WELFARE REFORM IN GREATER MANCHESTER

WELFARE REFORM IN GREATER MANCHESTER IMPACT ON PEOPLE, SERVICES, HOUSING AND THE ECONOMY New Economy 01

CONTENTS EXECUTIVE SUMMARY... 3 1 INTRODUCTION... 7 2 ECONOMIC CONTEXT... 8 3 WELFARE REFORM... 12 4 PEOPLE... 18 5 SERVICES... 30 6 HOUSING... 33 7 ECONOMY... 39 8 CONCLUSIONS... 41 9 ABBREVIATIONS... 43 New Economy 02

EXECUTIVE SUMMARY Aims This report summarises the potential impacts of the Government s welfare reforms on Greater Manchester (GM): on its people, services, housing and the wider economy. Where possible the study includes evidence of quantifiable impacts. However many outcomes resulting from the changes are yet to be recorded - due in part to the fact that many of the reforms have only recently come in to force, as well as the current inability of many monitoring systems to record change. The report therefore provides a framework for understanding the risks and potential impacts associated with the reforms to inform a priority-driven response. Current welfare spending in GM Of the 8.3bn that Government spent on welfare in GM in 2012: 33.6% ( 2.8bn) was spent on state pensions; 18.2% ( 1.5bn) was spent on Tax Credits; and 12.1% ( 1bn) was spent on Housing Benefit. In comparison, spend on Jobseeker s Allowance, where the traditional focus of welfare reduction policy has focused, accounted for just 3.2% of the total ( 0.3bn). Together Employment Support Allowance, Incapacity Benefit, and Income Support on the ground of incapacity, where policy has increasingly widened its focus to, accounted for 9% of the total ( 0.75bn). Background to the welfare reforms The welfare state is undergoing a significant and radical change the most substantial since its inception 70 years ago. The main changes, unveiled primarily in the Emergency Budget 2010, the Comprehensive Spending Review 2010, and the Welfare Reform Act 2012 are to: replace the complex range of out-of-work benefits and Tax Credits with Universal Credit; reassess claims of disability and incapacity related benefit, assessing capability to work; and introduce a single Work Programme to support long-term unemployed people into work. At the same time Government is looking to deliver 18bn of savings in 2014 15 and a further 3.6bn savings in 2015 16. The impact of the reforms will be wide ranging, affecting both unemployed residents and those in work, as well as local authorities, service providers, charities, and even businesses. While the reforms bring with them a range of risks, careful management could help to promote more positive outcomes for GM s residents and its labour market. In particular: some of the reforms will simplify the benefits system and will provide clearer incentives to work, promoting labour market participation. Universal Credit in particular, assuming it is effectively implemented, will provide a flexible system, more tailored to the needs of individuals, that will deliver a smoother transition between welfare and work; and the changes will also create opportunities and flexibilities for support organisations and local authorities to focus their planning and delivery on the activities which give greatest impacts and value for money helping people overcome barriers to becoming independent of state support. However, it is highly likely that the reforms will increase demand for public services at the same time as the funding for these services has been reduced. New Economy 03

Economic context When interpreting the likely impact of welfare reforms on GM it is important to note the economic context in which they are being implemented. GM s economy has changed significantly in the last 20 years, including more than a decade of sustained growth, followed more recently by recession and slow recovery. However, there are a number of key themes which has led to: rising employment in business services and public sector employment (although the latter has recently started to decline) which has offset declining employment in manufacturing; an increasingly hourglass shaped labour market, with rising demand for higher level skills, and increasing job opportunities requiring low/entry skill levels. This has been accompanied by increasing competition for lower skilled work; falling numbers of job opportunities in manual, craft and clerical occupations, the jobs which allowed many people to access employment as well as progress in the labour market; rising numbers of part-time workers and women in the workforce. The most significant impact of the changing nature of GM s economy is the increase in structural unemployment and inactivity due to a mismatch between the jobs available and the skills base of the resident out of work population. There has also been a rapid increase in the reliance on in-work Tax Credits. Whilst unemployment has not risen as much as expected in the recent recession, wages have been stagnant and low pay remains a particular issue for many GM residents. Impact on the economy If successful, the reforms will provide clearer incentives to work, alongside more tailored support to get more people into employment, which will result in a boost to GM s economy which has long been held back by high levels of economic inactivity. However, given the economic context, the reforms present a significant challenge for the local economy. Analysis of the savings Government expects to make shows that benefit payments will be 755m lower per year than would have otherwise been the case in GM in 2014 15. Accounting for how this money is then re-spent in the local economy, means that the impact on total economic output is potentially up to 1bn, equivalent to 2% of GM s economy. Whilst this is clearly very significant, this figure does not take into account the positive economic impacts arising from of residents moving from unemployment into work or increasing their non-welfare earnings. Impact on people The positive impact the reforms have the potential to create for individuals by moving them from benefits into work and/or increasing their earnings could be significant. For example, on average, moving from Jobseeker s Allowance to work results in additional annual earnings of 4,300 per year (in addition to the estimated saving to the exchequer of 8,500 per year) as well as an increase in well-being through improved confidence, self esteem and reduced isolation. 1 However, there are also risks for many individuals who currently rely on the current system of entitlements. Analysis highlights that: 456,500 (40%) of GM s households will be directly affected by the introduction of Universal Credit. While Government has made a commitment that no claimant will be worse off when they shift to Universal Credit they will be subject to increased conditionality (i.e. having to comply with conditions to claim their benefit, such as increasing the numbers of hours they work). This will particularly affect those transferring from in-work tax credit who are not currently subject to any conditionality; 1 This has been an important feature of Greater Manchester s work on Public Sector Reform and Cost Benefit Analysis. Figures sourced from New Economy (2013): GM Cost Benefit Analysis Technical Specification New Economy 04

