The coalition government's tax and benefit reforms will have the overall effect of strengthening people's incentives to work, according to a new paper from the Institute for Fiscal Studies. The paper looks at reforms implemented, or due to be implemented, over the period 2010–2015.

Key findings

• Taken together, coalition reforms strengthen the incentive for people to be in work, on average. They reduce the average 'replacement rate' – someone's out-of-work income as a percentage of their in-work income – by 3.4 percentage points. They also reduce the average 'participation tax rate' – the proportion of earnings 'lost' to higher taxes and/or lower benefits – by 2.5 points.
• In the absence of the reforms, work incentives would have weakened as a result of falling real earnings. Average replacement rates would have increased by 1.7 points.
• These changes to averages conceal far bigger changes at the individual level, however. For example, the benefit reforms (including universal credit) reduce the participation tax rate by 5 points or more for 7.5 million people, and by 20 points or more for 1.6 million: but they increase them by at least 5 points for 3.5 million people, and by at least 20 points for 1.1 million.
• Benefit changes other than universal credit are responsible for the bulk of the strengthening of work incentives. But their effect is less than might be expected given the scale of the cuts. Incentives are strengthened much less for those with children than those without children.
• Once fully in place, universal credit will strengthen incentives for couples to have one person in work rather than none; weaken them for both members of a couple to work rather than just one; and strengthen incentives for those with the weakest incentives under the existing system. Universal credit will halve the number of people with participation tax rates of 75 per cent or more – a reduction of 1.5 million people.

Source: Stuart Adam and James Browne, Do the UK Government's Welfare Reforms Make Work Pay?, Working Paper 13/26, Institute for Fiscal Studies
Links: Paper | Abstract | IFS press release | Public Finance report