Ending of short-term COVID-19-related benefit increases will result in £1,000 annual losses for almost 7 million people

Office for Budget Responsibility also highlights that the number of people on universal credit is now higher than its previous forecast had assumed for any point in the next five years

The Office for Budget Responsibility (OBR) has estimated that the ending of short-term COVID-19-related benefit increases will result in £1,000 annual losses for almost 7 million people.

In its Fiscal sustainability report - July 2020, the OBR highlights that it has altered its usual approach of forecasting long-term projections for public finances using its most recent forecast (which would have been its March 2020 Economic and fiscal outlook), as this was finalised before the full impact of the coronavirus (COVID-19) pandemic became clear. Instead, it presents three economic scenarios (‘upside’, ‘central’ and ‘downside’).

NB - the OBR advises that its report does not take account of the Chancellor's spending plans outlined in the Summer Economic Update on 8 July 2020 as these were finalised and notified too late for inclusion.

Focusing on the 'central scenario' - that assumes economic output recovers slowly to reach its pre-virus peak by the end of 2022, while unemployment remains elevated - the OBR’s projections include that -

• 15 per cent of furloughed workers will move into unemployment rather than back to work once the Coronavirus Job Retention Scheme (CJRS) ends;
• beyond the near-term, the unemployment rate will recover to the 4.1 per cent forecast in the OBR’s March forecast under its ‘upside scenario’, but will be one per cent higher in its 'central scenario'; and
• spending on ‘net social benefits’ will be £33.6 billion higher than in its March forecast, dominated by welfare spending (24.5 billion) resulting from a weaker labour market that raises spending on universal credit and legacy benefits, and policy measures (9.2 billion) that include the £20 weekly increase in universal credit and tax credits.

Elsewhere, the OBR highlights that the number of individuals on universal credit now stands at 5.3 million, up 75 per cent since March 2020 and higher than its March forecast had assumed for any point in the next five years. Identifying a broader consequence of the surge in universal credit claimants on the continuing rollout of the benefit over the coming years, the OBR says -

‘Many new universal credit claimants will have transferred from legacy benefits and tax credits due to a change in circumstances (such as losing a job). This will affect the future rollout of universal credit. For example, it should leave fewer individuals to be transferred at DWP’s behest under managed migration. But the demands of managing a higher caseload could also mean there is less capacity to migrate those remaining cases.’ (paragraph 3.72)

Looking forwards, to when the main coronavirus-related increases in benefit rates come to an end in 2021/2022, the OBR warns that this will take £1,000 a year from the incomes of 6.9 million individuals. However, noting a degree of optimism about this projection, the OBR says -

‘… as we highlighted in our December 2019 Welfare trends report, measures that create cash losers - like this return to pre-virus benefit and tax credit rates or the reintroduction of the minimum income floor for self-employed claimants - have in the past frequently been reversed, delayed or diluted.’ (paragraph 5.40)

Finally, the OBR says that, even with the current increased rates of universal credit, it remains far less generous than the CJRS and, with 1.3 million furloughed workers projected to move into unemployment rather than back to work, says that this could prompt calls for an increase in the generosity of universal credit (as well as for more spending on active labour market policies).

For more details, and associated documents, see Fiscal sustainability report - July 2020 from obr.uk