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:
- Working tax credit;
- Child tax credit;
- (Working-age) housing benefit;
- (Contributory) employment and support allowance;
- (Contributory) jobseeker’s allowance; and
- (Non-incapacity) income support.
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.