Universal Credit is making problem debt worse — it can be fixed
By Adam Butler, Public Policy Manager
Universal Credit isn’t working for people struggling with financial difficulty and problem debt. Feedback from StepChange clients shows how the government can fix the system.
According to national polling commissioned by StepChange, one in four people receiving Universal Credit is in severe problem debt: that figure compares to 14% among those receiving the legacy benefits Universal Credit replaced and 8% among the general population. Why are those receiving Universal Credit more likely to have problems with debt?
The first reason is simply that many of those receiving Universal Credit are struggling to make ends meet: 58% of those who responded to our survey (and receive Universal Credit) said that they go without two or more basic essentials, like being able to eat two meals a day or heat their home, because they cannot afford them.
While poverty is not synonymous with problem debt, it’s an important risk factor. We found that, nationally, 43% of those who receive working age support have used credit to pay for essentials in the last year — a significant risk factor in developing problems with debt.
Alarmingly, one in ten clients who responded to our survey say they have used a loan shark due to a problem with social security (we sometimes found this includes online scams as well as very high cost legal credit).
Universal Credit’s design is causing problems
Design features of Universal Credit are also causing problems with debt. The most well-known of these is the five-week wait from application to the first payment, leaving a substantial gap in support. While advance payments can mitigate the impact of the wait, subsequent repayments may cause a more modest but prolonged income shock. Almost all clients said the wait, or the repayment of an advance payment, had caused financial difficulty or hardship.
A less high-profile issue is the practice of deducting up to 30% of the standard Universal Credit allowance to repay debts such as rent, utilities or council tax arrears (as well as Universal Credit advances and past tax credit overpayments). While ‘priority’ deductions such as rent arrears can help people stay in their home, non-priority deductions are also typically made at fixed rates regardless of the affordability and impact of repayment. When clients had tried to negotiate deductions, a minority felt the repayment agreed was affordable.
The ‘dynamic’ nature of Universal Credit, which means that monthly payments respond immediately to changes in income from month to month, can also drive unexpected fluctuations in payments. For example, this may happen because someone is paid early or receives a bonus, or because weekly or bi-weekly payroll dates sometimes give the appearance of higher income in one month than the next, or simply because income from temporary or contract work may change from month to month.
The shift to monthly payments (legacy benefits were typically paid bi-weekly) can similarly cause problems for those struggling to make ends meet. For many it’s harder to protect their budget against both essential expenses and demands for payments for a full month compared to a shorter period. Many clients had also been caught out by default payment of the housing element of Universal Credit to their own account rather than their landlord.
Universal Credit was designed to simplify the social security system and support people to work. Measured against these aims, there’s cause for concern: two-thirds of clients said that Universal Credit had made it harder for them to budget and manage their finances; some also said that issues with Universal Credit made it less likely they’d work, for example because if they took a job and it didn’t work out, they knew they’d face another long gap in support.
(Problem) debt-proofing Universal Credit
The problems debt advice clients told us about can be overcome. A good place to start is to incorporate principles of best practice in debt collection into Universal Credit. The government’s new Breathing Space and statutory debt repayment plan schemes include most forms of government debt and are the right opportunity to overhaul the system of deductions from Universal Credit so that non-priority deductions are only made where they are affordable and sustainable.
Changes to Universal Credit can also reduce the instability of payments. Introducing a modest ‘buffer’ (we’ve suggested £2,500 each year), under which changes in income are disregarded, would help to smooth monthly payments. The difficult decision also needs to be made to build more flexibility into the Universal Credit infrastructure, so that assessment periods can be sensibly aligned with payment patterns. This would reduce arbitrary fluctuations in support.
Finally, the government’s decision to end the ‘benefits freeze’ is welcome but support for working age adults now stands at a multi-decade low. Policies such as the two-child limit that affect households that are among the most vulnerable to debt remain in place.
In the long-run, policy makers need to move beyond the clichés of welfare dependency and confront the taboo of investing in working age social security. Driving people into debt and instability creates negative side-effects that ripple out into society and public services. These don’t help anyone.
Those who rely on the safety net cannot afford the debate about Universal Credit to fall back into the ‘scrap it’ or ‘like it or lump it’ extremes. Many of the challenges we now face are different to those of the late 2000s when Universal Credit was conceived: in-work poverty and under-employment are a greater concern than worklessness. The proportion of households struggling with debt and arrears means that Universal Credit simply must work for those in financial difficulty. That means sooner or later the government must bite the bullet and act on what isn’t working.
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StepChange provides the UK’s most comprehensive debt advice service. We help people with debt problems take back control of their finances and their lives. People can get help with debts caused by the flaws in the benefits system by using our free and confidential online debt advice tool.
