The ongoing saga of Universal Credit, and why affordable credit matters
Douglas White, Head of Advocacy at the Carnegie UK Trust, on how to fix Universal Credit
Image credit: PA
The roll out of Universal Credit has been back in the news, and, as has sadly become the norm, the story was not a positive one.
While the principle of a simplified welfare system that tackles the ‘benefit trap’ (very high marginal rates of tax as someone moves from benefits into work), is difficult to argue against, the problems surrounding UC are significant and well documented; delayed payments leading to destitution, government ministers admitting that many people – already on low incomes – could be up to £2,000 a year worse off, and an ever-growing bill to try and fix a system where the design flaws become more apparent with every passing month.
Of course, the deployment of Universal Credit is only one – highly important – part of a systemic set of challenges to incomes in the UK.
The last ten years have brought severe income pressure, with an increasing number of people finding it ever-harder to get enough money in their pockets to enable basic, decent living standards.
The combination of welfare cuts and freezes, wage stagnation and the worst decade for living standards in 200 years have made life tangibly – and in many cases, severely – more difficult for millions of people. The nature and depth of the impact varies between different individuals, households, regions and demographic groups, but it is real and persistent.
One lesser explored part of the discussion about income pressure is the role of credit.
Credit is, of course, no substitute for a living wage or decent welfare payments but it is something that the vast majority of us rely on as a normal part of life.
This can be to support major purchases such as a house or a car, through the use of credit cards and overdrafts, to tide-over fluctuations in income, or where outgoings exceed income.
The Bank of England’s latest figures show that unsecured debt in the UK is at a record high of more than £200bn – or nearly £8k per household.
While this figure sparks some concern, it also masks a very different trend and different problem which is that access to credit has become substantially more difficult during the past 10 years for those on lower incomes.
That is, the very same households also squeezed by a lack of wage growth and freezes to welfare benefits.
A recent House of Lords Financial Exclusion Committee report found that 40 per cent of working age people had less than £100 in savings.
A savings cushion appears an expensive luxury for far too many people.
In the aftermath of the financial crisis in 2008, mainstream lenders such as banks significantly tightened their lending criteria which made it more difficult for many people to get loans.
This partly contributed to the rise of payday lenders, including Wonga, who grew their markets hugely from 2010 to 2014, serving a customer base predominantly excluded from mainstream financial services and charging them a significant premium for doing so.
The Financial Conduct Authority rightly stepped in to regulate the sector and protect people from harm – and that regulation, added to a raft of other factors – has helped to dramatically reduce the size and reach of the high cost lenders.
This is very good news. The pressing question now, though, is where people, on lower wages and lower benefits, might reasonably turn to access the money they need to cover temporary, urgent or unexpected expenditure.
There is a real risk that in a wider context of flatlining incomes, that the vital action to tackle high cost credit could result in unintended and undesirable consequences for people who simply need access to money to meet an unavoidable short-term need.
The positive news is that we now have a substantial opportunity to fill the gap in the credit market with affordable, ethical, not-for-profit alternatives.
There are a number of organisations leading this charged such as Scotcash or Conduit Scotland, backed by the actor Michael Sheen through his End High Cost Credit Alliance; the Scottish Government through its £1m commitment in the Tackling Child Poverty Delivery Plan; and the Carnegie UK Trust through our long-standing programme of work in this area.
The not-for-profit affordable credit sector is miniscule and the challenge and opportunity now is to support it scale and sustain, to offer a cheaper, viable alternative source of credit and a gateway to other important financial and social inclusion services for many more people.
Of course, more affordable credit is just one part of a wider set of solutions that need be explored to tackle the challenges that deny too many decent and dignified incomes.
A fair, working and intelligent welfare benefits system is a prerequisite for this and Scotland has obvious opportunities to forge a new path here through the new social security powers.
Other, potentially game-changing ideas also require exploration, for example the wider roll out of the real living wage, which draws on a place-based approach and offers real potential, as do the possibilities around universal basic income which requires piloting but is being examined by a number of local authorities.
None of these solutions are without challenges. But the clear and regularly reported problems of Universal Credit remind us again that we must continue to think widely and deeply about incomes.
We need to identify effective, sustainable action that can and should be taken to ensure that everyone has the money they need to live decent and fulfilling lives.
Douglas White is head of advocacy at the Carnegie UK Trust
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