The IFS Deaton Review of Inequalities

Cash payments directly to individuals or families are a major component of most modern welfare states. SIEMENS

The IFS Deaton Review of Inequalities 

Cash payments directly to individuals or families are a major component of most modern welfare states, alongside the provision of publicly provided services (throughout this chapter, we use the terms ‘transfers’, ‘benefits’ and ‘welfare payments’ interchangeably). The scale of their importance is easy to under-appreciate. The UK state spends more on cash transfers to those of working age (adults under state pension or retirement age) than on education, or defence and policing combined. At any point in time, more than a quarter of all working-age UK families are in receipt of means-tested benefits (Office for Budget Responsibility, 2018). And even that underplays the true reach of the system: at some point in their lives, most people will be in a household receiving a working-age means-tested benefit (Roantree and Shaw, 2018).

A system of transfers this expansive undoubtedly has large effects on the level of poverty and deprivation, and on the financial incentives that people face. But it does not stop there. For example, as we elucidate in this chapter, it probably affects the earnings and housing costs of people not even receiving the transfers (not to mention the taxes they pay), and it impacts the next generation via the children growing up in families that draw on the state safety net. In short, cash transfers are a very consequential part of our economy and our society.

All of the detailed discussion and analysis in this chapter focuses on the working-age part of the benefit system. As shown in Section 2, an even larger (and growing) portion of the welfare budget supports the living standards of those above the state pension age. Our focus on the working-age system is primarily because these two parts of the system are trying to do very different things. The labour market provides the backdrop, or at least critical context, to the workings of the working-age transfer system. Almost all of it is providing support to people in light of their not being judged to have enough to support themselves through paid work alone – including because they are judged unable to do any paid work at all due to caring responsibilities or health problems. Supporting the living standards of those in retirement is of course crucial, but not within scope of this chapter.

The term ‘cash transfers’ captures money paid to support people who cannot find, or are judged unable to do, paid work, or people who are in paid work and yet have a low income, or who have extra costs arising from children or disability or housing needs. The underlying motivations for these policies can be similarly wide-ranging: for example, preventing or reducing poverty, protecting people from adverse economic shocks (‘insurance’), pursuing ‘horizontal equity’ between people with different costs of living (e.g. due to disability or children), and promoting the life chances of children.

There are many key choices, and trade-offs, that governments face when designing and adjusting these programmes. How much are they willing to spend on them? What will be the balance between support focused on the neediest and support aimed at a broader base? Which demographic groups, or needs, will be prioritised? Will the benefits be in cash or in kind? To what extent will the level of support track people’s fluctuating circumstances in real time, stepping in quickly when needs increase, versus prioritising those in more persistent need? How are the benefits of having a simple system that is easy to understand and navigate to be balanced against the inevitable tendency towards complexity, when policy goals are multiple and the circumstances of the population widely-varying? How will support actually be delivered to people: what is the claiming process like, when does money arrive, how often is it paid, and so on?

Much of the chapter will discuss how policy choices made in the UK have changed over time and how they compare internationally, and the evidence on how these choices can shape the impacts of the system.

There are many ways in which transfer policies can fail to achieve their goals as effectively as might be hoped. For example, incomplete take-up of welfare programmes may inhibit their ability to alleviate poverty. In addition, the perhaps-successful pursuit of one goal can lead to other pitfalls that governments should, and often do, try to avoid (though some of these pitfalls reflect trade-offs that are impossible to get around entirely). For example, trying to maximise the impact of the system on reducing poverty can lead to support heavily targeted on a small group with the lowest resources; but this in turn can lead to negative behavioural effects driven by the steep phasing out of support, and demeaning or stigmatising effects of being a recipient which might themselves inhibit take-up and hence poverty alleviation as well. Of course, as with any public programme, an inadequate level of funding can also lead to a failure to achieve its goals.

One theme that runs through much of the chapter is the intricate relationship between the transfer system and the wider economic and policy environment. Much of the system is effectively applying a patch over social and economic problems that we have not yet found a better way of preventing or addressing (e.g. low pay or poor health). As the problems facing society evolve, the distribution of support provided by the transfer system, and its impacts, will tend to change – both automatically and via deliberate changes to its targeting or design. More progress in other areas of economic and social policy will typically make the transfer system’s job easier.

In broad terms, the chapter is organised in two halves. In the first half (Sections 2 to 4), we describe the UK benefit system and examine recent trends, both in policy and in the economy at large, that impact upon the role that it fulfils. In the second half (Sections 5 to 10), we turn to specific issues in benefit policymaking, summarising existing research, introducing new evidence and discussing lessons for policy.

The structure is as follows. In Section 2, as background to what follows, we describe the basic components and workings of the current UK working-age cash transfer system, and we define the scope of our chapter by distinguishing it from broader components of what one might term the ‘welfare state’. In Section 3, we set out how the role of the system has changed over time, through changes both in policy and in the wider economic and social environment. Section 4 examines the effect that the transfer system has on work incentives, both directly through the financial incentives to work, and through conditionality, sanctions and other ‘active labour market policies’. Section 5 discusses take-up of benefits, in particular who claims their entitlement and what the reasons are for non-take-up. Section 6 turns to ‘incidence’: whether, and how much, paying benefits to those in work or those renting homes can reduce their wages or increase their rent. Section 7 briefly discusses a number of implementation issues with transfer policy which are often glossed over but can be of great importance: wait times to receive the first payment, the period over which benefit entitlements are assessed, and who in a couple actually receives the transfer. Section 8 looks at intergenerational effects – how a benefit payment to a parent today might affect the education, labour market and indeed welfare outcomes for their child many years down the road. Section 9 brings together the implications of the evidence discussed for universal credit, the UK’s most important reform to the transfer system in decades, which is still underway. Section 10 discusses a number of broader policy issues and debates with implications across the benefit system. Section 11 concludes.

Governments in high-income countries typically provide extensive transfers to households, not only in cash but also in kind, such as in the form of health and education provision. Much or all of that would often be considered a part of the ‘welfare state’ – a term with no hard-and-fast definition. As explained, in this chapter we restrict our focus not only to cash transfers, but also to transfers paid to those below state pension age1 .  As is made clear by Figure 1, this means we consider only a modest share of the total expenditure on the welfare state defined in much broader ways. Nonetheless, before the COVID-19 crisis, spending on working-age benefits was very significant, standing at around £100 billion per year or 4½% of national income.

Figure 1. ‘Welfare state’ spending, 2019–20 (in 2021–22 prices)

Note: We use 2019–20 expenditure here as the latest public service spending data contain significant COVID-related spending.

Source: Authors’ calculations using HM Treasury’s ‘Public expenditure statistical analyses 2019’ and DWP’s ‘Autumn Budget 2021: expenditure and caseload forecasts’.

Below we give a broad sketch of the current UK working-age benefit system as it stands in 2022–23. Readers already familiar with the UK system, or wishing to skip the details, can proceed to Section 3. Table 1 provides a short summary of the various benefits2 .  Figure 2 shows estimates of their mechanical impacts on the rate of relative poverty to help illustrate how they are targeted (i.e. how much poverty would rise by under the thought experiment in which the benefit were abolished and nothing else changed). 

All means-tested benefits are assessed at the level of (in the technical UK terminology) ‘benefit units’. These correspond to what are known as ‘tax units’ in the US, consisting of an individual, any partner they have and any dependent children. These units are often referred to using the more accessible term of ‘family’, which we will adopt here to avoid the more cumbersome, less familiar alternative terms, though clearly this does not correspond precisely to the everyday usage of the term ‘family’. For example, a single person without children is considered a ‘family’ for these purposes, and an adult who lives with their parents is not treated as part of the same family. 

Table 1.  Description of working-age benefits (numbers relate to 2016–17)

Notes to Table 1 a Includes incapacity benefit. b Number of claimants and amount spent are not shown for UC, which very few people received in 2016–17. When fully rolled out, UC is expected to cost more than £60 billion per year and to be received by 7 million families at any one time. c Number of claimants and amount spent are for 2012–13, the last year for which council tax support (then council tax benefit) was administered centrally by the Department for Work and Pensions (DWP), and thus the last year for which these data are available. d Includes disability living allowance, including that spent on children. Note: We use 2016–17 numbers as UC roll-out began to pick up in 2017–18, distorting the figures. See text for discussion.  

Figure 2. Mechanical effect on working-age poverty rates from abolishing various working-age benefits (2016–17)

Note: The poverty line used is 60% of contemporaneous median after-housing-cost income. See text for definitions. We use 2016–17 data as they largely predate universal credit; the small amount of UC spending in that year is allocated to ‘Out-of-work benefits’. Excludes households comprised entirely of students.

Source: DWP’s ‘Households below average income statistics’, 2016–17.

‘Legacy benefits’ is the term often used to refer to those benefits that formed the bulk of the UK’s means-tested system for those of working age until they were largely replaced by a single integrated benefit, called universal credit (explained shortly) – a process that began in 2013 and is still ongoing. The complex array of support available under this system highlights the many things that the system was – and still is – trying to do. It also reflects the way in which the system has come about, with new priorities or demands from an evolving society sequentially leading to additional strands of support, or to substantial growth in existing strands of support, all layered on top of one another. 

While there are still a significant number of existing claimants of these benefits, no new claims for these are generally allowed any more, and eventually these benefits will disappear entirely3 .  The only exceptions are the two ‘contributory’ out-of-work benefits – entitlement to which is dependent upon having ‘paid in’ to the system through work earlier in one’s life – which will continue to exist alongside universal credit (UC). Describing the legacy system remains a good starting point for understanding the basics of what kind of support the UK offers to low-income households, since the key elements of support – the out-of-work safety net, the extras for housing and children, and so on – all remain in place under the UC system, and largely at the same rates. The legacy benefits are:

o    Jobseeker’s allowance (JSA) is paid to individuals who are looking for work. There are two forms of JSA: an income-related version, which is means-tested against family income and assets, and a contributory version, which is not means-tested and is paid for six months to those who meet fairly minimal recent-work requirements. JSA claimants are generally subject to ‘conditionality’: they must prove that they are looking for work and meet regularly with their work coach in order to get the benefit. A single claimant is entitled to £77.00 per week. o    Income support (IS) is very similar to income-related JSA with identical financial entitlements, but there is no conditionality attached and it is only paid to those caring for someone with disabilities or lone parents with a young child.  o    Employment and support allowance (ESA) is a benefit paid to those judged to be unable to work because of an incapacity. Like JSA, there is an income-related version which is means-tested against family income, and a contributory version which is not means-tested. Claimants are given differing entitlements based on the severity of their incapacity. Some – those assessed as being able to engage in ‘work-related activity’ – are subject to a form of conditionality, being required to do work-preparation activities such as training and CV writing. Some claimants are entitled to no more than the JSA rate (£77.00 per week for a single person), while single claimants with the most significant incapacities are entitled to £204.75 per week. 

o    Child tax credit (CTC) is paid to families with dependent children. Entitlements are higher for larger families (each child generating an additional £56.29 per week entitlement), though children born since April 2017 do not increase entitlements if they are the third or subsequent child in the family (the ‘two-child limit’).  o    Working tax credit (WTC) is paid to families who work at least a set number of hours (16 per week for lone parents, 24 for couples with children, 30 for everyone else). A lone parent working 16 hours is entitled to up to £80.45 per week. While in principle those without children are eligible, they are entitled to relatively little and so the take-up rate among such people is quite low. 

Universal credit (UC) is the UK’s new ‘integrated’ benefit, combining means-tested support previously separately provided by out-of-work benefits, means-tested benefits for families with children and means-tested benefits to help with rental costs. Eventually, UC will replace the ‘legacy’ benefit system entirely for those of working age (pensioners will still be able to receive housing benefit), though progress has been slow. Roll-out began in 2013 and is not expected to finish until at least 2028. Though there are some important exceptions (principally relating to assets and those with incapacities), families with no other income will normally get the same amount of UC as the total combined transfers they would have received under the legacy system (except for April 2020 to September 2021, when there was a temporary £20 per week increase in UC rates that was only reflected in WTC, and not out-of-work legacy benefit rates). They will also usually be subject to work-search conditionality (similar to JSA). The major difference in entitlements is among families in paid work: UC changes the rate at which benefits are withdrawn against earnings and, unlike WTC, does not have ‘hours rules’ which predicate entitlement on the number of hours worked. We explain how UC changes entitlements for working families in greater detail later in this section.

The government implemented other important changes to the operation and administration of benefits as part of the UC reforms, including the rather infamous ‘five-week wait’ between a claimant making an application and receiving their first UC payment. We discuss these issues, and particularly the five-week wait, in more detail in Section 7.