re-indexing benefits and limiting increases to 1% per annum will contribute to the most wideranging, and most significant, real-terms reduction in entitlements. To illustrate, the reform will mean an estimated loss in weekly income of 7.60 for Jobseeker s Allowance claimants and 7.80 for in-work Tax Credit claimants by 2016; the most acute challenge linked to the reforms will likely be felt by Incapacity Benefit claimants, who are judged fit for work but, due to their lack of current work experience and/or the health issues which limit the type of work they can do, will struggle to find employment in the near future. Already over 35,000 Incapacity Benefit claimants have been reassessed between October 2010 and May 2012, of which almost a third were found to be fit for work. Some of these will be able to claim Jobseeker s Allowance or income support but some will not be eligible and their need will be especially acute. It is estimated that by the time the reassessment process is complete in April 2014 an additional 84,000 Incapacity Benefit claimants will have been reassessed of which an estimated 26,000 will be fit for work; and looking to the future, while the state pension is currently out of scope for reform, it is likely that a future government, faced with an ageing population and an already large pensions bill, will have to look to make savings in this area. Identifying ways to mitigate the impact of this will be crucial in order to avoid future hardship in GM s older population. Impact on services A new service directly created by the reforms is the single Department for Work and Pensions (DWP) Work Programme. A series of Prime Contractors have been commissioned by DWP and given considerable freedoms to determine what activities each customer will undertake in order to help them into, and to sustain, employment. They also have significant flexibility in how, and by whom, these activities are delivered. While this flexibility is welcome, the first release of performance data issued for the Work Programme showed it underperformed against expectations, even when the state of the economy is factored in. More recent data shows an improving position, however the results still remain behind what is expected. Work needs to be done to develop additional support that delivers better outcomes, especially for those who remain at some distance from entering the labour market. More broadly services across GM are already beginning to change in response to budgetary pressures and changing user demands. Welfare reforms will impact in a wide array of areas, adding pressure on services that are already looking to deliver more with less. This includes: revenue and benefits services will clearly be one of the main frontline services impacted immediately. Changes to benefit entitlements and uncertainty for some customers will increase the number of enquiries to service and contact centres. Reductions in the amount of benefit paid out to customers is already leading to increased pressure upon council tax collections, as well as the potential risks of increased arrears, evictions and court actions; family finances and financial advice will be one of the top issues for many authorities, and is an area likely to see an increase in demand for support; Registered Social Landlords, Housing Associations and Arms Length Management Organisations will be significantly affected. Many have already established financial inclusion services offering support in areas such as budgeting and debt management. Many are also now actively involved with supporting tenants to deal with the reforms to welfare; there is a risk of a growing number of transient families moving as a result of the reforms and different areas response to the changes that may lead to swings in the demand for services such as the numbers of childcare and school places required. Linked to this, there is also the potential for the reforms to reinforce concentrations of deprivation and dependency in particular areas as more families look to move to more affordable locations. This will place New Economy 05

pressure on services in these areas. There is also potential for increased demand for before and after-school childcare as more residents are encouraged to work; and learning and skills services are critical to mitigating the impact of the reforms and it will be particularly important to ensure that provision is supporting residents into work as well as supporting those in work to progress to more hours and higher pay. Impact on housing The housing and public service impacts of welfare reform are complex and, for some areas, difficult to predict with confidence. There have been changes to Housing Benefit entitlement both in the private rented sector reducing the maximum rent that claimants can claim support for and in the social sector, with those under-occupying social housing being charged for doing so. Analysis suggests that the under-occupancy charge potentially affects 45,000 households in GM. These changes will force tenants to decide to stay and pay, or having to move; potentially leading to disruption for families and local communities. Anecdotally there has been an increase in the number of residents looking to buy their homes to avoid the excess charges. The impacts could be acute in particular locations within GM that have concentrations of social and private sector rented accommodation. More extreme impacts have already been recorded in national research for example Shelter s Eviction Risk Monitor shows that GM contains some of the areas in England where people are most at risk of losing their home: 12,455 homes in GM were the subject of repossession claims in 2011, with the highest rates of mortgage and landlord repossessions recorded in Manchester, Salford, Rochdale and Tameside. Each of these risks has the potential to increase disruption in the housing market. It is not possible to draw a direct link to other risk factors, however authorities should be aware of potential risks to homelessness, crime, community cohesion, household characteristics and sub-letting, changing use of local services; and a rising need for local information, advice and guidance services. Conclusions The analysis outlined above suggests that scarce resources should be focused on: managing transitions into the labour force, both from inactive benefits and from education. This means in the first place providing better advice and guidance for these groups, as well as work experience opportunities and wider employer engagement initiatives. Longer-term this means supporting the development of sustainable job opportunities alongside supporting residents to achieve the skills, confidence and health required to take up employment; supporting in-work claimants to progress in terms of their hours and/or rate of pay. Reductions in real terms tax credit payments generally and the introduction of Universal Credit puts the onus on supporting people to develop their skills and employability for the needs of the future economy. Ensuring people have the right skills will improve their chances of accessing work; and grow their productivity, wages and career progression. maintaining a focus on public service reform. Many of the investments made in GM are already helping to target interventions in an evidenced and effective way and will help to reduce the number of people requiring services in the first place. Whilst the reforms take time to generate a return on investment, there is potential to make a sustained reduction in the demand and dependency on services; and ensuring that investment supports growth and the creation of new jobs. Ensuring that there is an adequate number of job opportunities for residents to move into (and progress in) will be essential for many residents to be able to mitigate the worst effects of the reforms to the welfare system. New Economy 06

