UK welfare policy: impact on families with children

2. Changes in welfare policy since 2015/16

2.1 Financial impact of post 2015/16 welfare policy changes

During the 2010-15 and 2015-17 parliaments, the UK Government implemented a programme of significant change in the welfare system, which formed a central part of a wider policy objective of austerity and deficit reduction.

This report focusses on policies introduced by the 2015-17 UK parliament which will continue to impact families in Scotland to 2020/21 and beyond. In total, policies passed in the 2015-17 parliament are expected to reduce welfare spending in Scotland by around £0.9 billion by 2020/21 (see table 1).

The policies listed in table 1 are in addition to those passed in the 2010-15 parliament, which are expected to reduce welfare spending by £1.9 billion by 2020/21. Therefore, the overall impact of welfare policies is to reduce annual welfare spending in Scotland by £3.9 billion by 2020/21 ^[4] .

Table 1 – Post-2015 welfare policies – impact at a Scotland level

2.2 List of key welfare policy changes

In the case studies outlined in this report, the focus is on the impact of policies which have particularly affected families with children, these include:

1. The 2 child limit for tax credits and Universal Credit elements: From April 2017, child tax credit will be restricted to two children for new births after 6 April 2017 ^[5] . This change also applies to child elements in Universal Credit for new claims.

2. The removal of the 'family element' for child tax credits and Universal Credit: the 'family element' is paid to all households with children and worth around £545 per year as of 2016/17. New families who make a CTC claim from April 2017 will not be entitled to a family element. An equivalent change was also introduced to new claims under UC, where the first child is not entitled to a higher child element from April 2017.

3. Lower Benefit Cap: the Benefit Cap was first introduced in April 2013. This restricted the total benefit income of a family with children to around £26,000 per year. From November 2016 a new lower cap was introduced of £20,000 per year.

4. The four year freeze to working-age benefits: the main working-age rates of Income Support, Jobseeker's Allowance, Employment and Support Allowance ^[6] , Housing Benefit, Tax Credits (Child and Working) and Universal Credit will be frozen at their 2016/17 level until 2019/20. Previously these rates would have been uprated by the Consumer Price Index ( CPI) measure of inflation. The impact of this policy is highly dependent on the future path of inflation.

5. The reduction in the Universal Credit work allowance: Under Universal Credit, some households can earn up to a given amount each month before their benefit is tapered ( i.e. partly or fully withdrawn depending on income). This amount is called the work allowance. From April 2016, lower work allowances were introduced. For example, a lone parent family on UC can earn around £2,300 per year before some of their UC award is withdrawn. Previously, this level was around £3,150 per year.

6. Change in the Universal Credit taper rate: The taper rate is the rate at which a UC award is reduced as the claimants net incomes rise. From April 2017, this rate was cut from 65% to 63%, which means in-work families keep more of their UC award as their incomes increase. Unlike the other measures listed, this change makes UC more rather than less generous for some families and is set to increase welfare spending by £45 million per year by 2020/21.

Of the above measures, 1 and 2 will only affect families with children and 3 will affect mostly families with children. Other measures will affect a range of different household types.

2.3 Other changes affecting family incomes

As well as changes in the welfare system, the UK Government also introduced the National Living Wage in 2016 ^[7] and has committed to increase the personal tax allowance to £12,500 by 2020/21. These major changes are modelled alongside changes to the welfare system to put the overall impact of UK government welfare policies in context, although the change in personal allowance would only have an impact on working households whose (taxable) income is above the threshold.

As part of the UK government's welfare policy changes, a commitment to increase the minimum wage to reach 60 per cent of median earnings in 2020 was made. According to the latest OBR forecast, it is estimated that the National Living Wage ( NLW) will be £8.75 per hour in 2020/21, as opposed to £7.75 had the minimum wage been uprated by average hourly earnings ^[8] .