Figure 3. Weekly income for an example lone parent renter with two children earning the National Living Wage

Note: April 2022 tax and benefit system. Example is for a family where both children are under 5 and rent is £150 per week. Family lives in a band C council tax property in a local authority with the national average council tax rate and a council tax support scheme that, for lone parents, rebates 100% of council tax for a family with no income and applies a 20% taper rate for those with income above a certain threshold. Council tax itself is not included (i.e. it would have to be paid out of the weekly income shown). ‘Net earnings’ shows gross earnings minus income tax and National Insurance contributions. ‘Total income under UC’ is universal credit plus net earnings, child benefit and council tax support.

Source: Authors’ calculations using TAXBEN, the IFS tax and benefit microsimulation model.

To give a sense of how UC changes the system, Figure 3 shows benefit entitlements and net earnings for an example lone parent of two children who lives in rented accommodation and is paid the National Living Wage (£9.50 per hour in 2022–23). Legacy benefits, child benefit, council tax support and net earnings (earnings after tax) are shown as stacked areas, meaning that the sum of those areas is the worker’s total net income under the legacy system. Their income under the UC system (net earnings plus UC, child benefit and council tax support) is shown as a line. Under the legacy system, the lone parent has to claim five benefits to get their full entitlement when out of work. As they increase their hours, JSA is quickly withdrawn. When they get to working 16 hours, they become entitled to WTC. This means that the incentives to work at least 16 hours, rather than slightly less, are strong. Increasing hours beyond 16 results in their HB, council tax support and WTC (then CTC) being simultaneously withdrawn, implying a high marginal effective tax rate. In fact, as shown in Figure 4, once income tax and National Insurance contributions are included, it is not uncommon for lone parents to face a marginal effective tax rate of 96% (that is, 96p is lost in higher taxes and lower benefits if an additional £1 is earned).

Under the UC system, things are broadly the same in financial terms when the individual is out of work (although note that, other than child benefit, they now only need to make one benefit claim to receive their full entitlement, with potential implications for take-up, as discussed in Section 5). Above an earnings allowance (the ‘work allowance’), their UC entitlement is steadily withdrawn by 55p for every £1 of net (post-tax) earnings. But, as shown by Figure 4, once we account for tax and the withdrawal of CTS on top, the marginal effective tax rate can still reach 76% – lower than in the legacy system, but high, as discussed in the accompanying commentary by Moffitt (2023). Unlike WTC, UC entitlement is not dependent on working a precise number of hours (though those earning very little sometimes have to fulfil job-search conditionality requirements under UC), so there is no particular incentive to work 16 or more hours, for example. In comparison with the legacy system, UC therefore less strongly disincentivises so-called ‘mini-jobs’ of under 16 hours per week. It also reduces the worker’s effective marginal tax rate – whereas under the legacy system they saw both their HB and WTC (or CTC) withdrawn simultaneously, under UC that benefit alone is being withdrawn at a single rate. For this reason, working renters tend to gain from the switch to UC (Brewer, Joyce et al., 2019). This follows fairly directly from the fact that UC integrates strands of support that separately applied means tests to low-income workers and to renters – collapsing two phase-outs into one for those who are both low-income workers and renters.  

Figure 4. Amount lost in increased taxes and withdrawn benefits when earnings increase by £1, for the example lone parent in Figure 3 when working 30 hours per week

Note: See Figure 3. Source: Authors’ calculations.

Figure 5 shows incomes for an otherwise-identical lone parent who owns their own home. Because they are not a renter, they are not eligible for HB or the housing element of UC, meaning that their entitlements are quite a bit lower. This also causes a key difference in how they are treated by UC. Under the legacy system, they only see their tax credits (WTC first, then CTC) withdrawn as they increase their hours above 16 – meaning that their effective marginal tax rate is lower than that for the renting lone parent. But under UC, they face the same effective marginal tax rate as the renter because UC has a single withdrawal rate for homeowners and renters alike (though homeowners get a somewhat higher work allowance). Because of this, working homeowners tend to lose from the switch to UC and face higher effective tax rates than under the legacy system (Brewer, Joyce et al., 2019).

Figure 5. Weekly income for an example lone parent homeowner with two children earning the National Living Wage

Note: Example family is as in Figure 3, except they own their own home rather than rent. Source: Authors’ calculations using TAXBEN, the IFS tax and benefit microsimulation model.

These examples have focused on a lone parent, and things would look similar if we examined couples with children. However, those without children are generally entitled to little in work, especially under the legacy system. In principle, they could get WTC if they worked 30 hours per week. But a worker without children working 30 hours per week at the National Living Wage earns enough that, when the WTC means-test is applied, they are ineligible anyway – so only a low-earning self-employed worker, with an implicit hourly wage below the National Living Wage, would be eligible5 .  If their rent were, say, £100 per week, they would also have seen their HB tapered to zero. Because UC distributes more to renters and does not have hours rules, it is easier for single people without children to receive some support in work, though the sums remain relatively small.

To claim, benefits claimants typically fill in forms and provide evidence to prove that their circumstances are as they state (e.g. payslips to show their earnings). They are required to provide differing sorts of information depending upon the benefit in question. For example, an application for housing benefit requires the claimant to give their rent level, since their entitlement is related to their rent. For this reason, the means-tested benefits tend to require more information than the non-means-tested ones, since the government needs to collect information on different sources of income and sometimes assets. Under the legacy benefits system, claims were often made on paper forms. Applications for universal credit are generally made online (a feature that became extremely useful during the pandemic, when a huge volume of new claims needed to be processed during a time of social distancing), though those without access to the internet can apply over the phone.

Claimants to disability or incapacity benefits typically need to have their condition assessed before they can receive the benefit. The assessor then makes a determination as to whether the condition prevents the claimant from working (incapacity benefits) or means that they have difficulty with doing everyday tasks (disability benefits). These decisions can be appealed by the claimant, sometimes more than once. Of ‘work capability assessments’ for ESA that do not result in the claimant being awarded the highest level of eligibility, 30% are appealed once (called a ‘mandatory reconsideration’) and 8% are appealed twice6 . 

Benefit payments are generally made into the bank account of the claimant. One important exception is housing benefit, which is often paid directly to the landlord, especially for tenants in social housing – though this option is generally not available under UC. Payment frequency varies between benefits; under the legacy system, a claimant could receive JSA weekly or fortnightly, while tax credits were usually paid four-weekly. Under UC, there is a single payment frequency of a month. This change can have important consequences, a point we discuss in Section 7. 

The fact that so much of the UK’s system is either means-tested (as discussed more fully below) or health-related means that the role of assessment and/or judgement in determining who gets what is relatively large. This is a corollary of having a targeted system that is clearly trying to siphon support to those it deems most in need, though it also opens the door to some of the pitfalls of welfare policymaking when it comes to the well-being of those trying to navigate the system and the reliability with which the intended recipients of support actually get it. This is discussed elsewhere in the chapter, and in much greater depth in the accompanying commentary by Patrick (2023).

One feature that stands out from the short description of the working-age transfers system given above is that it is overwhelmingly a means-tested system: entitlements are focused on those with low current financial resources relative to (proxies for) needs, and are mostly independent of past circumstances. In fact, in 2019–20 62% of benefit expenditure was on means-tested benefits. In Section 3, we describe how the UK got to that point and show that, while this is a common way to design cash transfers, it has not always dominated the UK system as it does now, and nor are other countries’ systems typically so dominated by it. In fact, almost every other country in the OECD has some ‘contributory’ benefit system, where those who have ‘paid in’ more during working life get higher benefit entitlements in the early phase of unemployment. Two associated commentaries (Crafts, 2023; Timmins, 2023) discuss some of those issues in considerably more depth. 

Of course, the switch to universal credit does not (despite the potentially misleading term ‘universal’) get us away from any of the main trade-offs associated with means-tested forms of support. These have been noted, and agonised over, for many decades (see the Beveridge Report (Beveridge, 1942), Dilnot, Kay and Morris (1984), the Mirrlees Review (Mirrlees et al., 2011) and Moffitt (2023)) – but before proceeding to the rest of the chapter, it is worth recapitulating them very briefly. A classic trade-off is achieving redistribution versus not dampening work incentives. This can be seen in Figure 6, which shows gross earnings and net income (after taxes and benefits) for an example household (a single parent renter with two children, who can earn £15 per hour). If they work few hours – and therefore have low earnings – the tax and benefit system attempts to shield them from the very lowest living standards by redistributing to them. If they work and earn more, the extent of redistribution – as measured by the gap between the two lines – falls, and at around the point when they move to full-time work the system takes more away in taxes than it gives back in benefits. In broad terms, then, this sort of structure takes from higher-income families and gives to poorer ones. This inevitably distorts work incentives. In the absence of a tax and benefit system, if they worked one more hour they would receive an extra £15. But with the tax and benefit system, they generally receive less than that – in fact, above about 12 hours of work, an extra hour only increases their net income by roughly £47 .  If the value they place on an extra hour of time off work is more than £4 but less than £15, then their decisions have been distorted: without the tax and benefit system, they could work another hour and be better off (since they value that time at less than what they would be paid). But the incentives created by the tax and benefit system, and in particular the consumption floor with benefits available at zero hours of work, prevent this from happening.

Figure 6. Gross earnings and net income for an example household

Note: Example household is a lone parent with two children aged under 5, who earns £15 per hour, lives in a band D council tax property in an area with average council tax, is a social renter and has a rent of £150 per week. Net income is calculated using the April 2022 tax and benefit system. Net income is equal to gross earnings minus income tax, employee National Insurance contributions and council tax, plus universal credit, child benefit and council tax support.

Source: Authors’ calculations using TAXBEN, the IFS tax and benefit microsimulation model.

Providing households with insurance against shocks to their income is typically at tension with protecting their financial incentives to work, for very similar reasons to those for why redistribution and work incentives are at tension: if the benefits system reduces the difference in an individual’s income between a situation where they earn little and a situation where they earn a lot, it simultaneously provides them with insurance against low earnings and weakens their financial incentive to earn more. 

The trade-off between redistribution or insurance and work incentives is inherent within means-testing – though the extent to which people’s choices are actually affected by those incentives is an empirical question, and one that we cover in Section 4. But there are other features (or, perhaps more aptly, bugs) that have a tendency to come with means-testing too, and hence which are also a key part of the discussion of the UK’s welfare system. These include social stigma, the hassle and informational requirements of claiming, and the ‘relational’ inequality that might result when entitlement to support depends on the judgement of the government or bureaucrats about what someone ‘needs’ or whether someone is doing what is required of them (see Patrick (2023)). In turn these factors may affect how much of the means-tested entitlement is actually claimed and hence its ability to support people as intended.

As well as affecting incentives and insurance, the existence of means-testing of course directly determines whether poor or rich households receive transfers. Figure 7 shows the average receipt per household of different transfers across the income distribution. In general, poorer households receive much more than richer ones. This is true overall, and for each individual category of benefit (except for ‘other’). The one nuance to that story is that the lowest-income decile receive less than the second. This is partly because some people are entitled to benefits due to having little or no other income, and yet they do not claim them, and this tends to put precisely such households at the very bottom of the income distribution; in addition, survey respondents under-reporting the benefits they receive will tend to have the same effect. There are also those with a low income who are not entitled to much in terms of benefits, such as those with a significant amount of assets who are out of work.

Figure 7. Average annualised receipt per working-age household across the income distribution

Note: Income deciles are calculated using equivalised household income, at the individual level. Universal Credit is categorised as ‘Income support and JSA’. Benefit receipt is usually measured at a weekly, fortnightly, four-weekly or monthly level; the figure shows the annualised equivalent. Households are ranked into deciles using the whole population; averages are taken among working-age households only.

Source: DWP’s ‘Households below average income statistics’ 2016–17 data, in 2021–22 prices.

In this section, we examine how the role and design of the cash transfer system have shifted over time, thanks to both policy reforms and wider changes in the UK’s economy and society. In general when documenting longer-run trends at a high level, we examine the period since the mid 1970s, over which we have comprehensive administrative data on benefits. When looking in more detail at the drivers of trends and how they relate to policy, where we typically need to use the additional information provided by survey data, we focus our attention on the mid 1990s onwards, as the Family Resources Survey – used for much of this analysis – began in 1994–95. We often stop our analysis at 2019–20 to abstract from temporary distortions resulting from the pandemic, though where data sources go up to 2022–23, we include those years. 

The net effect of the changes in the system and the wider economy is summarised by Figure 8, which decomposes real per-capita working-age benefit spending according to its ‘purpose’8 .  We plot the cost of housing programmes as well as the cost of programmes to support claimants with disabilities. The remaining benefits bill is divided according to whether the recipient family has children and contains at least one adult in paid work. Between 1978–79 and 2016–17, the vast majority of the growth in spending has come from three broad areas: housing benefits (in yellow on the figure); health-related (disability, incapacity and carers’) benefits (in green); and other benefits for working families with children (principally tax credits and their forebears, and child benefit; in light grey). 