1 INTRODUCTION 1.1 In 2013 the welfare state is undergoing radical change, the most significant since its inception almost 70 years ago. This report investigates the impact of the Government s welfare reforms in Greater Manchester (GM) on: people, demand for services, housing providers; and on businesses and the wider economy. 1.2 The main changes, unveiled primarily in the Emergency Budget 2010, the Comprehensive Spending Review 2010, and the Welfare Reform Act 2012 are to: replace the complex range of out of work benefits and Tax Credits with a Universal Credit (UC); reassess claims of disability and incapacity related benefit, assessing capability to work; and introduce a single Work Programme to support long-term unemployed people into work. 2 1.3 The reforms aim to streamline the number of entitlements, and in so doing help ensure that individuals and families are better off in work than on benefits. It aims to help people to progress into work, at the same time as supporting the most vulnerable in society. Implementing these changes will be challenging in a period of fiscal restraint with Government aiming to deliver 18billion of savings from welfare in 2014-15 and a further 3.6billion savings in 2015-16. 1.4 While the reforms bring with them a range of risks not least that they will increase demand for public services at the same time as funding for them is reducing careful management of the challenges could help to promote more positive outcomes for GM s residents and its labour market. 1.5 In particular, Universal Credit is the single most important welfare reform in a generation. It will provide a radically more simplified benefits system by bringing together a range of working-age benefits into a single streamlined payment. If successful, it will provide a flexible system to accommodate personal circumstances which at the same time proves easier to administer and potentially delivers a smoother transition between welfare and work. The changes will also create opportunities for support organisations and local authorities to focus their planning and delivery on the activities that give greatest impacts and value for money, helping people overcome barriers to becoming self-sufficient and independent of state support. 1.6 Understanding the risks and impacts is complex, and in many cases definitive answers to important questions particularly surrounding the introduction of Universal Credit and cumulative impact are not possible. However, this report aims to provide a broad framework for understanding the risks and potential impacts associated with the reforms in order to inform a focused and priority-driven response to the changes. 1.7 The report is structured as follows: Section 2 provides the economic context; Section 3 summarises the welfare reforms; Section 4 outlines the impact that welfare reforms could have on people; Section 5 illustrates the potential impacts on services; Section 6 shows the potential risks and implications for housing; Section 7 estimates the high level impacts on the local economy; and Section 8 sets out conclusions and issues for policy makers and practitioners to consider. 2 HM. Government (2012): Welfare Reform Act http://services.parliament.uk/bills/2010-11/welfarereform.html New Economy 07

2 ECONOMIC CONTEXT 2.1 This section provides the local economic context in which the changes to welfare will take place. It includes a short analysis of structural change in GM s economy and how this has impacted on unemployment and claimant trends, wages and hours worked. It also provides a summary of current Government spending in GM on welfare payments. Structural change in GM s economy 2.2 Figure 1 illustrates how the structure of GM s economy has changed in the last 20 years and reveals several long-term trends that are expected to continue. The most obvious trend is rising employment in business services, which has offset significant losses of jobs in manufacturing. The restructuring of GM s economy has several implications for the labour market including: rising demand for higher level skills, increasing competition for lower skilled jobs, rising levels of occupational specialism; and growth driven by investment in innovation. GMFM 3 analysis shows that the trend towards increased demand for higher level skills looks set to continue over the next decade: forecasts indicate that of the 921,000 jobs requiring replacement over the next decade (due to retirements and labour market mobility, as well as growth) half will require skills equivalent to at least NVQ level 3, and a quarter to NVQ level 4. 2.3 The changing nature of employment has resulted in rapid increases in structural unemployment where there is a mismatch between the jobs available in the market and the skills available in the workforce. Figures 2 and 3 illustrate that, despite significant falls in unemployment benefit claimants, since the mid-1980s, the total stock of out-of-work benefits (which includes a large number of people claiming benefit for reasons of incapacity) has remained more or less flat. 2.4 It is also important not to overlook in-work benefits, which have become an increasingly large component of the welfare system. In part this has been driven by increases in part-time working and in part by the increase of low paid work. It is striking that Tax Credits accounted for 40% of the rise in income between 2002-03 and 2008-09 (without which real incomes would have fallen) 4 augmenting wages levels that have fallen in real terms since 2009, as shown in Figure 4 below. 3 Greater Manchester Forecasting Model and New Economy (2012): Greater Manchester Skills Analysis 4 M Brewer and L Wren-Lewis (2011). Why did Britain s households get richer? Decomposing UK household income growth. London, Institute for Fiscal Studies. http://www.ifs.org.uk/bns/bn125.pdf New Economy 08

Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Figure 1: The decline of manufacturing and the rise of Business, Financial, and Professional Services. Percentage of total employment in GM, 1991 to 2022 (forecast) 30% 25% 20% 15% 10% 5% 0% BUSINESS, FINANCIAL AND PROFESSIONAL SERVICES MANUFACTURING Source: Oxford Economics (2012) Figure 2: Jobseeker s Allowance claimants by duration of claim in GM, 1985 to 2012 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 12 MONTHS+ 6-12 MONTHS LESS THAN 6 MONTHS Source: Department for Work and Pensions (2012) Figure 3: Out of work benefits claimants in GM, 2002 to 2012 300,000 250,000 200,000 150,000 100,000 50,000 0 OTHER LPIS ESA/IB JSA Source: Department for Work and Pensions (2012) New Economy 09

120 Figure 4: Real hourly wages for the bottom decile of earners* in GM, 2002 to 2011 115 110 105 107.3 100 95 98.8 96.4 90 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 TOTAL PART TIME FULL TIME Source: New Economy calculations of ONS Annual Survey of Hours and Earnings (2012); *Adjusted for RPI 2.5 Despite years of concerted investment and initiatives designed specifically to tackle the issues which are outlined in this section, it has been impossible to eradicate challenges such as worklessness, long-term unemployment and low pay, even within the longest period of sustained growth. Targeted reforms and initiatives have the potential to make greater in-roads to some of these persistent challenges, building upon a more detailed understanding of the challenges residents face at the local level. Spend on benefits and pensions 2.6 As Figure 5 shows, the main proportion of the spend by Government on welfare (through both the Department for Work and Pensions (DWP) and HM Revenue and Customs (HMRC)) in GM is not on in-work or out-of-work benefits but on pensions. A third (33.6% or 2.8bn) of all welfare spending in the area goes towards paying the state pension. The state pension is currently out of scope from reform savings. However the level of spending here presents a significant challenge to both central and local government: as the population continues to age there will be rising pension costs and rising demand for services from older people. 2.7 The next largest element is on Tax Credits (both in work and out-of-work), which made up almost a fifth (18.2% or 1.5bn) of welfare spending in GM. Housing benefits (again paid to both those in work and those out-of-work) made up a tenth (12.1% or 1bn). 2.8 Jobseeker s Allowance (JSA), where the traditional focus of welfare dependency reduction policy has focused, in contrast accounted for less than 0.3bn (3.2% of the total). This suggests that serious in-roads to reducing levels of JSA claimants would have to be made before any real/visible savings are made from these areas of reform. Together Employment Support Allowance (ESA), Incapacity Benefit (IB), and Income Support (IS) on the ground of incapacity, where policy has increasingly widened its focus to, accounted for 9% of the total ( 0.75bn). New Economy 010

Figure 5: DWP spend on benefits and pensions, and HMRC spend on Tax Credits in GM, 2012 DWP and HMRC: 8,320,000,000 Source: Department for Work and Pensions (2012); HM Revenue and Customs (2012) New Economy 011

3 WELFARE REFORM 3.1 The key changes being made to welfare reform were first set out in the Government s Comprehensive Spending Review 2011 and set in law by the Welfare Reform Act 5 which received Royal Assent in March 2012. The Act aims to deliver 18billion of savings in 2014-15. This section sets out each of the principal reforms, with subsequent chapters analysing impacts. A. WELFARE REFORM OVERVIEW 3.2 The Act aims to protect the most vulnerable in society, as well as delivering fairness both to those claiming benefits and to the taxpayer. The Welfare Reform Act introduces a wide range of reforms which are intended to simplify, streamline and reform the benefits and Tax Credits systems in the UK. The main elements are: the introduction of Universal Credit to provide a single streamlined payment replacing income-based JSA, income-based ESA, Income Support (IS), Child Tax Credits, Working Tax Credits, and Housing Benefit (HB); a stronger approach to reducing fraud and error with tougher penalties for offences; a new claimant commitment which shows clearly what is expected of claimants; reforms to Disability Living Allowance (DLA), through the introduction of the Personal Independence Payment (PIP); changes to Housing Benefit which are intended to bring greater stability to the housing market and improve incentives to work; reforms to ESA and a new system of child support; replacing centralised support for Council Tax Benefit (CTB) with a localised support mechanism, with funding coming from grants paid directly to local authorities; and changes to the Social Fund giving greater power to local authorities. 3.3 While all will impact on GM, the latter two reforms, as there is a much higher degree of local control, will be hugely important in ensuring local residents are supported through the changes and risks identified in this report. 3.4 The 2012 Autumn Statement announced additional savings. The major change announced was a limit to the annual increase in all benefits and Tax Credits by 1 percent regardless of the rate of inflation. This was intended to make estimated savings of 3.6bn per annum. 3.5 The 2013 Spending Round also outlined further detail on welfare reforms, including a welfare cap to control overall public spending on benefits (that will not include the state pension), the implementation of a new programme called Work Search which job seekers must sign up to before they can claim any benefits (and a 7 day wait before benefits can be claimed); and steps to ensure all claimants speak, or be in the process of learning, English. 5 HM. Government (2012): Welfare Reform Act http://services.parliament.uk/bills/2010-11/welfarereform.html New Economy 012

