Without reform, the funding model for the Work Programme is set up to fail ESA claimants

The government’s Work Programme, whereby providers are paid on a results basis, is not fit for purpose and risks failing Employment and Support Allowance (ESA) claimants. Drawing on new research, Timothy Riley explains the problems with the funding model. In essence, getting the minimum performance benchmarks wrong creates a vicious circle of lower funding leading to lower performance, leading to still lower funding. He argues for a way forward that would cost no more than the government had planned.

The Work Programme is the government’s flagship national employment programme. It is substantially different from previous programmes, both in terms of its larger scale and the way it is commissioned. It is delivered by a range of (primarily private sector) providers who are largely paid on a payment by results basis, the results they are paid for being sustained periods in work for customers. The payment model differs for different groups of customers based in part on the benefits they claim, with job outcomes for customer groups considered to be further from the labour market being associated with larger payments.

Unfortunately, recent performance data has shown that whilst the Work Programme is performing better for the main Jobseeker’s Allowance (JSA) payment groups, it is still well below the Department for Work and Pensions’ expected minimum performance levels for the Employment and Support Allowance (ESA) payment groups.

Figure 1: One-year job outcome measure – equivalent minimum benchmark compared to actual, by participant group (Jun 2011–Dec 2012 referrals)

Riley fig 1

Source: DWP: Information, Governance and Security Directorate; Inclusion calculations. Average weighted by monthly referral numbers.

The Centre for Economic and Social Inclusion recently published a new report, Making the Work Programme work for ESA claimants, which sets out the problems with the funding model for Employment and Support Allowance claimants and what could be done to fix it. The report is a part of a wider project called Fit for Purpose, supported by 22 organisations and looking at the future of employment support for people with health conditions and disabilities. The final report will be available in the summer.

Specifically, we argue that a toxic mix of a weak economy, lower than expected referrals to the programme, changes to the rules on who is referred, provider under-performance and setting the targets too high in the first place have combined to lead to big shortfalls in funding and support for those on the programme.

Our calculations suggest that around 11% of ESA claimants that are required to take part in the Work Programme would have achieved a ‘job outcome’ if the Work Programme had not been introduced. The DWP, however, set their estimate at 15%. These targets have been missed in every contract, and as a consequence – because the Work Programme is a ‘payment by results’ programme – funding to support ESA claimants has been substantially lower than anticipated.

Of course, you could see this as a policy success: performance has been below expectations but the DWP has not had to pay so much to providers – so the risk of failure has been successfully transferred away from tax payers. But this would be a pretty short-sighted view. The state still picks up the tab through the benefits bill, and lower funding means more people out of work for longer and receiving less support.

We argue that getting the minimum performance benchmarks wrong risks a vicious circle of lower funding leading to lower performance, leading to still lower funding. In a sense, this means that the funding model has been set up to fail – with lower outcome payments, and therefore lower funding overall, hard-wired into the contracts.

We estimate that the money available to providers to deliver services to ESA claimants (based on DWP spend on ESA customers) is likely to be about 40% lower than was originally planned, with DWP likely to spend on average £690 per ESA claimant compared to an estimated £1,170 when the programme was designed. And this is going to get worse: as of April 2014 there are no more ‘attachment payments’ paid to providers when customers join the Work Programme, meaning that at current performance the DWP will pay providers on average only £550 per participant – which needs to cover two years of support.

When these figures are grossed up for the whole programme, taking into account lower referral numbers as well as lower performance, we estimate that the government will invest less than half of what it intended to on supporting ESA customers through the Work Programme – with spending around £350 million compared to the £730 million expected.

In the event, we find evidence that Work Programme providers are actually spending a bit more than they receive from DWP on ESA participants, in order to maintain some levels of service. In effect they are cross-subsidising from outcome payments for Jobseeker’s Allowance participants. Whilst this may be helping to paper over the problems with the payment model, it is clearly neither satisfactory nor sustainable in the longer term.