As already hinted, these patterns are driven both by changes in the economy and wider society, and by explicit policy reforms – which themselves are often in response to those economic and social changes. Even over just the past 25 years or so, which is the focus of most of our discussion, families’ circumstances have changed quite dramatically – particularly their working patterns and housing. 

Figure 8. Working-age benefit spending (2021–22 prices) per capita

Note: Universal credit is treated as an ‘other benefit’, though some of the expenditure is to cover housing costs or to support carers or those with an incapacity. ‘Child-contingent tax allowances’ are any reductions in income tax liability induced by the presence of children, and include child tax allowances, the additional personal allowance, and children’s tax credit. There are no such allowances from 2003–04 onwards. We include data only up to 2016–17, as after that the increasing prevalence of universal credit makes it difficult to examine trends in spending by purpose.

Source: Authors’ calculations using DWP, ‘Benefit expenditure and caseload tables, Autumn Budget 2021’; TAXBEN, the IFS tax and benefit microsimulation model; Family Resources Survey, 1994–95 to 2016–17; and Family Expenditure Survey, 1978 to 1993.

The core focus of this chapter is on the working-age benefit system, but it is worth briefly discussing the way in which its size has changed relative to the system for pensioners.

As shown in Figure 9, the total working-age benefit bill has generally grown over time, although not without exception. Real spending per working-age adult rose from around £1,200 per year in the late 1970s to £3,200 in 2010–11, before falling back to £2,500 just before the pandemic. By contrast, pensioner spending has steadily risen, including during the 2010s. On the eve of the pandemic, the working-age benefit bill made up 4.3% of national income, while the pensioner bill accounted for 5.5%. That 1.2 percentage point gap is around the highest since comparable records began in 1978–79, and has steadily grown since the mid 1990s. This partly reflects the ageing population, but also policy change – over the past decade or so there have been significant cuts to the working-age benefit system, while pensioner benefits were largely protected or increased.

Figure 9. Benefit expenditure per capita (2021–22 prices)

Note: For this figure, ‘working-age’ is defined as being under the female state pension age (even for men) and ‘pensioner’ is defined as being above it – this is how the administrative data are presented, as the female state pension age is when historically both men and women have become eligible for means-tested pensioner benefits. Figures for 2021–22 and 2022–23 are projections.

Source: Authors’ calculations using DWP’s ‘Benefit expenditure and caseload tables, Autumn Budget 2021’ and ONS’s ‘Population estimates for the UK and constituent countries by sex and age’.

As a consequence of these changes, the basic support for a single person with no other source of income is now 137% higher for those just over pension age than for those just under it. Back in 1990–91, that figure was 32%. Hence, while this chapter discusses the design of working-age cash transfers, the priority given to transfers made in the working-age portion of life versus those made during retirement is itself an important choice, and has in recent years helped shape the austere context within which working-age transfer policy is made.

Indeed, the current policy of increasing the state pension (the main – now almost universal – state transfer to pensioners; broadly the UK’s equivalent of the US’s Social Security) each year by the highest of inflation, earnings growth and 2.5% (a policy known as the ‘triple lock’) may well also cause a significant intergenerational transfer: in the limit, this policy is not sustainable (it implies pensions becoming an ever-increasing share of national income), and it is possible that the population currently of working age will not all end up benefiting in full from the same generosity.

There have been significant changes in household employment over recent decades, as well as a shift in how policy treats household employment.

An important factor here is the rising rate of female employment (from 53% in 1971 to 63% in the mid 1990s to 73% on the eve of the pandemic). A particularly pertinent shift from the point of view of the transfer system has been a sharply increasing employment rate among lone parents (the vast majority of whom are mothers), which, as Figure 10 shows, has almost doubled from 38% in 1994–95 to 67% in 2019–20. Among couples, the proportion in which neither partner is in paid work has halved over the same period, from 11% to 5%. Together these changes have led to a declining rate of household worklessness. Moreover, the rising female employment rate – combined with little change in the male employment rate – has also meant that the share of couples in which both partners work has steadily increased.

Figure 10. Work status of working-age families

Note: Excludes families entirely comprised of full-time students.

Source: Authors’ calculations using the Family Resources Survey, 1994–95 to 2019–20.

Table 2.  Real benefit spending per household per year (2021–22 prices), split by household gross earnings as a share of the relative poverty line

Note: ‘Earnings 0%–50% of poverty line’ only includes those with strictly positive earnings. Excludes households comprised entirely of students.

Source: Authors’ calculations using Households Below Average Income, 1994–95 to 2019–20.

A rising share of families with someone in paid work automatically tends to mean a rising share of transfers supporting families with someone in paid work (from 31% in 1994–95 to 48% in 2019–20). But there have also been deliberate shifts in policy which reinforce that pattern, especially through tax credits. This can be seen in Table 2, which takes broadly representative survey data on the income sources of UK households, groups households according to what fraction of the (relative) poverty line their gross (i.e. pre-tax-and-transfer) earnings make up, and shows mean real benefit receipt for each group – in three selected years. Over the past 25 years, benefits for families in work with low earnings have climbed faster than for other groups – both those out of work and those on higher earnings levels. Benefits in families with gross earnings exceeding the poverty line have declined in real terms by 38% since 2010–11 – a consequence of the more aggressive means-testing of benefits that reach high up the distribution that we describe at the end of this section.

One corollary of shifting support more towards working families on low earnings is that families have greater financial incentives to have someone in work. Indeed, this was always one of the major goals of the expansion of tax credits, and the next subsection elucidates further the work incentive effects. It is worth noting that the goal of encouraging paid work more through the welfare system has also been pursued through non-financial means, with strengthened use of job-search requirements (‘conditionality’). There is good evidence that these policy changes have themselves been partly responsible for changes in employment patterns. In particular, tax credit reforms in the early 2000s increased employment among lone parents (by around 5 percentage points (Brewer et al., 2006))9 ,  as did the expanded use of job-search conditionality from 2008 (Avram, Brewer and Salvatori, 2018; Codreanu and Waters, 2023). 

A consequence of focusing more on (means-tested) in-work support is that the transfer system provides a good deal of insurance against a decline in earnings for those who remain in work (since, if the worker is on benefits, the earnings loss is to a significant extent replaced by higher in-work transfers). Conversely, as the out-of-work safety net has not kept pace with growth in earnings, the system now provides less insurance against employment loss than it used to. This is compounded by the lack of earnings-related benefits in the UK, particularly for those not on the lowest earnings – having previously been in a mid- or high-earning job typically does not buy additional support upon job loss, unlike in many other countries. Families without children have especially low earnings replacement rates, as their out-of-work benefit entitlements have barely changed in real terms for half a century while earnings have doubled. Bourquin and Waters (2020) show that a single childless worker on average earnings in the UK can expect to receive 13% of their in-work income when they lose their job; across the OECD, the average is 55% (if they had been in work for the past 21 years).

The growth of in-work benefits has had profound consequences for the distribution of income. Figure 11 shows changes in the distribution of household earnings before taxes and benefits, and after tax and benefit net income, between 1994–95 and 2019–20 for working households. (Note that a larger share of households were working in 2019–20 than in 1994–95.10 ) Inequality in gross earnings before tax and benefits has clearly risen. Earnings at the 10th percentile grew by an average of 0.6% per year over the period, compared with 1.2% at the median and higher still above the 90th percentile. But once we account for taxes and benefits – i.e. move from the green to the yellow line – the change in income among the bottom 90% or so is almost completely flat. In other words, in-work benefits have (outside the top 10%) completely offset the increase in earnings inequality among those households with someone in paid work. As Cribb, Joyce and Wernham (2022) show, the opposite has happened if we focus specifically on the austerity period since 2011, when the transfer system has been cut back (see final subsection of this section).

Figure 11. Annual growth in household gross earnings and net income, by percentile, 1994–95 to 2019–20

Source: Cribb, Joyce and Wernham,

Figure 12. Share of people who support higher or lower benefit spending on different demographic groups

Note: Question asks ‘Would you like to see more or less government spending than now on benefits for …’. Those who refused to answer the question or stated ‘don’t know’ are excluded. 

Source: Authors’ calculations using British Social Attitudes Survey 2017.   Perhaps part of the explanation for the little change seen in basic out-of-work benefits, alongside the expansion of in-work support, is the political preferences of voters. Figure 12 shows the shares of the population who support more or less benefit spending on different demographic groups (in 2017 – the latest time these questions were asked). The groups with the greatest support for more spending are the disabled and their carers. But there is also a high degree of support for spending on ‘very low income working parents’ – two-thirds of respondents support spending more, against just 4% who support spending less. The only group where, on average, people support reducing benefits is the unemployed (20% support more versus 38% less). These questions have been asked intermittently since 1998, with not much change in levels of support (with the exception of the retired, for whom support for extra spending has fallen quite significantly). Given these preferences, the shifts in the shape of the system towards those in work are perhaps not surprising. 

An important aspect of the expansion of in-work benefits is that it has been concentrated more on those who work part-time than on full-timers (for the purposes of this chapter, we define ‘part-time work’ as working fewer than 30 hours per week). For example, under the legacy benefits system, lone parents must work at least 16 hours per week to be eligible for the work-related element of tax credits, but due to the means-testing of tax credits effective marginal tax rates when moving beyond 16 hours of work per week have been very high for many workers. 

This can be seen in Table 3. Here we focus on workers with children who are in the bottom third of the household earnings distribution (among households in work) – loosely speaking, those whom in-work benefits are largely distributed to (the equivalent table for all workers in households in the bottom third of the earnings distribution is Table A1 in the appendix). We take a representative sample of this group in each year from household survey data, and compute the average effective tax rates they would face when changing their hours of work, due not only to taxes on earnings but also to the withdrawal of means-tested benefits (Table A2 in the appendix is an equivalent of this where the population is kept constant and so only incorporates the effects of policy reforms). The ‘0 to 20 hours’ column, for example, shows the average share of gross earnings that is clawed back in the form of higher taxes or lower benefits when an individual moves from working 0 to working 20 hours per week. Higher tax rates represent a weaker incentive to change hours in the way described. The first two columns show tax rates at the extensive margin – the move from out of work to in work. The third shows tax rates at the intensive margin – in this case, moving from part-time to full-time work. 

Table 3.  Average effective tax rates on different increases in hours of work over time, for workers with children in low-earning households

Note: The ‘legacy’ and ‘UC’ rows show tax rates under the assumption that the UC roll-out has not yet begun or has been completed, respectively. Sample is workers with children living in households in the bottom third of the household gross earnings distribution (among households in work). For the 2022–23 rows, we use the tax-benefit system in that year deflated to 2019–20 terms using average earnings, and simulate tax rates using the 2019–20 Family Resources Survey data. We account for the threshold change in National Insurance contributions implemented in July 2022 by using the average threshold across the fiscal year.

Source: Authors’ calculations using TAXBEN, the Family Expenditure Survey 1978 and 1992, and the Family Resources Survey 1997–98, 2007–08 and 2019–20.

Since the late 1970s, there has been a very significant decline in extensive margin tax rates for workers with children in low-earning households (and, as we show in Table A2, this is largely driven by reforms rather than changes in the population) – consistent with the evidence in the previous subsection that the system has shifted towards in-work rather than workless families, and driven primarily by a large expansion of work-contingent support through tax credits and their forebears. Since the Great Recession, extensive margin effective tax rates have fallen further due to reductions in income tax rates and benefit cuts. By contrast, intensive margin tax rates have changed much less – today they are around where they were in the early 1990s, and in fact above their level in the late 1970s. In other words, the system has indeed shifted towards more strongly incentivising part-time jobs over not working, while generally weakening the incentives to move from part-time to full-time work. Table 3 also shows that the introduction of universal credit reinforces this, considerably strengthening incentives to work part-time on average, but with little change in the incentive to move from part- to full-time work11 .  The evidence suggests that people have responded accordingly – a majority of the increase in employment that the tax credit reforms precipitated was in part-time work (Blundell et al., 2016). 

The increased use of job-search conditionality is also again worth mentioning as something that has reinforced a wider trend in the direction of welfare policy. The expansion of conditionality for lone parents did result in more doing paid work, as we discuss in Section 4, but it was essentially entirely part-time work and on low earnings.

Much of the expansion of means-tested benefits has occurred via increased spending on families with children. This can be seen in Figure 13, which shows real out-of-work income for hypothetical families with no earnings, disabilities or housing costs, under different tax and benefit systems. Until the temporary increase to UC rates implemented during the pandemic (discussed in Section 2), there had, remarkably, been virtually no real-terms change in out-of-work benefit entitlements for families without children over the past half-century. Conversely, benefits for families with children had been considerably expanded. The increases in the out-of-work safety net are, over the period as a whole, roughly equivalent on average to having indexed their benefits to earnings (rather than the actual default of price indexation). Whereas in 1975–76 a couple with two children would get just 38% more than an otherwise-similar couple without children when out of work, by the eve of the pandemic that gap had increased to 132%. 

