Assessing the impact of welfare reform

A recent report by Sheffield Hallam University finds changes to Great Britain’s welfare system have had a negative effect on incomes.

 

A recent report by Sheffield Hallam University has found that the impact of proposed welfare reforms will be spread unevenly across Great Britain. The report notes how older industrial areas and less prosperous seaside towns will be hit the hardest, while much of southern England and London escapes lightly.

The post-2015 welfare reforms will take almost £13 billion a year from claimants by 2020-21 and when coupled with welfare changes that have occurred since 2010, claimants will receive a total of £27 billion less a year by the end of the decade than they did at the start.

However, the report notes that despite the severity of cuts so far, at this stage the Treasury has saved less than intended. By March 2016 the financial loss to claimants was £4.3 billion less than expected, meaning the Treasury is £2.5 billion short of its original savings target. However, by 2020-21 a new round of cuts to welfare reform and the introduction of Personal Independence Payments (PIP) is expected to help the Treasury reach its target. These changes are likely to affect everyone on lower and middle incomes, not just those who are out of work.

By 2020-21 another £12.9 billion is expected to be taken from claimants meaning in total, claimants will have lost more than £1 in every four previously paid to working-age benefit recipients. This loss is equivalent to £690 a year. In the period to March 2018 the biggest loss to claimants will come from the transition to PIP. Thereafter some of the other reforms, notably the benefit freeze, reductions in tax credits and the new Universal Credit tapers and thresholds are expected to hit hard. The report estimates that none of the housing-related reforms are expected to deliver savings to the Treasury until 2017 and in some cases not until 2018.

However, despite the scope of these changes, the losses for some people may be offset by the increase to the personal tax allowance, the national living wage, the reduction in social sector rents and the extension of free childcare.

By 2020-21 the Conservative government plans to increase the personal tax allowance to £12,500. However this change will only benefit those in full-time work as part-time workers are likely to already be below the threshold. The introduction of the national living wage will be of benefit to all.

For those social sector tenants who do not claim housing benefit, the reduction in social sector rents will put an extra £600 per year in their pocket. Yet under the new ‘pay to stay’ initiative higher-income tenants could face bigger rent bills effectively cancelling this saving. The extension of free childcare to 30 hours per week for parents of three and four year olds is worth up to £2,500 per child and while this will prove substantial, it will also benefit many upper-income households who do not rely on the benefit system.

Ultimately, the report acknowledges that these reforms will be comprehensive and far-reaching but notes that while almost all full time middle and higher earners will benefit from the perks and will barely notice the impact of these welfare cuts, others such as lone parents will struggle as a result of their introduction and may be oblivious to the perks.

 

*By 2015-16

Source: HM Treasury and Sheffield Hallam estimates based on offical data

 

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