Our report sets out an alternative model that we argue should be implemented for the remainder of the programme. This new funding model is based on four key assumptions:

  • That spending should be restored for new participants to the same level as was originally intended – but foregoing the ‘savings’ that have already been banked by the Government;
  • That in return for increasing funding we should expect increased performance;
  • That the model should remain strongly outcome-based, so that risk is shared between the taxpayer and those providing services – in our proposal, around three quarters of funding would be linked to getting and sustaining jobs; and
  • That funding should be highest for those that need the most support (and specifically, those who used to claim Incapacity Benefit).

Our proposed payment model is below.

Proposed Work Programme payment model for ESA claimants

PG5 – ESA Volunteer

PG6 – ESA Flow

PG7 – ESA ex-IB

Attachment payment

£350

£350

£350

Job entry payment

£600

£900

£1,250

Job outcome payment (three months in work)

£1,150

£1,400

£4,000

Maximum job sustainment payment*

£2,300

£4,700

£9,620

Cost per attachment

£1,018

£1,181

£1,413

* Same overall levels as current model, but paid over 9 months after job outcome payment.

Without reform, in our view the funding model for the Work Programme is set up to fail ESA claimants, particularly those joining over the next two years. Whilst we and many others are rightly thinking about what should come next with ‘Work Programme Mark 2’, it is critically important that the Work Programme Mark 1 works for ESA claimants. Our report shows the failings of the current payment model for ESA groups, and a way forward that is achievable and would cost no more than the government had planned.

Note:  This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. Homepage image credit: Grant Kwok

About the Author

Tim RileyTimothy Riley is a Senior Researcher at the Centre for Economic and Social Inclusion. He specialises in research into labour market and skills policy, with recent projects including high profile evaluations of Lone Parent Obligations for the Department of Work and Pensions, and Want to Work for Jobcentre Plus, and has led Inclusion’s work on ethnic minority employment. @TimRiley83.

http://blogs.lse.ac.uk/politicsandpolicy/archives/41681

 

Do the poorest really pay the most in tax?

Authors: Stuart Adam and Mike Brewer

 

The Liberal Democrats have, once again, claimed that the poor pay more of their income in tax than the rich, and that this gap has got larger under Labour. But, by ignoring the fact that the poor get most of this income from the state in benefit and tax credit payments, and by overstating the extent to which indirect taxes are paid by the poor, this comparison is meaningless at best and misleading at worst.

The underlying figures come from the Office for National Statistics, and are not in dispute. As the Liberal Democrats say, in 2007-08, the poorest fifth of households had a gross annual income of £11,105 on average, and paid £4,302 a year in tax, a ratio of 38.7%. Meanwhile, at the other end of the scale, the richest fifth of households had an average gross annual income of £74,247, and paid £25,926 in tax, on average, a ratio of 34.9%. (See Table 1 of this article).

The first key point to note is that benefits and tax credits account for £6,453 of the £11,105 average gross income of the poorest fifth of households. Their original income – in other words, private income from sources such as earnings, private pensions and investments, but not that from benefits and tax credits – was an average of £4,651. So the poorest fifth of households were clearly net beneficiaries from the tax and benefit system, to the tune of £2,151 a year, on average. At the other end of the scale, the richest fifth of households received £1,666 a year in income from the state, and so they are net contributors to the Government’s coffers, to the tune of £24,259 a year, on average.

If we define “net taxes” as “taxes paid less benefits received”, then the net tax rate of the poorest fifth is -46% of their original income (or -32% of their after-tax income), with the negative number reflecting that they are net beneficiaries. At the other end, the richest fifth have a net tax rate of +33% of their original income (or +50% of their after-tax income). These figures show what one would expect: the tax and benefit system as a whole takes money from the rich, and gives it to the poor.

The combined impact of the tax and benefit system on the distribution of income seems much more enlightening than the impact of the tax system alone when talking about fairness. The Liberal Democrats’ analysis does highlight, though, that benefits and tax credits do more to reduce income inequality in the UK than the tax system.