B. KEY CHANGES TO THE WELFARE SYSTEM The introduction of Universal Credit 3.6 Universal Credit is the centrepiece of the Government s welfare reform programme. Its aim is to tackle so-called cliff-edges and perverse incentives in the system of entitlements where for some people, work has not been as financially attractive an option as it could be. Indeed, these problems are inherent in a welfare system which has evolved over time and had to take account of the variety of circumstances in which those reliant on state support find themselves. Implementation of UC has already begun within GM (i.e. in Tameside focussing on claimants with less-complex circumstances). Three of the Pathfinders areas will then cover: Oldham, Tameside and Wigan. 3.7 UC will eventually be extended nationally to all local authorities in from October 2013; and attaining full coverage by 2017. UC provides a rationalisation of many key entitlements for those both in-work and out-of work into a single monthly payment, including housing benefit. The entitlements being subsumed under UC are: Incomebased Jobseekers Allowance; Income-related Employment and Support Allowance; Income Support; Child Tax Credits and Working Tax Credits; and Housing Benefit with direct payments to landlords. 3.8 The UC payment is designed such that a transition into work, or a move to increase hours/pay, will be rewarded more uniformly across the income distribution. Those receiving increased wage earnings will be subject to a tapering-off of entitlement, instead of the many smaller tapers and cliff-edges that currently exist. There is also an earnings disregard for those initially entering employment, and these differ according to the individual circumstances of the claimant. The Claimant Commitment and the Work Programme 3.9 The process of helping claimants back into work will primarily be dealt with through a structure of support, with sanctions for those who do not engage. The Work Programme (WP) provides tailored support for claimants seeking employment and forms the backbone of the Government s efforts to help job seekers back into employment. It includes requirements for work-focused interviews, work preparation, work search, and availability for work. The WP replaces previous programmes such as the New Deal, Employment Zones, and the Flexible New Deal. The WP seeks to address the shortcomings of previous programmes by providing: clear incentives to deliver results; freedom for service providers; and the development of long-term commitments. 3.10 Individuals are referred to the WP by Jobcentre Plus (JCP), with the length of time from the start of the claim to referral being determined by the claimant group. However, JCP advisors will also have the ability to immediately refer a claimant onto the WP if they feel that this will support the claimant to a positive outcome. 3.11 In April the Youth Contract was launched and is intended to supplement the WP. It is a dedicated means of supporting young jobseekers into an employment opportunity. WP providers will also receive additional funding to support young people into apprenticeship and work experience opportunities. The key offer of the Youth Contract New Economy 013

consists of 160,000 individual wage incentives of 2,275 each for 18 to 24 year olds who are taken on by employers. It also includes the offer of a guaranteed placement for every unemployed 18 to 24 year old wishing to participate in work experience. It is anticipated that 250,000 placements will be provided nationally, with opportunities lasting for up to eight weeks. In GM, there will be opportunities for employers to access supplementary funding to create Apprenticeships, by giving employers a grant of 750 if they recruit 16 to 24 year olds that are unemployed or Not in Employment Education or Training (NEET). Work Capability Assessment, Incapacity Benefit and Employment Support Allowance 3.12 The process of reassessing IB claimants through the Work Capability Assessment (WCA) is ongoing, having started in April 2011. The plan is that, by April 2014, all IB claimants (excluding those reaching pension age before then) will be required to take a test which looks at physical and mental capabilities. If the reforms proceed to schedule, there will potentially be no IB claimants remaining after April 2014, having been replaced by ESA. 3.13 The WCA has three outcomes, claimants can be: judged fit for work and no longer entitled to IB, or its replacement ESA; moved into the ESA Support Group; or moved into the work related activity group (WRAG). 3.14 Those who are deemed fit for work can apply for JSA whilst they seek employment. However this will have an immediate impact on the amount of benefit they can receive and they will come under a new regime of increased conditionality. Claimants in the ESA category are essentially judged unable to work long-term, receiving higher payment and also lower job seeking conditionality. Those in the WRAG group are being placed on the basic rate of ESA and receive additional support so that they may return to work again in the future. 3.15 The Welfare Reform Act also sets out a time limit to contributory ESA to one year so that people who have paid only a small amount of National Insurance cannot qualify for unlimited ESA. The time limit does not apply to those claiming income-related ESA. It also does not apply to people who cannot work due to a long-term illness or disability. Young people who previously qualified for contribution-based ESA without having to pay National Insurance contributions will no longer be able to do so. Disability Reassessment and the Personal Independence Payment 3.16 Disability Living Allowance will not form part of the UC benefit. Instead it will be replaced by a Personal Independence Payment. The changes took place from April 2013 for working age claimants only, and the key features are: all new and existing claimants of DLA aged 16 to 64 years old will be required to undergo an assessment, regardless of the length of their original award; there will be no direct transfer of claimants from DLA to PIP; instead existing claimants will be invited to make a claim for PIP between October 2013 and March 2016; and under the new PIP arrangements, the application process will move away from a system where people self-assess, to an independent medical consultation. 3.17 To qualify for the PIP people aged 16 to 64 years old will need to satisfy the daily living and/or mobility activities test for 3 months prior to claiming, and be likely to continue to New Economy 014

