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9 October, 2020 Open access

New research considers government’s options for temporary COVID-19-related benefit increases beyond 2020/2021

Institute for Fiscal Studies highlights more subtle policy options than just keeping or losing current policies such as increases in universal credit and LHA rates, and suspension of the minimum income floor

The Institute for Fiscal Studies (IFS) has examined the government’s options for the future of temporary COVID-19-related benefit policies beyond 2020/2021.

In The Temporary benefit increases beyond 2020/2021 - part of its annual Green Budget that for this year analyses the economic and fiscal outlook since the last Budget in March 2020 - the IFS examines key policies in the wake of the coronavirus outbreak that have expanded the working-age means-tested social security system, including -

Highlighting that, together, the temporary increases (including related changes to the legacy benefits system) cost an additional £9 billion, the IFS says that the government now faces the ‘standard trade-offs’ that any government faces in designing future welfare policy -

‘… it can make the system more extensive, boosting incomes among poorer families (and those made poor by COVID), but at a cost to the exchequer and with the effect of weakening work incentives… Given the uncertain state of the economy and the labour market, and given the low levels of benefits for many in the UK relative to international standards, there may well be a case for this. But it would weaken work incentives and, in the case of the MIF, inappropriately encourage seemingly low-value self-employment and, potentially, fraud.’

The alternative, the IFS says, is to return to pre-crisis policy - that would lead to around 4 million families losing an average of 13 per cent of their benefits overnight (if claimant numbers are the same in March 2021 as they were in May 2020) - in which case it says -

‘… early and clear communication to those likely to be affected is important to ensure that the drop in income that would occur for many does not come as an unpleasant surprise.’

However, beyond this binary choice, the IFS suggests there is a more subtle approach, at least for two of the three policies -

‘LHA rates could be linked to current rents, rather than 2011 rents, removing the unfairness and inappropriateness of families in some high-rent areas being able to get less housing benefit than those in low-rent ones. And the MIF could be made more robust to volatile incomes, ensuring that the benefits system treats those with steady and volatile income similarly.’

Finally, the IFS suggests a further option - that would be equally applicable to all three policies - for current claimants to continue on the temporary measures, with new claimants put on the pre-crisis scheme. While this approach may appear attractive, as it would ensure that no households see overnight drops in their incomes between March and April 2021, the IFS also points out that it would create perverse incentives -

‘If a family ceases to claim universal credit, but later on begins a new claim, it would receive a lower amount (whether because of the standard allowance, the MIF or its housing support) than if it had been continuously claiming. Naturally, this disincentivises households to stop claiming universal credit (including by increasing their earnings) in the first place. And it would arguably be unfair to have two otherwise-identical households receiving substantially different amounts of benefits into the future purely because one began claiming just before the end of 2020/2021 and the other right at the start of 2021/2022.’

Commenting on the research, IFS Economist Pascale Bourquin said today -

‘The government significantly expanded the working-age benefit system in the wake of the pandemic. Even so, for many families out-of-work benefit levels remain very low by international standards. There may well be a case for a more generous benefit system, but not necessarily in the way in which increases were implemented at speed this year. A more serious review of the treatment of, for example, housing costs and of the self-employed is required. Simply reverting to the pre-COVID system would mean going back to a world where self-employed universal credit claimants are penalised for having incomes that fluctuate within the year, and where housing benefits are based on local rents from a decade ago.’

For more information, see Tough choices ahead as spending on working-age benefits set to hit record levels from ifs.org.uk