One way of putting these differentials into some context is to compare them with the assumed differences in the needs of different family types implied by official measures of incomes, and income poverty. Income statistics (including the official ones produced by the government) use ‘equivalence scales’ to try to account for the different needs of different-sized families. These scales imply that the couple with two children would need 40% more income than the couple without any in order to have the same current living standard, all else equal – about the gap seen in the mid 1970s, but much smaller than the one present today. Of course, there are plausible justifications for distributing more to families with children than to those without (discussed in more detail in Section 10) that go beyond the economies of scale with respect to current living standards – in particular, impacts on the future life chances of the children. In addition, the equivalence scales themselves should not be taken as an infallible benchmark for relative need: it is notoriously difficult to identify the ‘correct’ equivalence scales. 

Figure 13. Net household income over time for out-of-work families, by family type (2021–22 prices)

Note: Figure shows net incomes out of work under the April tax and benefit system of the corresponding year. There were temporary increases to universal credit in April 2020 and 2021 because of the COVID-19 pandemic. To put 2022 into 2021–22 prices, the Office for Budget Responsibility’s March 2022 forecast for CPI is used. The figure assumes that the households are owner-occupiers with no other source of income, two children, one of whom was born before April 2017, and no disabled members and have all their council tax covered by council tax support.

Source: Updated from Bourquin and Waters (2020).

Figure 14 provides another way to see the increased emphasis of the benefit system on those with children. It shows the mechanical contribution of benefits to reducing poverty – that is, if all benefits were abolished and nothing else changed, how much would poverty go up by? In 1994–95 the mechanical effect of the benefit system on relative income poverty (where the poverty line is 60% of median income) was 14 percentage points (ppts) for families with children and 11ppts for those without12 .  But as the benefit system increasingly shifted towards those with children, the mechanical effect on their poverty rate increased, while it fell for those without children. More recent benefit cuts have lessened the impact of benefits on poverty for those with children, but the differential remains large, at 15ppts and 5ppts respectively. Given these trends, it is perhaps not surprising that poverty has become increasingly concentrated among those without children (see Figure A1 in the appendix): in the 1960s and 1970s, the working-age non-parent poverty rate was only about a third of that for others, but from 1980 the ratio started to steadily increase, and by 2011–12 the rates were almost the same. Again, retrenchments to benefits since then have slightly pushed the rates apart, and larger families in particular have seen a sharp rise in poverty (Cribb et al., 2022). This is at least in part a consequence of two policies: the benefit cap, which places a limit on the amount of benefits that some families can receive (and so tends to affect renters with several children, who typically receive more than other family types), and the so-called ‘two-child limit’, which means that third and subsequent children do not generate extra tax credit or universal credit entitlement. A detailed discussion of the impact of these policies on child poverty is available in Stewart, Patrick and Reeves (2021). In addition, Reeves et al. (2020) show that the benefit cap had a sizeable effect on mental illness.

Figure 14. Mechanical effect of benefits on working-age relative poverty rates

Note: Excludes households comprised entirely of students.

Source: Authors’ calculations using Households Below Average Income, 1994–95 to 2019–20.

The trends in relative spending on those with and without children are dominated by deliberate policy changes, rather than underlying changes in the population: the fractions of low-earning families (bottom 40% of the equivalised family earnings distribution) made up by lone parents and couples with children have consistently hovered around 12% and 31% respectively for the past 25 years.

Since the inception of the welfare state, the issue of housing costs, including their wide variability across the country and the relatively large share of income that poorer people typically spend on housing, has challenged policy. As we shall see, in modern times the challenge has been accentuated by key changes in the wider housing landscape, including rapid growth in private renting. 

Today, the UK benefit system’s support for housing costs is mainly targeted at low-income renters13 .  Some homeowners are entitled to Support for Mortgage Interest (SMI), but eligibility criteria are tight (limited to those out of work who have been claiming some means-tested benefits for at least nine months), support covers only interest repayments rather than principal repayments, and as of 2018 SMI is a loan rather than a grant. For this reason, we focus on renters in this subsection14 .  Importantly, in addition to being eligible for cash support for their rental costs, renters in social housing (those who rent from a housing association or local council) generally also receive support in the form of below-market rents (for more on this, see Adam et al. (2015)). Here we focus only on the direct cash subsidy – housing benefit.

Figure 15 shows housing trends for working-age households in the bottom 40% of the (post-tax/transfer) household income distribution in each year. We choose the bottom 40% simply as an approximation for the part of the population that are often eligible for benefits, though some households inside that group will be ineligible and some outside will be eligible. The sum of the areas in the figure shows that there has been an overall shift towards renting (and hence away from owner-occupation) among low-income households, as there has been for society at large. This comprises a rapid increase in the size of the private rented sector, more than offsetting the long-term decline of social housing. Both private and social rents have increased in real terms over the period, but the growth has been significantly larger among social renters (58% versus 19% since 1994–95).  

Figure 15. Housing tenure composition and average rent of working-age households in the bottom 40% of the income distribution

Note: Social and private rents are deflated using the Households Below Average Income before-housing-costs deflator. The figure shows average rent and tenure composition among the poorest 40% of households in each year, as measured by gross income excluding housing benefits. 

Source: Authors’ calculations using Households Below Average Income, 1994–95 to 2019–20.

The combination of these trends means that over the past 25 years the amount spent on rent has increased by 53% in real terms on average among all lower-income households (including owner-occupiers, who of course pay zero rent). The most important factor contributing to this change is the increase in social rents (contributing 31ppts), followed by the increase in relative prevalence of private renting (14ppts), followed by the increase in private rent levels (9ppts).

This steady rise in real rents over the past 25 years has added around £5 billion to the annual working-age housing benefit bill (out of a total of around £20 billion15 ),  and has pushed receipt of housing-related benefits further up the income distribution. By 2019–20, one in every three working-age renting families was in receipt of housing benefit or the housing element in UC.

In summary, this is a leading example of where wider trends in the economy and society can radically change what is required of the benefits system. While rising rents and the shift towards private renting continue, policymakers have to either accept an ever-increasing housing benefits bill or leave a growing fraction of the low-income population highly exposed to high housing costs, or some combination. In reality, both have happened. Among low-income private renters, just 8% now have all their rent covered by housing benefits, compared with almost half in the mid 1990s. For 32% of them, the amount of rent not covered by housing benefits eats up at least one-third of their (non-housing-benefits) income – a situation faced by just 14% of the group in the mid 1990s (Bourquin and Waters, 2020). Despite this, working-age housing benefit spending per capita increased by 38% between 1994–95 and 2016–17 (Figure 8). While these housing trends continue, there can be no easy answer for transfer policy. The very latest response from the government has been to nominally freeze the maximum support that private renters can get for housing costs (after raising these caps in the pandemic). As rents rise, this means that the real support provided to renters will steadily dwindle, especially in areas where rent growth is fastest.

Although the universal, free-to-use National Health Service means that the UK benefits system does not need to cover health insurance, health-related benefits exist for income maintenance (in the face of constraints on ability to earn through paid work) and to cover extra health-related costs. We use the terms ‘incapacity’ and ‘disability’ benefits, respectively, to cover these distinct (though overlapping) functions. The modern incarnations of these benefits for those of working age are employment and support allowance (ESA) and personal independence payment (PIP), though many other names have applied in the past.

In addition, health and the benefits system interact in more subtle yet also important ways, since those in poor health are more likely to be out of work or on low earnings and thus eligible for other benefits. In this subsection, we briefly discuss long-term health trends and how they relate to benefit claiming; elsewhere in the Deaton Review, a whole chapter is devoted to health (Case and Kraftman, 2022) and a forthcoming paper will focus specifically on inequalities in disability (Banks, Karjalainen and Waters, forthcoming).

The incapacity benefit caseload has changed substantially over the past half-century. Figure 16 reproduces analysis from Banks, Blundell and Emmerson (2015), showing the share of the population claiming incapacity benefits in different age groups for men and women between 1971 and 2014. The figure shows that the rate of claiming among all groups steadily rose from the early 1980s to the mid 1990s, especially for older individuals. This was a period of rapid economic change in the UK – specifically, deindustrialisation including the decline of manufacturing and near-disappearance of mining – when labour market opportunities for some significantly weakened (Beatty and Fothergill, 2020). This highlights the likely role of labour market conditions in determining health-related benefit claims: health is clearly a crucial factor, but it cannot be decoupled from the wider economic environment. There is a significant amount of US evidence which attests to the same point: health-related benefit claims increase when economic opportunities deteriorate (Black, Daniel and Sanders, 2002; Autor and Duggan, 2003; Autor, Dorn and Hanson, 2013; Charles, Li and Stephens, 2018). For women specifically, the increasing rate of female employment may have also contributed to the rising incapacity benefit caseload. Over this period, eligibility to incapacity benefits was partly contribution-related (even when means-tested routes to eligibility were also available). Rising female employment therefore means more women with the contribution record required for incapacity benefit receipt.

Following a reform to tighten eligibility in the mid 1990s16 ,  claim rates among men have fallen steadily. That decline is particularly sharp among older age groups – prior to reform, more than a quarter of men approaching state pension age were receiving incapacity benefits. Women did not seem to be as strongly affected by the mid 1990s reform as men, and the overall rate of incapacity benefit claiming among women has changed fairly little since 2000. Men and women of the same age are now similarly likely to be on incapacity benefits.

The figure also shows that gaps in the claim rates between different age groups have narrowed considerably for both men and women since the mid 1990s. Instead, the key predictor has increasingly become education. Emmerson, Joyce and Sturrock (2017) show that in 2000, older high-educated individuals were two to three times as likely to claim incapacity benefits as younger low-educated individuals; by 2016, the reverse was true. This suggests that receipt of incapacity benefits may increasingly be a longer-lasting state of affairs, for a group who face persistent challenges in the labour market beyond only their health. 

Figure 16. Percentage of individuals claiming incapacity benefits, by age and sex

Note: The figure is restricted to men aged under 65 and women aged under 60, since for most of the period those older were above state pension age and hence generally ineligible for incapacity benefits.

Source: Reproduced from Banks, Blundell and Emmerson (2015).

Banks, Blundell and Emmerson (2015) show that there has also been a steady increase, for both men and women and across all age groups, in the share of incapacity benefit claims for mental or behavioural health problems. By 2014, roughly four in every ten claims was for one of these reasons.

These changes present big challenges. Previously, the caseload was to a sizeable extent made up of older claimants, with largely physical health problems. It was very often acting as a stopgap between wages and state pension entitlement, for those unlucky enough to experience a hit to their economic prospects and/or their health towards the end of their careers. The kind of support that those claimants need is likely to be quite different from that for today’s caseload, who are younger, probably claiming for longer, and more likely to be claiming in light of (often fluctuating) mental and behavioural health problems.

Figure 17 shows a similar chart for disability benefits – non-means-tested transfers aimed at compensating individuals for the higher living costs associated with disability. Data limitations mean that we can only begin the series in 2002. There are two things to note from the figure. First, with the exception of older men, claim rates have increased, especially for women, over the past two decades – in contrast to the pattern seen for incapacity benefits. Whereas the decline in the latter may be partly accounted for by a strong labour market, since disability benefits are neither means-tested nor work related the labour market has a far less direct impact on claims. Second, although the replacement of disability living allowance with PIP (which began in 2013) attracted high-profile news stories of individuals seemingly in clear need of support not being able to get it, overall there is no visible evidence of a decline in disability benefit claiming following the reform17 .  This is in contrast to the mid 1990s reform to incapacity benefits which did appear to reduce the caseload. Shortly before the completion of this chapter, further evidence of unexpected increases in claims for disability benefits emerged, with sharp rises in the number of new monthly claims from 2021 onwards, alongside broader indicators of worsening health outcomes in the UK. A consensus on the causes is yet to materialise, but the increase in new claims was seen across a range of health conditions and age groups (Joyce, Ray-Chaudhuri and Waters, 2022). Trends here look likely to continue to be a major issue, and serious challenge, within benefits policy.

Figure 17. Percentage of individuals claiming disability benefits, by age and sex

Source: Authors’ calculations using DWP Stat-Xplore.

If we take a relatively long-term historical view, perhaps the most significant change, reflecting the accumulation of many policy choices over many decades, has been a shift away from contributory benefits (where entitlement is based upon having ‘paid in’ to the system through work earlier in one’s life) towards means-tested benefits (where entitlement is dependent upon currently having a low income). This has often come as part and parcel of the shift towards families with children and working families already discussed. Moreover, a desire among policymakers to get support to people quickly and push down poverty rates has generally come with increased means-testing, since universal benefits come with a very high cost and it takes time to accumulate entitlement to contributory benefits.