satisfy this test for a period of at least 9 months. People will not necessarily have to wait 3 months from the date of their claim before getting PIP. The qualifying period starts when an eligible need arises, not from when a person makes a claim. They will also be required to pass Residence & Presence and Habitual Residence tests. The Benefits Cap 3.18 The Act empowers the Government to put a cap on the total benefits to which an individual or couple is entitled. This cap, introduced from April 2013, applies to the combined income from the main out-of-work benefits, plus Housing Benefit, Child Benefit and Child Tax Credit. A cap of 500 per week applies to couples and lone parents, and 350 per week for single adults. There are exemptions from the cap: for example all pensioners are exempt, as well as working age households where the claimant, partner or any dependent child receives, or is entitled to, any of the following: Disability Living Allowance or Personal Independence Payment; Attendance Allowance; Working Tax Credits; War Widows, War Widowers or War Disablement pension; Employment and Support Allowance (Support Component); Industrial Injuries Benefits; and Armed Forces Compensation Scheme payments. Local Housing Allowance 3.19 From April 2011 the Government made several changes to how Local Housing Allowance (LHA) was awarded. 6 It is calculated with respect to the level of rent in the Broad Rental Market Area. The main changes were: Benefit payments capped according to the number of bedrooms that the claimant and their family need rather than the number of rooms they have; the maximum 15.00 per week 'excess' that some people were entitled to has ended, ensuring that housing benefit is not greater than the amounts paid in rent; reductions in the amount received by non-dependents living at home; LHA is awarded up to a level no higher than the bottom 30% of the properties in the rental market area, whereas previously this was 50% (the median rent), reducing the number of homes available to those on LHA from a half to under a third of properties in the market area; single claimants without children and under the age of 25 are only entitled to a lower rate of LHA the shared room rate, and the changes also extended the lower entitlement to those aged up to 35 years old. Changes to Housing Benefit and under-occupation 3.20 HB is to become one of the components of Universal Credit. Restrictions are being placed on the amount of HB that claimants in social housing can receive. These restrictions are based on the size of the accommodation that the claimant occupies, meaning that under-occupiers - with spare bedrooms - are at risk of having their benefit reduced. This replicates the process that applies to claimants in the private rented sector. The new size-criteria on which under-occupancy is judged allow one bedroom for the following: 6 Local Housing Allowance is essentially Housing Benefit for private tenants, introduced in 2008 New Economy 015

every adult couple (married or unmarried); any other adult aged 16 or over; any two children of the same sex aged under 16; any two children aged under 10; any other child, (other than a foster child or child whose main home is elsewhere); a carer (or team of carers) that do not live-in, but provide overnight care. 3.21 The amount of benefit removed is based on a national percentage rate according to the number of spare rooms in the household. The use of a percentage reduction takes account of different rent levels in different parts of the country, and helps to reflect the rent associated with additional numbers of bedrooms. Reduction rates are up to 25% where under-occupying by two or more bedrooms. This applies to working age claimants. People above the state pension age are unaffected by the changes. 3.22 The reformed system makes a direct payment once monthly, to mirror and account for wages, directly to the claimant. Housing Benefit, for example was previously payable direct to the landlord. The default position under Universal Credit is that claimants will receive any support for their housing costs directly, rather than having benefit paid direct to their landlord. The aim is to make claimants more independent and to enable a greater degree of control over personal finances. Lone Parent entitlement to Income Support 3.23 Lone Parents (approximately 90% of whom are female) are entitled to claim Income Support (IS), but there has been a policy change in recent years (pre-dating this Government and the Welfare Reform Act) which has progressively reduced the age of the child for which a Lone Parent can claim this benefit. These changes began in November 2008, and have been phased in over the last four to five years. From 25 October 2010 if the youngest child is aged seven or over, or would have been seven that year, then Income Support may have stopped during that year. From 21 May 2012, this was extended to cover most lone parents with a youngest child of five or over who will have to seek work. If they have not found work and need to make a new claim as a lone parent, they will be able to apply for either JSA or (if eligible) ESA. Child & Working Tax Credits 3.24 Changes to Child and Working Tax Credits were implemented from 2011/12 and include a freeze of the basic element and 30 hour element of Working Tax Credit, a reduction in the percentage of childcare costs that can be claimed with the childcare component; and a change in eligibility rules which mean that couples with children must work 24 hours a week between them (with at least one working for 16 hours a week). However, in the 2013 budget, the Government announced that from the Autumn of 2015, 85% of costs of childcare for parents of in receipt of Universal Credit will be met - provided that both parents are working and they earn more than the personal tax allowance, due to reach 10,000 by 2015. Child Benefit 3.25 Child Benefit payments were frozen for three years as of April 2011, producing an estimated saving of over 2 billion to the UK economy. However, there were also changes announced to taper the upper entitlements to Child Benefit which have now New Economy 016