A second difficulty with the numbers relates to the way in which indirect taxes are treated, and this affects whether they appear to be regressive or not. People who are interviewed in the sort of surveys which underpin this analysis, and who report a low current income, tend to spend a lot relative to their current income, and therefore pay a lot of indirect tax relative to their current income. But this arises because the figures are a snapshot view of indirect taxes paid in a given period as a percentage of income in the same period. In reality, much low income is temporary, and people borrow and save to smooth out their living standards; over a lifetime, individuals cannot spend more than their income. As acknowledged by the ONS (see footnote 35 here), we get a different impression of the impact of indirect taxes by ranking people by their level of spending. That shows, for example, that VAT is progressive as a percentage of spending, since zero- and reduced-rated goods (such as food, children’s clothes and domestic fuel) are necessities that are bought disproportionately by the poor. IFS researchers have written more about this issue here, although it must be noted that the ONS analysis suggests VAT is regressive even as a percentage of spending.

What about the Liberal Democrats’ second claim: that the tax system has got less redistributive over time? Following the definition we introduce above, net tax rates on the poorest fifth have gone up since 1997-98, and those on the richest fifth have fallen very slightly (the 1997-98 figures which underpin this calculation are available in Table B here. But the poorest fifth have seen their own private income rise faster than the richest fifth (masking the opposite trend at the very extremes of the income distribution), so this may not be a particularly enlightening comparison: net tax rates should rise as incomes rise under a progressive tax and benefit system.

A more definitive answer is provided by analysis of the impact of Labour’s tax and benefit reforms on the distribution of income, which have been strongly progressive, with the poorest households gaining, on average, and the richest households losing, on average (but with the precise amounts depending on what one considers to be a “change”). It is also clear that these changes acted to dampen down what would otherwise have been a large rise in inequality.

Even on the Liberal Democrats’ peculiar definition, a natural follow-up is to wonder whether the tax system would get any less regressive over time under their policies? IFS researchers will provide a fuller assessment of that after their manifesto has been published. It is reasonably clear that the reforms to capital gains tax and the new mansions tax should increase the tax burden on the rich, but it is less clear that the proposal to increase the income tax personal allowance to £10,000 will help many of the poorest households, as the poorest fifth of households will contain those with incomes too low to pay income tax. (In any given year, one third of adults do not pay income tax and one quarter of adults live in a family where no-one pays income tax). The largest beneficiaries of the higher personal allowance will be families with two earners (where both earn less than £100,000).

http://www.ifs.org.uk/publications/4813

 

Whose recovery is this? That’s the great election question

If competition over living standards for low and middle earners does become the next battleground, that’s cause for celebration.

Exceptionally unpleasant propaganda seeps out of the Department of Work of Pensions. In the past, the DWP press operation was always reasonably straight under both Tory and Labour governments, following normal civil service practice. Whitehall press officers promoted their ministers’ policies. But I have never known this degree of politicisation.

This week the DWP put out a press release on benefit fraud, not attached to new figures or anything in particular. It offered a string of juicy anecdotes of disgraceful excuses used by cheats: “A benefit fraudster claiming his wife was really his sister and one saying she needed the cash for satellite TV are both examples of some of the oddest excuses DWP benefit fraud investigators have heard over the last year. One claimant – using a fake ID – said her skin colour had changed after a road accident, one man blamed his evil twin, while another claimed she wasn’t in a relationship but just had a three-night stand resulting in three children over five years.” Every magistrate hears idiotic excuses from stupid criminals, but this is the DWP’s unsubtle nudge that all claimants are fraudsters beneath the skin.

I spotted the story in other papers, but never saw the press release and it’s not on the DWP website, which is odd. I asked a senior press officer who said airily, “Oh it was just lighthearted, one of those end of recess stories.” Who was it sent to? I didn’t get one, did anyone at the Guardian? “No, I don’t think anyone did.” That’s how Iain Duncan Smith and Lord Freud set about poisoning public opinion, their one success.