The shift can be seen in Figure 18, which splits real working-age benefit spending per capita into means-tested benefits, contributory benefits, and ‘other’ benefits, entitlement to which is independent of income or past contributions (principally child benefit and disability benefits).  

Figure 18. Working-age benefit spending (2021–22 prices) per capita

Note: ‘Other’ includes the child-contingent tax allowances discussed in the note to Figure 8. It also includes child benefit, though as discussed in Section 2, this can be thought of as a means-tested benefit where the means-testing kicks in at a high level of income. 

Source: Authors’ calculations using DWP, ‘Benefit expenditure and caseload tables, Autumn Budget 2021’.

The rise in real-terms benefit spending since the late 1970s is almost entirely due to means-tested benefits, which have trebled as a fraction of the total working-age bill from 23% to 63%. Conversely, contributory benefits – which made up 38% of the bill in 1978–79 – have seen a steady relative decline, and now account for around 8% of spending (contributory unemployment and incapacity benefits are the main areas where spending has fallen). Policy choices have been key to this relative decline. The de facto default in the UK is that virtually the entire working-age benefits system is price-indexed, but there have been some substantial above-indexation (broadly, real-terms) expansions to the system in recent decades, overwhelmingly concentrated within the means-tested parts of it – often focused on families with children, and sometimes with the addition of new layers of support such as the current tax credit system. But changes in the wider economy have also contributed. For example, a large chunk of contributory benefit spending is on unemployment benefits, and so the declining worklessness discussed above has pushed down on the contributory benefits bill.

The associated commentaries by Crafts (2023) and Timmins (2023) discuss the history and political economy behind the shift away from contributory to means-tested benefits. 

As seen in Figure 9, working-age benefit spending steadily increased between the late 1970s and 2010, both in real terms per capita and as a share of GDP. As already discussed, some of that increase related to changes in the economy and society (such as rising rents) and some to policy reforms (such as expanded benefits for families in work and those with children).

Between 2010 and the eve of the pandemic, working-age benefit spending fell. That partly reflected the economy recovering from the Great Recession, but also had much to do with deliberate policy choices. These choices have included a combination of across-the-board real-terms cuts (such as nominal freezes in most working-age benefits between 2015 and 2019) and savings from cutting particular benefits in more specific ways. To the extent that clear themes have emerged beyond simply trying to reduce the benefits bill, they have been along two lines.

First, the coalition government of 2010–15 tended to more aggressively means-test benefits, reducing entitlements the most for recipients who do not have the very lowest incomes. As discussed in Section 2, child benefit has been effectively means-tested for the first time. An element of child tax credit which even relatively high-income families had been eligible for was reformed, so that it is now targeted at a much more similar (lower) income bracket to the rest of CTC. And the government simultaneously made a number of cuts to working tax credit and increased CTC, which in combination meant that the poorest families tended to gain while better-off (still relatively poor) families tended to lose. Other reforms were made over the 2010s which did reduce entitlements for a wide range of benefit recipients, including those on the very lowest incomes – for example, a four-year nominal freeze in most benefits. Nevertheless, the removal of support from benefit recipients slightly further up the income distribution remains one standout feature of the 2010s reforms. More recently, the pendulum has begun to swing back, with several universal credit reforms since 2017 increasing the amount that claimants can keep when they move into work or increase their earnings, including quite a large reduction in the UC taper rate in 2021.

Second, the norm of the benefit system attempting to reimburse people for some of their actual costs (or an approximation of their actual costs) has to some extent been eroded in favour of trying to cover (the government’s view of) ‘reasonable’ costs. This has never been stated as a general principle guiding policy, but it is implicit in a number of reforms:

All of these policies weaken the link between a family’s actual costs – namely the costs of children and housing – and the benefits they are entitled to. One way to interpret such reforms is that they reflect a view that taxpayers should only pick up the bill for claimants’ choices up to a ‘reasonable’ point; if, for example, a claimant has high costs because they live in an expensive property, that should not be the responsibility of the taxpayer. Of course, many claimants make their choices about how many children to have or what property to live in when they are not, nor expect to be, in receipt of benefits; and some will not be able to easily adjust their arrangements when circumstances change (e.g. when a child leaves home, it may not be straightforward to find a nearby property with one fewer bedroom). These reforms also relate closely to the relative lack of focus in the present UK benefits system on insuring people against the loss of work. People who have taken on costs that are commensurate with their working incomes can now find that a very low fraction of those spending commitments are covered after job loss. Many of these policies are also examples of where design choices can affect ‘horizontal’ or ‘between-group’ inequalities. For example, the two-child limit disproportionately affects certain religious and ethnic minorities.

Around the same time as the size of the benefit system has been reduced, another pattern has emerged – relatively sharp increases in the minimum wage, in particular since 2015. While this is not a transfer policy, it merits a short discussion here as the two policy tools are often linked. Indeed, when a sizeable rise in the minimum wage was first announced by Chancellor George Osborne in 2015, it was presented as helping to offset the further significant cuts to benefits that were announced at the same time. For the most part, this framing is misleading. An individual’s gross hourly wage, which minimum wages affect, is only weakly correlated with their family benefit entitlement or their family income. A minimum wage worker might, for example, live with a high-earning partner, meaning that as a family they are relatively well off and so receive little in benefits. A worker with a higher hourly wage might nonetheless be entitled to benefits because they do not work many hours, and/or because they have children or high rents and a non-working partner. And, of course, families where no one works cannot gain from a minimum wage rise, and are likely to be in receipt of benefits and on a very low income.

In fact, Cribb et al. (2021) show that the biggest proportional impact of the UK’s recent minimum wage increases was felt in the middle of the working-age household income distribution. This is for a couple of key reasons. First, minimum wage workers are most commonly located around the middle of the household income distribution, often as second earners, with those at the bottom of the income distribution typically out of work. (If we look only among households with someone in paid work, the gains from minimum wage increases are spread more evenly throughout the lowest-income half of households, but still not concentrated towards the bottom of that group, as benefits are.) Second, those minimum wage workers who are in poorer households are often on benefits and so face some of the very high effective marginal tax rates discussed in Section 2. That means that an increase in gross earnings does less for their net income than for that of another minimum wage worker further up the income distribution18 .  In short, the distributional outcomes to be expected from minimum wages and from benefits are in general very different. 

The other big recent theme in benefit policy has been the integration of much of the working-age benefits system into a single payment – the universal credit reform described in Section 2. Historically, as governments have sought to use the benefit system to respond to emerging issues or achieve particular goals, they have tended to layer parallel programmes on top of one another. Tax credits were added (and expanded) on top of the pre-existing strands of support, as was a benefit to support those with high local tax bills. Housing benefits made up a relatively small share of benefit spending several decades ago, but have grown as a share of the budget following the big increase in the size of the private rented sector and a shift away from social housing, and the increase in private sector rents. That means that the design of housing support, including how it interacts with the rest of the transfer system, has become an even more important issue. 

The different programmes tend to have rather complicated interactions with one another. For example, receiving tax credits reduces entitlement to housing benefit (by counting as income for the assessment of housing benefit). Given the existence of these parallel programmes, there are often defensible reasons for these interactions (to continue the previous example, it dampens the disincentive to work for people receiving both housing benefit and tax credits, since the tapering away of tax credits will, all else equal, bolster housing benefit entitlement). But the need for such interactions highlights some of the liabilities of having a system of this clunky form in the first place.

This patchwork of support, and particularly the resulting jumble of overlapping means tests, sometimes created strong disincentives to work (as discussed in Section 2), was difficult to understand, and often required claimants to claim a significant number of benefits to get their full entitlement. With this in mind, universal credit was intended to integrate these benefits together and rationalise the system. As shown in Section 2, UC’s fundamental structure is considerably simpler than that of the legacy benefit system, with a basic entitlement steadily withdrawn above a disregard (‘work allowance’). Having to apply for only one benefit simplifies application, and also avoids many applicants having to make a new benefit claim when they, for example, lose their job or have a child. By ensuring that there is a single taper rate applied to all claimants, UC also means that the very weakest work incentives that were present under the previous system (with marginal effective tax rates as high as 96%) are removed – though on average it does not significantly change the marginal incentives to work (see Table 3 earlier). Integration, however, is not an unalloyed good: it generally removes flexibility to design different elements of support depending on their actual purpose. For example, it implies choosing a single assessment period (discussed in Section 7) for in- and out-of-work support alike.

Despite the appeal of some of the motivations for it, universal credit has created major challenges, some of which we discuss in Section 7 – in particular, the five-week wait for benefits mentioned in Section 2. It is also notable that the integrating spirit which motivated UC’s introduction has not been pushed as far as it could have been. Council tax support (CTS) will remain a parallel benefit when UC is fully rolled out, but it could have been integrated together with the rest of UC. That it is separate means that claimants can in fact still have very high marginal effective tax rates, depending on how their local authority chooses to design its CTS system. Once we account for the continued existence of CTS, we estimate that around 6% of workers entitled to means-tested benefits will still have an effective marginal tax rate in excess of 75% under UC. That is certainly much lower than was present under the legacy benefit system, where the equivalent figure was 36%. But it could have been cut to practically zero if UC had been integrated with CTS19 .  However, integration would amount to mean-testing benefits more slowly, costing £2 billion per year and bringing more people into means-testing – though this could have been offset by slightly increasing the UC taper rate. Similarly, when the government decided to effectively withdraw child benefit from higher-income families, it did so in a roundabout way by implementing an additional income tax charge. This is complex for some recipients who must now file a self-assessment tax return, and is a rather awkward form of means-testing, being based on the income of the higher-income parent rather than on the total income of the family. Neither of these consequences would have been necessary had child benefit been integrated with UC.

The discussion of the current UK transfer system, and how its design and role have changed over time and compare internationally, has already hinted at a number of key ‘outcomes’ or ‘impacts’ that transfer systems can have. These go well beyond the mechanical impacts of the government deciding to make money available to certain people: the ultimate impacts depend on how policies affect people’s behaviour and how they interact with the wider social and economic environment. In the following sections, we examine the evidence on how differently designed systems can have different effects. We begin in Section 4 by briefly examining the huge amount of existing research on the impact of benefits on choices over paid work. In Section 5, we examine who actually takes up their entitlements – an area in which we have a moderate amount of evidence but more could be learned, including from careful experimentation, and especially in the UK. We then turn to three issues on which the evidence is more limited: the ‘economic incidence’ of transfers (that is, whose income is ultimately raised by them) in Section 6; then several ‘operational’ aspects of benefits, such as payment frequency and which member of a couple receives the benefit, in Section 7; and finally the ‘intergenerational effects’ – how transfers can have long-lasting impacts on the children of claimants – in Section 8. 

Within economics, the most studied aspect of benefit policy is probably the effects on paid employment and the hours thereof. The evidence base here is very large, allowing us to draw some fairly clear conclusions. A recent development in this literature has been to go beyond looking at how incentives affect how many hours people work at a given point in time, to studying how they affect career progression, and here too we are starting to gain important insights.

Discouraging paid work is a key drawback of means-tested benefits. Alternatively, in-work benefits – by encouraging work, or at least helping to mitigate the discouraging impacts of other parts of the transfer system – generate additional pathways to increases in income (Hoynes and Patel, 2018). Because these issues are reviewed extensively elsewhere, our discussion here is brief. (For a fuller treatment, see Blundell and MaCurdy (1999) or Meghir and Phillips (2010).)

There is a large amount of evidence on the importance of incentives at different margins and for different groups, much of which was reviewed and examined previously in the Mirrlees Review (Mirrlees et al., 2011). We briefly summarise key points from this research here.  For men, the impacts of financial incentives on work choices have generally been found to be quite small at both the intensive (how many hours you work) and extensive (whether you work at all) margins. Essentially, a very large fraction of men work full-time – though this has declined for those on low wages – and this remains true even if you change the tax and transfer system a lot. Larger effects, especially on the extensive margin, can be found for those whose trade-offs between the gains from work and its costs are more finely balanced – in particular, lower-educated men (e.g. Meghir and Phillips, 2010), those around retirement age (e.g. Manoli and Weber, 2016) and those with disabilities (e.g. French and Song, 2014). 

There is a greater responsiveness among women, especially on the extensive margin. This is not especially surprising since the employment rate of women is below that of men – indicating greater scope for a change in work status – though as that gap has steadily closed it is likely that the responsiveness of women will have become closer to that of men. Responses are larger for mothers making delicate trade-offs between paid work, time with family and childcare costs than for women without dependent children. Lone mothers also tend to be more responsive than married or cohabiting mothers, for similar reasons. (Meghir and Phillips (2010) show these differences by comparing labour supply elasticities for these groups in different studies. Of course, more research has been done since then, and an update of this sort of review would be valuable.)

