Southwark is facing a crisis as Universal Credit is rolled out, with local food banks and charities putting out urgent calls for help as they see a dramatic increase in clients. This situation is not limited to Southwark, it's a problem facing boroughs up and down the UK. But who does Universal Credit really benefit?
Far from being an expert in fiscal studies, my background working in fraud prevention has given me a small insight into how financial systems work, and the huge systematic changes proposed by Universal Credit piqued my interest.
When I first heard about Universal Credit, several years ago, and as a benefit recipient myself, my first question was why? It’s true that the old benefits system was overly complex, but was such radical reform required? Why would the government spend so much money on completely overhauling a system that needed work, but arguably was not completely broken? What was in it for them?
Many benefit recipients currently receive their payments weekly or fortnightly, such as Income Support, or Jobseekers Allowance, Working Tax Credits, Child Tax Credits and others. Under the new Universal Credit system, all the eligible benefits will be rolled together into one lump sum. Instead of recipients receiving smaller weekly payments, here and there, they will now get one monthly payment for a higher amount in one single transaction.
Concerns have been raised already about the transition for recipients from being paid weekly to monthly and the difficulties that could occur with budgeting, The Government also seem less than concerned over the impact that having no benefits at all during the 5-6 week transition period has on the most vulnerable. Last week, Southwark Foodbank launched an urgent appeal for food donations as its client numbers increased dramatically and it's shelves emptied.
Housing Benefit makes up a big part of the Governments welfare expenditure. 2014-2015 statistics show that nearly 5 million people in England and Wales claim housing benefit, with those on the lowest incomes, often receiving the biggest housing benefit payments. For example, a single full time parent receiving Income Support may have their rent covered in its entirety. If they were a local authority or housing association tenant, the Housing Benefit would have previously gone straight to their landlord. That money will now instead pass through the claimants own personal bank account and they will be responsible for paying rent in full, out of the overall sum that they receive.
For eligible renters in the private sector, their payments were always made directly to them in this way, but now that this applies to every eligible recipient in the social rented sector, nearly £24 billion each year in Housing Benefit is set to be paid directly from the Government, to the landlord, through private bank accounts first. As a result, the appearance of the income of many recipients will increase dramatically. It is these funds being pointlessly transferred through the bank accounts of the countries poorest that intrigues me the most.
What does this mean?
In the eyes of the banks, the monthly income of many benefit recipients has historically been fairly low in the example described above, with small weekly or fortnightly payments coming in, the majority of which is likely being spent on outgoings before the next payment a week or a fortnight later. In many cases, the bank balance of benefit recipients will never exceed a certain figure. Now, all that has changed. Benefit recipients Vs. people receiving a monthly wage, will be harder for the systems and algorithms used by banks to differentiate between when calculating ‘credit-worth’.
That single parent on Universal Credit may now receive a much larger sum, not unlike a full time workers salary. On the surface of things and in terms of the overall figures, it appears as though that individual is thriving, the bank balances of the poorest now appearing much healthier and everyone looks like they’re doing better financially. In fact, the poorer you are, the more well off you may now appear, in terms of the figures.
Here's a break-down using the example of that full time single parent with one child, living in a Housing Association property with rent of £200 per week:
Under the old benefits systems would receive:
£64.02 Child Tax Credit per week
£146.20 Income Support per fornight
£20.70 Child Benefit per week
(Housing Benefit paid directly to the landlord)
Total weekly income = £157.82 (Y)
Total monthly income = £683.88 (Yx52/12)
Total annual income= £8,206.64 (Yx52)
Under Universal Credit will receive:
£1461.56 per month
£89.70 Child Benefit per month
(Housing Benefit paid directly to the claimant)
Total monthly income= £1551.26 (Z)
Total annual income = £18,615.12 (Zx12)
For this claimant, their monthly income increases by 126%. Where previously their bank balance was unlikely exceeding a certain amount each month as benefits were paid in in dribs and drabs, they are now in a completely different position, their bank balance breaking all previous thresholds, and they are now deemed much more credit-worthy. They will likely be eligible for overdrafts, loans and credit cards, with banks and lenders set to make a fortune in interest. This very scenario happened to me during a period when I rented privately, when my Housing Benefit was being paid directly to me, I was able to take out a £700 overdraft and two credit cards, where previously I couldn’t get any credit at all. I’m still paying it off, 6 years later.
Questions need to be answered: What effect will this have on the economy? Will the transfer of these billions of pounds through personal bank accounts affect the appearance of Income Per Capita? Will this help the financial institutions to get back on their feet after the banking crisis? Will this reduce the appearance of poverty and improve the appearance of standards of living under a Tory Government? And importantly, what safeguards are in place to prevent benefit recipients from falling into debt?