“Hardworking taxpayers lost an outrageous £1.2bn in benefit fraud last year,” it says, without adding that DWP figures show a fraud rate of 0.7% – less than average for private companies and retailers. Vigilance against fraud is essential for public trust in social security – but these ministers deliberately undermine that trust: one good anecdote is worth shed-loads of statistics.

Why this now? The clue is in a quote from Lord Freud: “Universal credit will close the gaps in the welfare state that cynical benefit cheats try to take advantage of. The new benefit will reduce fraud by £200m a year when rolled out fully.” This was put out just ahead of the National Audit Office’s excoriating report on universal credit, which specifically warns that the new IT system cannot identify potentially fraudulent claims, so manual checks have to be done instead, but “such checks will not be feasible or adequate once the system is running nationally”. There must be some degree of misrepresentation that a permanent secretary should refuse to sanction.

I have lost count of the statements and speeches where Duncan Smith and Freud have sworn blind everything was on track and on budget. I have never known so much whistleblowing from within a department about the failing system, the chaos, the people sitting around doing nothing. The NAO complains about a “fortress culture”, and indeed serial denial continues to cover the chaos with bluster, diverting attention with smears against claimants. If universal credit collapses or is delayed to beyond the blue yonder, it will be a shame that a project every government considers, but shies away from in its enormity, is wrecked by incompetence, arrogance and a political imperative to rush. Combining the records of HMRC and DWP so everyone is assessed on what to pay or receive in tax and benefits according to real-time changes in income or family circumstances is the gold standard, especially for those in and out of temporary jobs.

But this delivery system doesn’t define the generosity of benefits within it. UC’s reputation may be damaged when Duncan Smith’s deep benefit cuts mean it won’t, as promised, ensure working extra hours always pays more: people will in fact still lose an average 65p in every extra pound they earn. Duncan Smith may now find he is even starting to lose public support for benefit bashing, as the next British Social Attitudes survey may suggest softening public sympathies.

The elephant-sized problem of the benefit budget lies far outside the narrow remit of the DWP and its petty spite. The ineluctable rise in the need for state support is driven by the plunge in pay. The Resolution Foundation’s report this week, Low Pay Britain 2013, described the growing gap in a two-tier workforce, as managerial and professional pay surges ahead while a million more fall into low pay, below the £7.45 an hour living wage. Britain has suffered the biggest fall in working incomes in the G7 countries, with half the working population losing an average £1,500. There has been nothing like this in living memory.

Here’s what’s happened: if since its 1999 introduction, the minimum wage had kept pace with FTSE 100 directors, it would now be £19 an hour. Instead, it keeps falling further behind. The share of GDP that goes into pay continues to fall, as more is taken out as profit. In the Commons debate this week on living standards, Tory speakers one after another boasted of 1.3m new jobs – but a third are part-time and a third are temporary, with a million people on zero-hour contracts. They boasted of raising the income tax threshold – but low-paid families are still £890 worse off from cuts than they gain in tax.

Rachel Reeves made a good speech as one Labour MP after another rose to tell of the million more claiming housing benefit, the soaring cost of childcare, rising rents, mounting debts due to uncertain pay or sudden benefit withdrawal, and food banks struggling to cope.

Labour’s analysis is strong; the facts show a frightening trajectory of ever-rising inequality. Whose recovery is this? That’s the great general election question: is it just for the upper echelons? Labour has good ideas and strong instincts – but its cautious remedies still fall short of a policy that would make a significant shift in earnings. There are signs that the Tories might jump ahead by promising sharper rises in the minimum wage, with two ministers hinting at it and a Newsnight leak.

If competition over living standards for low and middle earners does become the next battleground, that’s a cause for celebration. But if so, Labour needs to keep well ahead. Housing, childcare, jobs for the young and stopping cartel fuel and rail prices are all Labour turf, but this autumn a bolder structural policy on sinking pay has to show where Labour would lead the country in the long term, or the benefit bill will go on rising.

via Whose recovery is this? That’s the great election question | Polly Toynbee | Comment is free | The Guardian.