One key factor studied by this literature is the extent to which benefits affect work choices by changing the returns to work (i.e. the extra income from working an extra hour) and by changing an individual’s income at their current level of work. For example, suppose that the government decides to reduce the UC taper rate, so that it is withdrawn more slowly as earnings rise. For those in receipt of UC, that increases the returns to additional work – if they work an extra hour, they will lose less UC than they did previously – so the incentive to work more is strengthened. But it also increases their income at their current level of work – less of their UC has been withdrawn. They can ‘spend’ that increase in income on more time off work (i.e. they can have the same income as before while doing less paid work), weakening their incentives to work more. These two effects – known as the ‘substitution’ and ‘income’ effects – push in opposite directions, and so in principle such a reform could increase or decrease the amount an individual works. In practice, the empirical literature has generally found that income effects are quite small and are dominated by substitution effects20 . 

This has implications for benefit design. In particular, more universalist policies (such as child benefit) are unlikely to have very significant impacts on labour supply because they only change incomes and do not change the absolute returns to work. Conversely, as the above example demonstrates, means-tested benefits with high taper rates imply reductions in the returns to work and so may have bigger effects. Within means-tested benefits, extensive margin work incentives can be strengthened by reducing out-of-work benefits or increasing in-work benefits21 .  Intensive margin incentives are more complicated. They can be strengthened for existing claimants by slowing the speed at which benefits are withdrawn (e.g. reducing the UC taper rate or increasing the work allowance). However, such reforms also mean that benefits stretch further up the income distribution, bringing more people into means-testing and weakening their incentives. 

Work choices can also be affected by so-called ‘active labour market policies’, and these are often closely linked to the transfer system, through requirements to look for a job in order to claim out-of-work benefits or through the provision of training programmes, job-search assistance or employment subsidies to transfer recipients. Card, Kluve and Weber (2018) provide a summary of such policies. Job-search and conditionality approaches (discussed in more detail below) can have significant positive effects on employment in the short run, but the evidence generally suggests much smaller long-run effects. The implication is that those short-term increases in employment do not have radically positive impacts on labour market attachment and skill development, contrary to the grandest hopes that sometimes accompany such schemes. This is likely to reflect both the kinds of people typically targeted and the types of work that they are incentivised to move into (in particular, low-skilled work, often at part-time hours, which tends to have limited effects on human capital development, as discussed later in this section). 

Conversely, programmes that aim to build human capital more directly – training programmes and subsidised private sector employment – have limited effects in the short run, since participants have to pass up employment opportunities when on the programme, but when designed well they offer the promise of larger positive effects in the long run as the employee can draw on the skills gained. This distinction is brought out clearly in Hotz, Imbens and Klerman (2006), who examine a programme in California with both job search and human capital development aspects. The former was more effective at getting people into work in the short run, but the latter was more effective in the long run. Subsidised public sector employment has little or even negative effects on employment across all time horizons (e.g. Gerfin and Lechner, 2002), suggesting that such programmes may be ineffective at building participants’ human capital, and simply slow down their search for unsubsidised jobs. An accompanying commentary discusses in more detail the potential for human-capital-focused interventions to play a role alongside the transfer system (Moffitt, 2023).

The UK has experimented with various forms of active labour market policies. The ‘New Deal’, introduced in 1998, aimed to strengthen human capital among several groups (principally long-term unemployed young people) through training and education. Evaluations suggest it had modest success in raising employment and reducing the benefit caseload (Riley and Young, 2001; Blundell et al., 2003; Dolton and Smith, 2011).

In 2003, the government launched a three-year randomised trial providing job-search and advancement assistance, training, and cash incentives to undertake training and to get into and remain in work (known as Employment Retention and Advancement, or ERA; Hendra et al. (2011) describe the programme in detail). An evaluation five years after the start of the trial (Dorsett and Oswald, 2014) found that it had only a temporary effect on employment, but a persistent effect on earnings (£10 per week). Perhaps surprisingly, it had a negative effect on self-reported life satisfaction and financial security.

But perhaps the most common tool used has been job-search conditionality. An early strengthening of such rules came with the introduction of jobseeker’s allowance in the mid 1990s. Evidence on this change suggests that while it was successful at getting people off unemployment benefit, some simply went onto incapacity benefits, and overall there was no effect, or perhaps even a temporary negative effect, on employment (Manning, 2009; Petrongolo, 2009).

A more recent example of the expanding use of conditionality applied specifically to lone parents: the ‘Lone Parent Obligations’ (LPO) reforms, implemented between 2008 and 2012. Whereas previously any lone parent out of work did not have to search for a job to receive out-of-work benefits until their youngest child turned 16, that threshold was incrementally reduced to 5. This led to a sharp increase in the fraction of lone-parents subject to job-search conditionality (see Figure 19).

Figure 19. Share of lone parents subject to job-search conditionality

Source: Authors’ calculations using Family Resources Survey, 1994–95 to 2017–18.

This experience provides a case study in why, even if increases in employment can be achieved through conditionality (often the explicit goal of such policies), one should not fall into the trap of taking employment to be the only outcome that actually matters. The kinds of jobs that claimants get into, as well as other ways that they can respond, are important, as are the wider impacts of participation in such schemes on their well-being. Codreanu and Waters (2023) examine the impacts of the LPO on a range of outcomes, drawing a few key conclusions. First, consistent with much of the existing literature, the use of conditionality was very effective at getting people into paid work: the LPO raised the employment rate of those affected by 4.4ppts, from a base of 63%. Second, however, the increase in employment was essentially entirely in part-time, low-paid jobs. This can be seen in Figure 20, which shows the effect on the cumulative distribution of hours and earnings, i.e. in panel A, a point on the line indicates the impact on the share of lone parents who are in work and are working less than the number of hours shown on the horizontal axis. Almost all of the increase in employment was accounted for by part-time jobs – 70% in jobs with fewer than 24 hours per week, and a further 22% in 24- to 29-hour-per-week jobs. As panel B shows, virtually all of it was in jobs paying £20,000 per year or less (the 40th percentile of the overall earnings distribution), with around half in jobs paying £8,000 per year or less (2021 prices). That the increase was entirely focused on these particular kinds of work is critical for the likely long-term effects of the policy: as discussed later in this section, the evidence suggests that part-time work results in very limited career progression. Third, some claimants responded to the policy by claiming new benefits. In particular, the increase in the shares claiming incapacity and disability benefits, which do not have job-search conditions attached, increased by 3.3ppts and 0.7ppts respectively. Fourth, the sum of these effects meant that the fiscal savings from the policy were small (not statistically significant and considerably less than the government had anticipated). Those newly employed did not earn much, and so paid little in tax and (because of the UK’s focus on in-work benefits) the net impact on their receipt of transfers was small; and those who started claiming new benefits generally saw an increase in receipt. Fifth, despite the fact that the effect of the reform was to remove an option for lone parents (claiming out-of-work benefits while not seeking a job), it appeared to have little effect on mental health, reported life satisfaction, or well-being overall. Codreanu and Waters provide suggestive evidence that this overall impact is the combination of two offsetting effects: those who get into work because of the policy see an improvement in these outcomes, while those who remain out of work – and are now subject to conditionality – see a deterioration. This chimes with qualitative evidence indicating that conditionality can negatively affect the well-being of some claimants (see Patrick (2023)).

Figure 20. Impact of job search conditionality on the distribution of hours and employee earnings among lone parents

Note: The graphs show the impact of the LPO policy on the share of single parents who are in work and working less than or equal to a given number of hours (panel A) or in work and earning less than or equal to a given level of earnings (panel B). The dashed lines show 95% confidence intervals. The effect on the share working a positive number of hours is slightly larger than the effect on the share earning a positive amount because the former includes the effect on self-employment, whereas the latter does not. 

These somewhat mixed conclusions are of particular import given that the UK’s switch to UC is expanding conditionality significantly further:

Taken in the round, the evidence casts some doubt on the value of conditionality in recent years in the UK. Reforms in the 1990s were found to have no positive impacts on employment, and the employment effects of reforms affecting lone parents in the 2000s and 2010s were substantial, but almost entirely in part-time and low-paying jobs (known to bring little long-term benefit in terms of career and wage progression) and with barely any fiscal savings. This is not to say that it would be impossible to posit positive effects, or to find ethical frameworks that would lead to a coherent justification. Perhaps being in work brings non-pecuniary benefits to people that they undervalue until they enter work. Perhaps conditionality is deemed necessary for the political acceptability and sustainability of an extensive safety net. Or perhaps a philosophical framework that goes beyond pure welfarist criteria can be invoked, as Moffitt (2023) neatly summarises: ‘Most of those who find work requirements to be optimal give up on welfarist criteria and adopt some other criterion, such as poverty alleviation with zero weight given to leisure … or just put recipient work directly into the social welfare function, effectively a form of paternalism’. Along these lines, some people may simply feel that it is not fair for people not willing to search for work to get the same support as those who are, and that the system needs some way of recognising that. Regardless of the merits of any of these arguments, it is not clear to us precisely what the UK government currently thinks the purpose of conditionality is, and it is questionable whether – if those purposes were spelt out explicitly – the evidence would suggest that the goals are being met.

Particularly topical in the UK is the effect that UC will have on employment and hours of work. Research on this issue to date has been scant. Several studies (e.g. Browne, Hood and Joyce, 2016; Brewer, Finch and Tomlinson, 2017) have examined UC’s effects on financial work incentives (i.e. the financial return to work), but this does not tell us how claimants will respond to those incentives, nor does it incorporate the effect of other changes that UC makes (e.g. obviating the need for multiple benefit claims). A more concrete piece of evidence comes from the Department for Work and Pensions (2017), which used administrative data to compare new claimants to UC in parts of the country where the benefit had been rolled out with those in other parts where it had not yet been. This suggested a positive employment effect, with employment 3–4ppts higher for UC claimants for each of the next six months after their claim began. However, the nature of the study meant that only a very specific type of claimant could be evaluated (single, unemployed, with no children and no housing costs). It is unlikely that we can extrapolate reliably from this narrow group to the much wider pool that will claim UC when it is fully rolled out – especially given that UC changes work incentives quite differently for different groups.

As far as the direct financial incentives to work go, it looks as if UC on average does strengthen incentives to be in work (see Table 3). But, following the theme of recent decades, it particularly incentivises part-time jobs. The incentive to move from 0 to 20 hours of work is considerably strengthened, but the incentive to move from 20 to 40 hours is left almost unchanged.

The issue of low wage progression at the bottom of the earnings distribution (and indeed low wage growth across the whole distribution) has become perhaps the key labour market issue in the UK. In particular, employment rates have increased (as we showed earlier) but – prior to the sharp increases in the minimum wage introduced since 2015 – wage gains were limited for the lowest-skilled workers. 

A starting point for thinking about this issue, as it relates to transfer policy, is recent research demonstrating how the long-run impacts of tax credits on earnings and employment in the UK have been constrained by the lack of wage progression among the low-skilled (Blundell et al., 2016). This means that the aim of encouraging people into work as a stepping stone to further career progression is not often realised – people move into work, but there is no job escalation thereafter and they stay on low pay (and hence receiving in-work transfers). This again highlights that welfare policy should not be designed in isolation: while in-work transfers can achieve a lot, their long-run impact could be magnified considerably if we could only find complementary policies that can secure career progression for people once they are in work. 

One way in which the design of transfers themselves could be altered to try to improve wage progression is by tweaking the extent to which they encourage full-time versus part-time work. This is because hours of work and hourly wages seem to be strongly linked in the long run – and, in particular, working part-time seems to shut down progression in hourly wages (Blundell et al., 2016). This raises the question as to whether we could better meet the long-run aims of in-work transfers by trading off incentives at the extensive and intensive margins of labour supply differently, taking more pains to limit the disincentives we create to increase hours of work. 

This goes somewhat against the grain of modern thought in both policy and academic circles. To the extent that the trend towards in-work transfers – which took hold not only in the UK, but also in the US (through the Earned Income Tax Credit, EITC) and other countries – was given impetus by the scientific literature, it was probably largely due to the findings of Saez (2002). This research showed that if labour supply elasticities are higher on the extensive margin than on the intensive margin – that is, loosely, if people’s working decisions respond more to incentives over whether to work at all than to incentives over how much to work – then there is a strong case for work-contingent support that is then phased out at higher earnings levels. Those insights have been very important, but they were generated within a ‘static’ framework that ignored the possibility of different work intensities having different impacts on human capital, and hence future wages and labour market behaviour. What if the phasing-out of support at higher earnings levels discourages precisely the kind of work that would bring the bigger benefits to careers and wages in the longer term? We now know more about these dynamics, and as a result we should factor them into policy thinking.

