Covid-19 likely to have ‘lasting consequences’ for spending on universal credit

OBR highlights implications of the pandemic on caseloads and awards, particularly in relation to the health-related elements of the benefit

The Covid-19 pandemic is likely to have 'lasting consequences' for spending on universal credit, the Office for Budget Responsibility (OBR) has said.

Introducing its Welfare Trends Report - March 2021, published today, the OBR highlights that due to the demands created by the coronavirus pandemic, this year's annual report is shorter than usual and focuses on two areas - the nature of the sharp rise in spending on universal credit, and the medium-term implications of the pandemic for working-age welfare spending (and universal credit in particular).

Forecasting that spending on universal credit will rise by £19.5 billion in 2020/2021, the OBR says that this is based on -

• an increased caseload - expected to average four million through 2020/2021 and up 88 per cent on 2019/2020;
• the temporary £20-a-week increase in the universal credit standard allowance - estimated to have cost an additional £4.4 billion; and
• other pandemic-related policy changes such as raising local housing allowance rates - estimated to have cost £1.2 billion.

In addition, turning to the medium-term implications of Covid-19, the OBR says that -

'Our latest forecast assumes the pandemic will have lasting effects on the prevalence of benefit receipt that results in higher caseloads and awards .... These effects are largely confined to universal credit and are concentrated in the health-related elements of the benefit.'

Indeed, the OBR forecasts that while the coronavirus-related caseload (which peaked in June 2020 at 1.3 million) will fall back as unemployment falls, it will nevertheless stabilise at around 240,000 in 2025/2026 -

'This reflects the judgements we have made about the lasting implications of the pandemic for the labour market and for incapacity-related benefits. Our central economy forecast is predicated on higher labour market inactivity and a modestly higher equilibrium rate of unemployment in the medium term. Our universal forecast assumes that those effects translate into 240,000 more health-related cases and 55,000 more cases in the ‘intensive work search’ group.'

NB - in a section focusing on policy risks, the OBR highlights that in last year's Welfare Trends Report it looked back at how the large cuts to welfare spending announced in Summer Budget 2015 had fared in practice, concluding that the measures that were subsequently dropped, reversed or watered down were typically those that generated cash losers from one year to the next. The OBR adds that -

'This prompted us to flag the risks posed by ending the one-year £20-a-week boost to the universal credit standard allowance. As many expected, that measure was extended into 2021/2022 at the March 2021 Budget, but it has only been extended for half a year. This means the point at which millions of families will face cash losses has now moved to October of this year. In our central forecast, this coincides with the point at which unemployment rises most sharply as other support measures are withdrawn. The risk of further extensions to the £20 uplift therefore remains.'

For more information, see Welfare Trends Report - March 2021 from obr.uk