taken effect. This will mean that families with one earner, who has a salary of more than 60,000, will now lose benefit; and those earning 50-60,000 will lose part of it. Education Maintenance Allowance 3.26 Education Maintenance Allowance, an entitlement for students aged 16 to 19 years old which incentivised further studies, was abolished in April 2011. Instead the Government has provided a 16 to 19 year old Bursary Fund which (with some exceptions) is primarily aimed at young people who are claimants of Income Support, ESA or DLA. Localisation of Council Tax Benefit 3.27 Under the current system, the Council Tax of those unemployed, or in low-paid work, is funded by DWP through the payment of Council Tax Benefit. This system was abolished in April 2013, and has been replaced with an arrangement called the Local Council Tax Support Scheme (LCTSS). This gives local authorities the power to design their own support schemes. This change aims to allow support to vary across the country based on local priorities, whilst also encouraging local authorities to promote employment and economic growth. In addition to the localisation of CTB, there has also been a 10 percent reduction in Government funding associated with the benefit. This places responsibility upon the local authority to determine how savings are made. The Social Fund 3.28 The Social Fund offers monetary help to families on a low income when they find themselves in an emergency situation. Community Care grants and Crisis Loans are being abolished and replaced by local provision administered by local authorities. Crisis Loan Alignment Payments are being replaced by a national scheme of short term advances administered by the DWP. Budgeting Loans will remain until Universal Credit is fully rolled out, at which point people will have access to a new system of Budgeting Advances that will replace Budgeting Loans for Universal Credit recipients. Fraud Penalties and Sanctions 3.29 The Government is introducing tougher penalties for benefit fraud, including a new minimum administrative penalty of 350 for benefit fraud, or 50% of the amount overpaid (whichever is greater) up to a maximum of 2,000. There is also a system of benefit sanctions, equating up to 3 year loss of benefit in serious fraud cases. There is also a new civil penalty of 50 for claimants who are negligent in maintaining claims. New Economy 017

4 PEOPLE 4.2 This section begins by estimating the impact each of these reforms will have on GM residents, looking at their circumstances and the geography of the impact. Quantifying the interaction of all entitlements across GM s population is often not possible, especially where there are complex combinations of changes. Where this is the case the analysis uses case studies to illustrate the potential risks and cumulative impact. 4.3 The analysis then continues by providing a discussion on the positive and negative impacts of the Welfare Reform Act. Many impacts will fall disproportionately on different parts of society, in particular those living in the most deprived areas. However, not all of the reforms will be negative. With successful implementation UC can provide a simpler system for the administration of benefits, and streamline incentives to work. Transitional policy and funding will also help to mitigate some of the key risks identified throughout this report. Universal Credit 4.4 Due to the complex nature of the changes involved in the introduction of Universal Credit, and the circumstances which different residents face, breaking down the detailed impact on specific groups within GM is not possible. However, the DWP UK analysis and assumptions have been applied to GM data, with the main findings shown in Table 1. It is estimated that 456,500 (40%) of GM s households will be affected: 154,000 (33.7%) will have lower entitlement (before cash protection); 132,000 (28.9%) will have no change in their entitlement; and 170,500 (37.3%) will have a higher entitlement. Table 1: Estimated Impact of Universal Credit on GM households by income quintile HIGHER ENTITLEMENT NO CHANGE LOWER ENTITLEMENT (BEFORE CASH PROTECTION) Bottom Quintile 55,000 82,500 38,500 2nd Quintile 71,500 33,000 60,500 3rd Quintile 27,500 11,000 38,500 4th Quintile 11,000 5,500 16,500 5th Quintile - - - Total 170,500 132,000 154,000 Source: New Economy calculations based on DWP claimant statistics and DWP impact assessment (2012) 4.5 Figure 6 shows the main localities which are at risk from the changes implemented by the introduction of Universal Credit, in terms of impacts on residents receiving benefits payments. DWP has committed a package of transitional protection, to ensure that there will be no cash losses for any households that are actively moved to UC from legacy benefits or Tax Credits where their circumstances remain the same. 7 However, a quite different and perhaps less familiar picture is shown in Figure 7 which shows in-work Tax Credit claimants in 2010. There are several areas shown, which aren t conventionally the focus of policy interventions in GM, but will be affected by the introduction of UC (as well as other reforms such as re-indexing). 7 Source: http://www.dwp.gov.uk/docs/universal-credit-wr2011-ia.pdf New Economy 018