Figure 21. Impact on outcomes, averaged over working life, from increasing the UC work allowance and reducing the taper rate

Source: Goll, Joyce and Waters, 2023.

Goll, Joyce and Waters (2023) study this issue, analysing the consequences of designing the benefit system to differently incentivise part- and full-time work. They build on a dynamic model of labour supply developed in Blundell et al. (2016), estimated empirically using UK longitudinal data. Two simple potential reforms bring out the difference clearly. First, the government could increase the work allowance in UC – allowing claimants to keep more of what they earn before their UC starts to be withdrawn. Second, the government could reduce the taper rate in UC – the rate at which the benefit is withdrawn as a claimant’s earnings increase. Superficially, these reforms might appear very similar – they both increase incomes for working families, so strengthen the incentive to have someone in work. But on the intensive margin they are quite different. Increasing the work allowance tends to incentivise part-time work, as it generally results in at least as large a cash increase in income for part-time workers as it does for full-time workers24 .  Reducing the taper tends to incentivise full-time work, as the (cash) increase in income is larger the more a claimant earns. Figure 21 summarises the impact of these reforms on outcomes across working life. Although both reforms are successful at getting people into work, the increase in the work allowance reduces the number of full-time workers – and so, despite employment gains, reduces human capital accumulation on average, and with it hourly wages and consumption. Conversely, the cut to the taper rate increases full-time work, and with it wages and consumption in the long term. Moreover, because the taper rate cut encourages full-time work and raises wages, it ends up boosting tax revenues and so costing the government less than the increase in the work allowance. While it is certainly not true that the taper rate cut is better for everyone than the work allowance increase, on average the effects look more positive. Goll et al. (2023) go on to show that a more radical policy of introducing a tax credit that is targeted towards those who work full-time could have even stronger effects.

These results indicate that the case for worrying about the financial incentives to work full-time is significantly stronger if one takes account of these long-run consequences than if one does not. Governments that want to enhance career progression for benefit claimants would do well to consider these effects – and may find that, by doing so, they end up with reforms that are more cost-effective than one would expect if one focused only on the immediate impacts.

To ward off one potentially important misunderstanding, there are of course many people who would, in the absence of distortions to their financial incentives, choose to work part-time rather than full-time. The argument is not that those people should somehow be pushed into working full-time instead. Parents in particular are weighing up many factors, in light of many constraints, when deciding what sort of paid work they want to do. Rather, the point is that the existing tax and transfer system tends to discourage moving from part-time to full-time work by distorting the relative financial rewards. Empirical research on how labour supply responds to financial incentives tells us that, therefore, there are people in the UK who would on balance have chosen full-time work but, due to the tax and transfer system, are instead working part-time. Our point is that, alongside the standard sorts of arguments about the pros and cons of such a system, there is another, longer-term consideration: incentivising some people to work part-time who would otherwise have worked full-time will likely mean that their future wages are lower than they would have been. Reforms that reduce the overall disincentive to full-time work can limit that effect.

The government decides how much it wants to support different kinds of people, but the money also has to reach those people. Particularly in a predominantly means-tested system such as the UK’s, getting money to the ‘intended’ recipients is not a trivial part of the process. Incomplete take-up of entitlements has long been bemoaned by proponents of alternative systems, such as those arguing for more universalism (e.g. Atkinson, 2015). 

In broad terms, the main reasons for non-take-up are somewhat well understood, but precisely who is ‘screened out’ by the barriers to take-up (particularly whether it is the more or less needy, among those entitled), and precisely whose claiming rates would be increased by particular interventions, are crucial questions about which we know much less, and could use more evidence. An additional caveat is that a large fraction of the empirical evidence in this area comes from the US. There are many reasons to be cautious about how transferable that evidence is to the UK setting.

Figure 22 gives a sense of the scale of the issue, setting out estimated take-up rates of different UK benefits. These show the share of those entitled who claim (caseload take-up) and the percentage of the money that people are entitled to which is actually claimed (expenditure take-up). Overall, in 2014–15 (the last year before universal credit roll-out significantly complicated take-up estimates), around one in seven pounds of means-tested or contributory working-age entitlements was not claimed (totalling £15 billion in 2021–22 prices). Figure 23 shows our estimates of expenditure take-up rates for means-tested and contributory benefits by family type, also in 2014–15 for consistency25 . 

Take-up rates differ significantly for different benefits and between different groups:    

Note: All figures other than child benefit relate to 2014–15; we choose this year because very little of the universal credit roll-out had started by then, and that roll-out significantly complicates take-up calculations. The child benefit figure relates to 2011–12, because during 2012–13 the government implemented the ‘high-income child benefit charge’. While any family with a child can still claim child benefit, for higher-income families it generates an equivalent increase in tax and means that they have to complete a self-assessment tax return. It is unclear whether a family that would be subject to the full charge and does not claim should therefore be classed as ‘not entitled’ or ‘entitled but not claiming’. Child benefit caseload take-up rates are on a per-child rather than per-family basis. HMRC only provides a caseload take-up estimate for child benefit, but since there is little variation in entitlement for an eligible child, the expenditure take-up rate should be very similar and so here we simply report it as identical to the caseload take-up rate. Housing benefit statistics are for non-pensioners. The tax credit expenditure take-up rates reported are for total tax credit take-up for those entitled to both CTC and WTC (i.e. the CTC expenditure take-up rate includes WTC expenditure for those entitled to both; and the WTC rate includes CTC expenditure for that same group). This is because of the way HMRC reports the data.

Source: DWP’s ‘Income-related benefits: estimates of take-up: financial year 2014/15’ and HMRC’s ‘Child benefit, child tax credit (CTC) and working tax credit (WTC) take-up rates 2014 to 2015’.

Figure 23. Expenditure take-up rates of means-tested and contributory benefits, by family type  

Note: Families are classified into age brackets by the age of the oldest person. ‘With children’ and ‘without children’ relates to dependent children.

Source: Authors’ calculations using Family Resources Survey 2011–12 and 2014–15 and TAXBEN, the IFS tax and benefit microsimulation model.

The first step in thinking about how much we should care about non-take-up, and what policy approaches might be appropriate in light of it, is understanding why people do not claim what they are entitled to and who does not claim. The social science literature identifies factors that we might describe in turn as informational barriers, psychological costs (e.g. stigma; Herd and Moynihan, 2018) and ‘compliance’ costs (e.g. the hassle and time associated with filling in forms and going to jobcentres). We briefly examine the empirical evidence on the contribution of each of these reasons for non-take-up in turn. Another very recent review of this literature is available in Ko and Moffitt (2022).

One factor driving non-take-up which has been the subject of a lot of quantitative empirical research is a lack of information about what support is available or how the system works (though high-quality empirical evidence on this from the UK is lacking). Providing information to potentially eligible claimants about how to claim and what they might be eligible for, typically with a letter, has been found to increase take-up rates for a wide variety of transfers across many studies27 .  Both lack of awareness of the benefit and false beliefs about eligibility seem to be at work (Bhargava and Manoli, 2015; Engström et al., 2019). Accordingly, these studies find that letters that explicitly counter these beliefs have a – modest – impact. 

Two nuances are worth mentioning. First, an important study of this sort of intervention (Linos et al., 2022) found that providing information about claiming a tax credit had no impact on the low-income households studied. One potential explanation offered by Linos et al. is that their study was targeted at those who were not filing tax returns – and so the hurdle to file a tax return in order to claim the tax credit may simply have been too great for an information intervention to overcome. In contrast, almost all the other papers in the literature examine interventions that target those who already claim benefits, pay taxes, or similar28 .  A plausible conjecture is that those already interacting with the government (in a way relevant to the benefit they are receiving information about) are ‘closer’ to claiming, and so can be pushed into doing so with a letter, while for those with little or no interaction with the state, who may be among the most vulnerable, the barriers to claiming may be sufficiently high that a letter has little effect.

Second, several studies, again in the US context, find that adding assistance (with form-filling) on top of information delivers significantly larger increases in take-up. This suggests that the combination of assistance and information may be important (Bettinger et al., 2012; Finkelstein and Notowidigdo, 2019).

The structure and administration of benefits can cause stigma (Moffitt, 1983), stress, cognitive overload and loss of autonomy due to complicated applications and treatment by case workers (Herd and Moynihan, 2018). Empirical evidence on the role of psychological costs as a barrier to take-up is limited. The available evidence is focused on stigma, and finds that it does not seem to play a significant role in take-up. Bhargava and Manoli (2015) show that sending EITC reminder letters which are worded so as to try to reduce stigma has no effect, although this could be because EITC stigma is already low. Currie et al. (2001) show that allowing SNAP claimants to use a (more discreet) debit card rather than coupons has little impact. Currie (2004) offers some indirect evidence for stigma not being a significant contributor to non-take-up, including the fact that in the US take-up rates among means-tested and non-means-tested benefits are similar, despite the former presumably having higher stigma.

That said, we do have plenty of qualitative evidence that feelings of stigma exist around the claiming of benefits (see the accompanying commentary by Patrick (2023)). If these are widespread then it would be surprising if they were not having at least some impact on the number of people who choose to claim their entitlements. But this is an appropriate place to emphasise that some of the potential barriers to take-up matter even if their actual impact on take-up is modest, as the literature suggests may be the case in relation to psychological barriers. Feelings of stigma, for example, degrade the lives of people on benefits, even if those people still, on balance, choose to take up those benefits given the financial pressures they are under. 

A somewhat different set of psychological factors that may influence take-up is cognitive biases in decision-making. These include procrastination, optimism bias (e.g. excessive optimism about the prospects of finding a job soon) and the perception that not claiming is a forgone gain rather than a loss (Bertrand, Mullainathan and Shafir, 2004). 

There are good reasons to think that some of these biases are at work. Manoli and Turner (2014) show that reminder letters to claim EITC have a very big effect on take-up in that year, but a much smaller effect in future years – suggesting that the ‘nudge’ of the letter is more important than any new information it contains. Currie (2004) points to the fact that people are defaulted into Medicaid Part B when they turn 65, and – despite the fact that they actually have to pay (heavily subsidised) premiums – take-up is nearly 100%. This suggests some inertia and is reminiscent of the literature on pensions auto-enrolment, which suggests that people automatically enrolled into a pension scheme are very likely to remain in it even if they can easily opt out. With technology and information systems offering increasing prospects of ‘automatically’ identifying who is most likely to be eligible for support, this is an area in which some policy experimentation, allied with a careful strategy of evaluating the results of those experiments, would be welcome. The Scottish Government is beginning to do this as part of its ‘benefit take-up strategy’29 ,  through an ‘Invite to Apply’ scheme whereby those likely to be eligible for certain support are sent a letter alerting them to this – although, as far as we aware, there is unfortunately not a systematic plan for how the impacts of this intervention will be isolated.

Compliance or transaction or hassle costs refer to a variety of specific aspects of the claiming process which are time consuming or burdensome.

There is much empirical evidence that the hassle of applying decreases take-up. Making claimants check in at benefit offices more frequently, or increasing the distance to such offices, reduces take-up (Currie et al., 2001; Bitler, Currie and Scholz, 2003; Rossin-Slater, 2013; Deshpande and Li, 2019); the process of having to fill out application forms dissuades people from applying, and providing assistance with those forms helps persuade them (Schanzenbach, 2009; Bettinger et al., 2012; Radford, 2012; Finkelstein and Notowidigdo, 2018), while requiring more information, making the form more complex or giving people less time to complete it reduces take-up (Bhargava and Manoli, 2015; Homonoff and Somerville, 2021). Ongoing demands placed on claimants in the form of work requirements and the application of sanctions – issues discussed further in the previous section – also reduce take-up (Moffitt, 2003)30 .  

So far, we have discussed the barriers or costs of taking up a benefit as reasons for non-take-up. But the benefits of take-up – i.e. the money received – are also clearly relevant. 

A large number of empirical studies confirm this point: increasing the financial value of benefits strongly raises take-up (Anderson and Meyer, 1997; Dahan and Nisan, 2010; Whelan, 2010; Zantomio, Pudney and Hancock, 2010; Zantomio, 201531 ).  This also implies that, at least to some extent, people not claiming what they are entitled to are aware that support is there and appear to be implicitly weighing the ‘costs’ of making a claim against the financial rewards of doing so. In other words, the ‘lack of information’ and ‘psychological biases’ explanations discussed above cannot be the whole story, though they appear likely to be parts of it. 

The existence of non-take-up may impact the ability of policymakers to actually target those intended, or – more optimistically – it may help to ‘screen out’ the less needy from these programmes (Nichols and Zeckhauser, 1982), saving public funds for other uses. This area is now the subject of quite a large empirical literature.

