A ‘Fresh Approach to Universal Credit’ – Are There Lessons from Australia?

Posted in: Economics, Global politics, Public services, Welfare and social security

Peter Whiteford is Professor in the Crawford School of Public Policy at The Australian National University, Canberra, and Visiting Fellow at the Institute for Policy Research (IPR). Jane Millar is Professor of Social Policy at the University of Bath Department of Social and Policy Sciences and IPR.

The introduction of Universal Credit has been described as one of the most important social security policy changes in the UK since the Beveridge Report more than 70 years ago. This is a radical change that removes the distinction between workers and non-workers in means-tested social security benefits for people of working age. The aim of the reform is to make work pay, particularly part-time work, but also to encourage recipients to move into full-time and better-paid work. Since its introduction however, Universal Credit has been dogged by controversy, both in relation to administration and design.

Amber Rudd, MP, the Secretary of State for Work and Pensions in the UK, has said that she is open to a ‘fresh approach’, in terms of a willingness to make reforms to Universal Credit, and some have already been announced.

It is often assumed that Universal Credit is unique to the UK. In fact, while it is not widely recognised, Universal Credit will make the UK system of income support for people of working age more similar to the Australian benefit system - except that the Australian system has been operating in this way for more than 25 years.

In a previous blog we examined overpayments and debt recovery issues in the two countries. Here we focus specifically on how the broader Australian system of income testing works, to see whether there are useful policy lessons to be learnt across countries.

Australian income testing

It is worth noting that the Australian system has significant weaknesses, some of them similar to those facing Universal Credit and earlier UK benefit programmes. Payments for the short-term unemployed – once account is taken of the low level of help with housing costs – are among the lowest in the OECD, primarily because the flat-rate benefits are indexed to prices and not wages. As a result, real benefit levels are roughly the same as they were 25 years ago, having fallen from around 24% to 18% of the average wage.

Benefits for lone parents and families with children have also been significantly restricted in the last 15 years, leading to concerns that child poverty could increase in the future. Job search requirements for the unemployed are onerous and there are concerns that the privatised employment services system and activation programmes are both ineffective and burdensome, with the result that the Australian Labor Party has foreshadowed significant reforms should they win the Federal election later this year.

But here we focus on the way income testing works in Australia. The design of the Australian social security system has been seen as distinctive for a long period of time, because of the very strong focus on income and asset-tested benefits. Australia has the highest level of spending on income-tested payments in the OECD. This amounts to 6.5 per cent of GDP and close to 80 per cent of all spending on cash benefits in 2012 (OECD, 2014).

There are also various ways income-testing has developed differently in Australia from the UK. Australia has never had an hours rule for out-of-work benefits, as is the case with Income Support and Jobseekers Allowance in the UK, which generally excludes those working 16 or more hours per week. However in the past there have been high withdrawal rates for earned income in Australia. For instance, up until 1969 all income support payments had 100 per cent withdrawal rates; that is, above ‘free areas’ – the amount of gross income allowed before benefits start to be reduced, similar to the work allowances in Universal Credit – payments were reduced dollar for dollar, as gross private income increased. This was very much like the income test for applying to Income Support in Britain, and in most European systems of social assistance.

Over the past 50 years, this approach has changed significantly. Benefits are now reduced at a much lower rate, first by 50% and then by 60% as additional income is earned, rather than 63% as is the case for Universal Credit. For lone parents, the withdrawal rate is even lower at 40%. Additional payments for children are separately income-tested, with a withdrawal rate of only 20-30%.

The Australian system retains different benefits, targeted at specific groups (unemployed, carers, lone parents, etc.), albeit all income-tested, rather than a single payment, as is the case for Universal Credit. There is no separate in-work benefit or tax credit, but the relatively generous treatment of earnings through the income allowance free area and the taper rates means that people in paid work can continue to receive benefits.

Overall, these changes meant that support for people not in paid work shifted from a tightly targeted ‘social assistance model’ towards allowing a ‘benefits plus work’ model more similar to Universal Credit. As a result, there is now a significant overlap between receipt of income support and part-time work in Australia: around 11 per cent of working age income support recipients were earning in 2016, and these accounted for around 12 per cent of all part-time workers (Whiteford and Heron, 2018).

The shape of income tests

There are some features of the Australian approach to income testing that are worth further examination.

First, the shape of the income tests – with a free area/work allowance and tapered withdrawal rates - is broadly similar in Australia and the UK. But these free areas are available for all claimants in Australia, unlike the UK where the work allowance in Universal Credit applies only to people with children and those with limited capability for work. Australia also has higher free areas and lower taper rates. In the 2018 Budget the UK work allowances were increased, but there are still calls for further reforms to make both the work allowance and the taper rate more generous, which would increase the level of support and improve work incentives.

Second, in Australia, income support assessment and payment are fortnightly rather than monthly. This means that there is a much shorter waiting period at the start of the claim than in the monthly UK system. It also aligns with most Australian wage and salary earners, who are also paid fortnightly. In contrast, Universal Credit has a fixed monthly assessment which does not always tally with when wages are paid. The Department for Work and Pensions provides detailed guidance on this, noting that people paid every four weeks are likely to get two payments of earnings within a Universal Credit assessment period once a year.

The income fluctuations and losses caused by this have recently been the subject of a High Court Case brought by CPAG and a private law firm, on behalf of a number of working lone mothers. The High Court has found that this practice is unlawful, or that in other words, wages are to be allocated to the month in which they were earned, rather than to the assessment period in which they were received. How this is to be achieved in practice remains to be seen.

Third, the Australian system has a feature that specifically addresses the issue of unused work allowances, and allows these to accumulate over time. This Working Credit is calculated automatically and starts to accumulate when total income (including from paid work and investments) is less than $48 per fortnight. It is possible to build up a maximum of 48 Working Credits each fortnight to a total “bank” of 1,000 Working Credits for those receiving most working-age payments, and 3,500 Working Credits for those receiving Youth Allowance as a job seeker (the payment for unemployed people less than 22 years of age). For students, the Income Bank arrangement is similar, but much more generous.

The Working Credit allows people to earn more before their payment is reduced when income goes over $48 per fortnight. In these fortnights, available Working Credits offset excess earnings until the Working Credit balance is zero, and then the income support payment starts to reduce. Thus, the Working Credit takes account of fluctuations in earnings by smoothing out the impact of these over time. There is no such provision in Universal Credit.

Fourth, the treatment of couples in the income test provides a form of ‘partial individualisation’. Each member in a couple has their own individual work allowance and the income test is sequentially applied. This means that the earnings of one partner in a couple does not reduce the partner’s payment until the other earner’s component is fully extinguished. Thus there are financial incentives to work for both partners in couples.

This is very different from Universal Credit, where the joint work allowance for couples (in addition to other features of Universal Credit) means that prospective second earners – often women - have little financial incentive to work. In addition, while benefits may be paid into joint bank accounts (although this is not compulsory), entitlements in Australia are individual. This means that each person has their own access to payment, potentially giving greater financial independence to women.

Lesson learning across countries can be a challenging activity, as often provisions do not transplant well to a different context. But all means-tested/income-tested system must address similar problems, and the UK and Australia could potentially learn more from each other.

Posted in: Economics, Global politics, Public services, Welfare and social security

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