Figure 6: Out of work benefits claimants in GM Source: Department for Work and Pensions (2012) Figure 7: In-work Tax Credit recipients in GM, 2010 Source: HM Revenue and Customs (2012) New Economy 019

- 7.55-5.91-4.47-3.30-2.09-2.39-1.67-0.27-0.62-1.07 Indexing Changes 4.6 From April 2011 onwards, the measure of inflation used for the indexation of state benefit, Tax Credit; and public sector pensions changed. These now rise annually in line with the Consumer Prices Index (CPI) having previously changed in line with the Retail Prices Index (RPI). The Government also announced, from April 2012, that personal tax thresholds would be increased in line with CPI, rather than RPI inflation with the CPI series of data almost always being lower than RPI. 4.7 These changes have the potential to create the biggest financial impact of any of the reforms discussed here. Crucially entitlements will grow increasingly further away from where they would have been under previous index measures, and become distanced from inflation in essential costs (e.g. mortgage interest, council tax, rents). 8 Whilst this in itself would have constituted a major challenge to those whose budgets were already stretched, the Autumn Statement of 2012 made a further change, which limited the increase to 1 percent per annum, regardless of inflation or wage increases. 4.8 Based on inflation forecasts, Figure 8 below estimates how much an average JSA claimant aged 25, or older, will lose due to each of the reforms. In sum this means that, in nominal terms, while JSA payments would have increased by around 2.00 per week every year between 2012 and 2016, the reform changes mean that they will now increase by around 0.60 to 0.70 per week. By 2016 these changes potentially translate into a monthly reduction of 30, or an annual reduction of 363. 4.9 Those receiving in-work Tax Credit claimants will also affected by these changes, but they will have a larger cut in entitlement compared with those claiming JSA. Figure 9 shows how the average GM in-work Tax Credit claimant will lose by 2016, amounting to 31 per month; and 406 per year. 9 Research from the Resolution Foundation has also shown that inflation affects low-income households more than it does on others due to their spending patterns. This means that the real terms cuts illustrated here are likely to understate the impact. 10 Figure 8: Cumulative loss (in real terms) of JSA income due to re-indexing (Adult rate) 2012 2013 2014 2015 2016 0-1 -2-3 -4-5 -6-7 -8 BUDGET 2010 AUTUMN STATEMENT 2012 Source: New Economy calculations based on DWP data and HM Treasury inflation forecasts (2012) 8 Joyce R. and Levell P. (2011): The impact in 2012-13 of the change to indexation policy. London, Institute for Fiscal Studies 9 Tax Credits will be subsumed into Universal Credit from October 2013 for new claimants 10 Hirsch D. Plunkett J. Beckhelling J. (2011): Priced out: the new inflation and its impact on living standards New Economy 020

Figure 9: Illustrative cumulative real-terms loss of Tax Credit payments for GM in-work claimants due to re-indexing changes Source: New Economy calculations based on HMRC data and HM Treasury inflation forecasts (2012) Employment and Support Allowance and Incapacity Benefit Reassessment 4.10 In common with many cities where industrial decline has been a major economic trend, GM has historically had a large number of economically inactive residents claiming IB, Severe Disablement Allowance (SDA) or ESA. Claimants of these benefits are now undergoing a reassessment of their claim Work Capability Assessment (WCA) detailed previously. 4.11 It is estimated that 67,700 IB claimants in GM were diverted from other benefits onto IB in 2012 alone. It is possible that many of these may, despite having health difficulties, be able to work. 11 However, these residents may well face barriers to employment, including competition for jobs with those that have recently been in work, and are more likely to lack the experience and employability skills required by employers. 4.12 To illustrate the potential geographical impact of this change in GM, Figure 10 gives an overview of IB/ESA claimants in GM by Census Area Statistic ward. 12 This shows a familiar picture: high levels of claimants in those wards with high levels of deprivation, high unemployment; and in some (though not all) cases, higher levels of claimants in areas of social housing stock and/or low-rent private housing provision. 4.13 The WCA began receiving referrals in October 2010. Of GM s 37,110 caseload data (released March 2012), a total of 35,670 cases (96.1% of the total caseload) were assessed, of these: 8,150 (22.8%) were placed on the ESA Support Group (SG); 16,220 (45.5%) were placed on the ESA WRAG; and 11,300 (31.7%) were judged fit for work, and therefore not eligible for ESA. 11 Beatty C., Fothergill S. And Gore T. (2012): The real level of unemployment 2012. Sheffield, Centre for Regional Economic and Social Research Sheffield Hallam University 12 Note that these are wards based on the 2001 Census and therefore do not correspond directly to electoral wards which have changed since. This is due to data availability. New Economy 021