Results are split on the crucial question of whether barriers to claiming cause benefits to be targeted more or less on the neediest. It is not surprising that there is no single answer to the question, though, given the diversity of transfer programmes, eligible populations and means of implementation. Finkelstein and Notowidigdo (2018) find that those who respond to an information intervention on SNAP are less likely to be needy – so existing barriers screen out less needy people32 .  Homonoff and Somerville (2021), also studying SNAP, find the reverse: having less time to recertify screens out needier groups. Deshpande and Li (2019) find that increasing transactions costs screens out needier groups on some margins (education and pre-application earnings) and less needy groups on others (disability). Bhargava and Manoli (2015) find that the effect of EITC reminder interventions is quite consistent across dimensions of heterogeneity33 ,  suggesting that existing barriers do little screening one way or the other. It would be very valuable to build an evidence base that helps us understand more systematically the conditions under which non-take-up screens out the neediest, versus the conditions under which we may be less concerned about it.

Questions related to take-up are highly relevant to the universal credit reforms in the UK, since we are combining out-of-work benefits (generally considered high stigma, consistent with the evidence in Figure 12 showing greater public opposition to unemployment benefits than to others, and often with conditions/hassle attached) with in-work benefits / tax credits (low stigma, without conditions attached but possibly in future with some conditions under UC). Additionally, UC should reduce transactions costs by replacing multiple legacy programmes with a single application. It is not clear how information about UC will differ from the legacy system. The government has implemented a significant advertising campaign, perhaps improving information, although the benefit has also been subject to a string of negative headlines, potentially increasing the perceived downsides of claiming.

Housing benefit and tax credits comprised about half of all working-age cash transfers in the UK prior to the introduction of universal credit. As UC combines these payments (and others) for working-age households, those strands of support are being phased out as separate entities. But it will remain the case that the system will include a component that subsidises rental costs, and will affect the financial gain to paid work, which means that changes to the system will tend to change the implicit tax on wages.

Standard economic arguments, and lots of empirical evidence, suggest that (implicit or explicit) taxes and subsidies can affect the price of the thing being subsidised – which in this context would mean rental prices or wage rates. This means that gains or losses can in the end be felt not merely by those impacted ‘on paper’ – those who are the formal recipients of the subsidy or payers of the tax – but by those on the other side of the market (e.g. the landlords letting the property or the employers paying the wages). It can also affect those who compete with those who are directly impacted by the policy. For example, an in-work subsidy for parents might increase their labour supply, driving down wages across the labour market – including for those without children.

How the housing and in-work support is shared between tenants and landlords, or workers and employers, is clearly a crucial question. There are tens of billions of pounds of resources here which, depending on precisely how the labour and housing markets work, could end up raising the incomes of the (primarily low-income) recipients they are designed to help, or could instead be effectively ending up in the pockets of very different people, such as landlords or the owners of companies who employ low-income workers.

The way in which the gain or loss is ultimately shared, after accounting for the knock-on effect on market prices, is known as the economic ‘incidence’. Simple theory is enough to indicate that it will depend on how the market in question works. In a competitive market, the determinant is the relative sensitivity (‘elasticity’) of supply and demand to the price. For example, if the supply of rented housing is very inflexible, then subsidising tenants to live in it will raise the market price: the higher subsidy will increase demand for rented housing above the level that can be supplied, so landlords will be able to charge higher prices while still filling their properties. Hence landlords will capture the gains in this scenario (if some renters are ineligible for the subsidy, then they can become worse off than if there had been no subsidy at all). In less competitive markets, the analysis is different but it is still the case that the incidence is shared by both sides of the market. 

Unfortunately, given the potential importance of this issue, empirically estimating the economic incidence of taxes and subsidies tends to be methodologically challenging, and the evidence with respect to both housing support and in-work transfers remains quite scant and without a very clear consensus. It should certainly be a priority for further research. We summarise below the currently available evidence.

Three papers attempt to estimate the incidence of the EITC in the US. Rothstein (2008) uses variation in exposure to an EITC expansion to estimate the incidence on single women. He finds that 72% of an EITC increase is ‘captured’ by employers in the form of lower wages for low-income single women as a whole. A subsequent paper, Rothstein (2010), takes a different approach: rather than directly estimating the impact of an actual reform he instead uses estimates of labour supply and demand elasticities from the wider literature to simulate the incidence on women. In his preferred specification, 36% of the increase in EITC is captured by employers. Leigh (2010) also attempts to estimate the incidence of the credit using variation in state EITC schedules. But the effects he finds are extremely large – Nichols and Rothstein (2016) show that they amount to employers capturing 500% of EITC spending, suggesting that the methodology used may not be entirely sound in this context.

Bennmarker, Calmfors and Seim (2014) use Swedish panel data to estimate relative incidence effects. That is, they compare how wages evolve for workers who are differently exposed to a reform. But, as emphasised above, if workers compete in the same labour market then the reform will likely affect the wages of all workers, even those not directly exposed to the reform. This may explain why they get relatively small effects, with wages falling by 10–20% of the value of a subsidy. Azmat (2019) provides the only UK study of benefit incidence. She looks at the introduction of working families’ tax credit in 1999. One important part of this reform is that (unlike the system it replaced) it allowed employers to see how much subsidy employees were getting. She estimates that this fact alone reduced wages by 30% of the value of the credit, with another 8% fall induced by the fact that the reform expanded benefits. A key limitation of this paper is that it measures the gross expansion of tax credits. But in the UK, an increase in tax credits can result in declines in entitlement to housing benefit and council tax benefit, reducing the net giveaway. This is a first-order issue, with up to 85p of a £1 increase in tax credits clawed back in the form of lower benefits. It is therefore not totally straightforward to interpret the magnitude of these results.

This literature, by virtue of both its small size and methodological difficulties, does not provide us with much guidance on what to expect will happen to wages when tax credits are expanded. On balance, however, it does provide good reason to suspect that the incidence on wages is not a trivial issue and may go some way to undercutting the purpose of tax credits. More research would be extremely valuable, including on how other aspects of policy can help to ensure that the intended incidence is more like the actual incidence. The joint use of tax credits and a wage floor provided by a minimum wage would be a key example.

There is also an empirical literature on the incidence of housing benefit, in a variety of housing and policy environments. 

In the US, Susin (2002) compares long-run rent trends between areas where the supply of housing vouchers (which are supplied by the government and can be used to pay for rent) expanded by different amounts, estimating that the existence of the voucher system had increased the rents of non-recipients by 16% – although Olsen (2003) argues that one might be concerned that underlying rent trends differed between areas that saw different increases in housing voucher supply. Recent evidence from the US comes to more mixed conclusions about the impacts of more generous housing vouchers on rents (Eriksen and Ross, 2015; Collinson and Ganong, 2018). A small body of evidence from outside the US has found that a substantial share of the incidence of more generous rent subsidies falls on landlords, in the form of higher rents (Laferrère and Le Blanc, 2004; Fack, 2006; Viren, 2013; Grislain-Letrémy and Trevien, 2014; Sayag and Zussman, 2015).

Two papers have looked at this issue with respect to the UK’s housing benefit. Gibbons and Manning (2006) looked at a cut to HB in the mid 1990s that applied only to new claimants, and affected those with the highest rents among households of their size in their local area. They estimated that 60% to two-thirds of the incidence of the cut was on landlords. 

Most recently, Brewer, Browne et al. (2019) studied large cuts to HB for private renters in 2011 and 2012. They found, overall, very little short-run impact on rents, but they did find more impact for certain small subgroups – namely, those who were previously treated relatively generously by the system and for whom better housing at the margin may have been more of a ‘luxury’ (implying relatively elastic housing demand, and hence more incidence on landlords) than for the average recipient. That paper argues that this might explain some of the variation in the findings of other papers. Many of the non-UK European studies, which tend to find substantial incidence on landlords, studied extensions of housing subsidies to specific groups that might be expected to have highly elastic housing demand (e.g. students). When Brewer et al. restrict attention to groups who plausibly share that characteristic, they get more similar results, i.e. higher incidence on landlords. In addition, the Gibbons and Manning UK study had looked at a previous cut to HB at a time when the system was more generous and hence would have had impacts further up the distribution of housing quality.

Before ending this section, it is worth joining the dots from two of the takeaways above. First, though the precise sharing of incidence remains unclear, it is likely that a non-trivial fraction of the gains from housing and in-work support does end up with people other than the intended low-income tenants and workers. Given the huge expenditure on these strands of support, it is even more likely that a non-trivial amount of resources in absolute terms (even if a small fraction) is ending up with people other than the intended beneficiaries, as well as making non-subsidised renters or workers worse off. Second, the balance of incidence is not a universal constant – it is going to depend very much on how the housing and labour markets work. In combination, these considerations highlight the value of making policy in a joined-up way. If, for example, in-work support reduces wages, that effect can be limited by combining the policy with the use of minimum wages. Here we start to tread on the territory of other parts of the Deaton Review. But, for our purposes, the key point is that the impacts of the welfare system can interact in crucial ways with things such as trade union policy or minimum wages – very much contrary to some of the political narrative of recent years, which appears to have seen in-work transfers and minimum wages (in particular) as alternatives to each other, rather than complements. 

There remain a number of issues relating to how the system actually operates and is administered. These are very often abstracted from in policy-related research (particularly, perhaps, in economics). But the purpose of this short section is to flag some of these questions, referring to more detailed work on them that can be found elsewhere, while also arguing that these can in fact be of first-order importance if the system is actually to achieve what is intended and is to adequately account for the experience of people using that system. In other words, abstracting from these questions is generally not a tenable approach when actually designing a policy framework, and mistakes here can really undermine broader goals.

One key issue, especially in the current UK context, is the timing of the first payment after a benefit claim begins. Under the legacy system, 33–41% of new claimants to jobseeker’s allowance would have their claim processed within just 5 days, 62–89% within 10 days, and virtually all within 21 days34 .  But as a result of the universal credit reform, there is now by default a ‘five-week (i.e. 35-day) wait’ between a claimant applying for the benefit and them receiving their first payment (though loans are available to help cover this period). Most of that five-week period is due to an early ‘administrative’ choice (made to avoid over- or under-payments) to pay benefits in arrears, meaning that the government ‘waits’ for a month to receive income information before calculating entitlement and making the payment. This has caused many unpleasant stories about vulnerable families experiencing hardship and resorting to food banks or private loans taken on unfavourable terms while waiting for their support to arrive35 .  It seems to have been one of the main contributors to the difficult time that UC has had politically during its roll-out and to a more general (and we would argue confused) perception that the whole direction of reform has been undesirable.

Clearly, the period between the event that generates benefit eligibility (e.g. losing one’s job) and the first payment being received can be a particularly difficult one for families who have little savings. Around a quarter of households on benefits have less than £250 of gross liquid wealth, and about half have less than £1,00036 .  The financial precariousness of this period can be accentuated by the fact that it typically takes time to adjust key living costs such as housing in order to bring them more into line with the new level of resources. Given that one of the primary functions of the benefits system is to provide insurance or, as economists would often put it, to help people smooth their consumption in light of a shock, an overly-long waiting period clearly has the potential to severely undermine part of the purpose of the system – especially in a dynamic economy where people frequently come onto and off benefits.

Delestre et al. (2020) examined this issue in the context of the COVID-19 crisis. Using anonymised bank account data from a budgeting app, they compared new UC claimants with those who looked similar before the crisis but who saw no change in their income. Relative to the control group, the spending of UC claimants falls prior to the receipt of the benefit, as expected. But after the benefit is received, about 40% of that gap is closed – indicating that the short-term lack of liquidity had negative implications for living standards, over-and-above the fall in living standards implied simply by the difference between prior earnings and UC entitlement. The importance of delays is also seen in that same research in the wait during the crisis to receive a grant from the Self-Employment Income Support Scheme. Claimants of the grant saw their spending fall by 13% during the wait, relative to households who looked similar pre-crisis – but after the support arrived, that entire gap was closed37 .  

What can the government do about this issue? Some sort of waiting period is necessarily going to occur for a benefit that pays in arrears, because the payment comes after the assessment period is over. To entirely avoid a wait period, then, UC would have to be paid in advance and based on expected income – but that creates the spectre of overpayments, occurring when a claimant’s actual income turns out to be higher than expected. The recouping of overpayments has caused hardship and political difficulty of its own in the context of tax credits. If, for this reason, the government wants to pay UC in arrears, loans look to be a reasonable way to address the wait period issue. This is in fact what the government has done with the ‘advances’ system where claimants are paid a loan after making their claim, which is paid back in the form of lower benefit payments subsequently. Further alleviation of the difficulties of the five-week wait may be available by tweaking the advances system – for example, by making the loans opt-out rather than opt-in or by recouping them more slowly. The government could go even further and turn the advances into non-repayable grants, though some have argued that this may open the system up to fraudulent claims38 . 

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