Autumn Statement.

Table E: Additional costs of universal credit, excluding financial transactions

a In due course we expect that HM Treasury will adjust DWP’s DEL to move these costs from DEL to AME, and we will then reflect the final costs of universal credit in our social security forecast for all years.