Understanding Society Scientific Conference 2019 - , University of Essex

Universal credit and its impact on household incomes: the long and the short of it

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Day:Wed 3 Jul
  • Tom Waters, IFS

Most distributional analysis of tax and benefit reforms, including the shift to universal credit (UC), is based on a ‘snapshot’ of household incomes and circumstances. We use longitudinal Understanding Society data together with a detailed tax and benefit microsimulation model to compare the impact of UC on incomes measured in the snapshot against its average effect measured over longer periods. We find that UC reduces incomes more among the temporarily poor than the permanently poor: a consequence of it giving less to those with financial assets, working homeowners, and the self-employed. To quantify the importance of this, we propose a new method to decompose longer-run distributional consequences into two effects: a ‘dilution’ of the short-run effect which results from individuals’ changing circumstances over time, and a ‘tagging’ impact resulting from the reform’s effects being conditioned on characteristics predictive of longer-run incomes (such as self-employment). We find that UC is made modestly less regressive on a longer-run basis as a result of tagging.