Universal Credit is not pocket money

In this blog I argue that the good work that Government economists do needs to be explained clearly. I take the Universal Credit as an example. My estimate is that 80 per cent of the savings associated with the Universal Credit will never turn into cash.

Whether labour or tory, the next Government will need to work hard on the benefit system. David Cameron has not met the expectations he set on the Universal Credit. Although to be fair, he was trying to make probably the most ambitious change in domestic policy since the Second World War.

Deciding which way to go with the money that the unemployed, carers, disabled, and many others need to make ends meet is a tough task. For that reason, politicians engage the best civil servant economists before making decisions in the minefield of welfare benefits.

Believe it or not, these economists do the same thinking as your parents when they used to administer your pocket money.

You will remember the excitement you felt when your weekly pay, amidst threats in case you exceeded the sweets allowance, went from £4 to £5. It was only comparable to the sense of outrage you would be filled with today if your employer called you up to proudly announce that your salary is going go up by £1 a week.

Yes, you got it. Even though Poundland will happily give one of its items to anyone in exchange for a £1 coin, the value of that coin is different for each person, depending on their age, income, and their ambitions and prospects in life.

According to the spending watchdog, by 2024 the Universal Credit will have produced £21 billion which would not have existed if the benefit system had stayed the same. This is the cost of two Olympic games, or doubling the police force.  But before we get carried away with spending options, please note that not all of these £21 billion is actual cash, so we cannot really use it for anything.

I estimate that over 80 per cent of the value of the Universal Credit is just the result of the economists’ effort to calculate how excited people will get when they receive new money.

This is how it works. In the case of jobs accessed through the Universal Credit, one of the many areas where improvements are expected, people will get new cash worth £2 billion. Because these people are the most deprived in society, it will be as if they received £17 billion. As if.

The £15 billion you are struggling to understand is the economists’ guess as to how much weight deprived people attach, in their heads, to new money compared to those who are better off, and therefore less excited about having £1 extra. The £15 billion is not actual cash.

Treasury asks Government economists to do these calculations before politicians make decisions. The sheer size of the fictitious – notional, non cashable, choose your preferred word– money associated with the Universal Credit is telling us that it is probably a well targeted policy. But politicians should clearly say that the figures they use are not always actual cash we as a society can spend on the things that matter to us.

If you have taken the time to read my blog, I would be grateful to hear your thoughts. Please use the comments box below.