From the TUC

Why progressives need to defend tax credits, as well as calling for stronger wage growth

25 Jan 2013, by in Economics

The Living Wage is rapidly gaining support, among commentators if not employers. But, on left and right, this new recognition of the need to boost Britain’s shrinking wage share has been accompanied by a growing sense that if more businesses were to pay more, the tax credit bill could be substantially cut.

For example, in Monday’s Guardian John Harris wrote that:

…The cost of tax credits, which includes a vast de facto subsidy to poverty pay, runs to just under £30bn. These things denote the deep, structural issues that need to be addressed before any debate about universalism starts.

While in the Telegraph Jeremy Warner, perhaps a surprising advocate of the Living Wage, recently concluded that:

A living wage would obviate the need for in-work benefits – one of the biggest growth areas in welfare spending.

It is of course right that if more people were paid more money, their tax credit entitlements would slightly fall. As IPPR and Resolution’s excellent analysis has shown, if everyone currently paid below the Living Wage rate saw their pay rise to meet it, tax credit expenditure would fall by £1.1 billion (which, combined with increased tax revenues, would bring a net gain to the Exchequer of £3.6 billion).

But tax credit spending currently totals around £29 billion. So even in this scenario (which the report also suggests would cost us 160,000 jobs, bringing even greater falls in demand for young employees) we’d still be spending close to £28 billion on tax credits. The fall in expenditure would only be around 4 per cent.

The implications for individual households would vary according to circumstances, but in an average couple household with kids in London the move from NMW to London LW would increase their hourly household income by £1.50 an hour, while tax credits would still supplement their total income by an additional £3 an hour. These payments matter a great deal (indeed the Living Wage rate is set each year taking them, and other in-work benefits, into account). And (unless paying slightly higher wages provides Governments with a justification for far more significant tax credit cuts) pay rises are not going to significantly lower the social security bill. If progressives argue otherwise, they risk undermining the vital case for the redistributive policies we will always need, regardless of how much we improve employees’ pay.

This is not just an argument rooted in pragmatism. Even if the NMW was £20k a year (leaving aside the rocketing unemployment levels this would leave us with) we would still need tax credits and there would still be a case for redistribution. Why?

The answer is partly because tax credits are targeted at households, not individuals. This is extremely important. As Gavin Kelly set out last week, focusing policies on individual rather than household incomes means many of those who are the worst off lose out, and that the additional costs faced by families are not recognised. It is progressive to believe that households caring for children or facing the challenges of disability should get more than those who do not. But wages alone can never take this into account. As Fran Bennett and Ruth Lister have argued for some time (in an article which is well worth a read):

Seeing low pay through the lens of household poverty – whether defined as a minimum income standard, or a relative poverty threshold – can only ever provide a partial solution, because it does not place inadequate wage levels in the context of the unequal structure of labour market rewards and the persistent under-valuation of certain forms of paid (and unpaid) work. Neither does it provide a coherent strategy for meeting the wider needs of workers and other family members which are better met through specific employer provision and/or government policies such as the ‘social wage’.

Bennett and Lister’s second point is also important – the rewards of work are not fairly shared. Progressives believe that it’s not just individual effort which underlies how much we are paid. We still have a paid jobs market with strong gender pay gaps, with rocketing CEO pay and no pay at all for millions of (mainly women) undertaking unpaid caring work. Yes we need structural changes to reduce inequalities – more collective bargaining, new mechanisms to set pay floors above the NMW in sectors that can afford it, worker representation on remuneration committees to help bring top pay down – but we also need a tax and benefit system that redistributes from those to whom the market gives too much to those to whom it does not give enough.

It’s also important to bear in mind that while wage growth is certaintly important for boosting incomes it is also less targeted than tax credits. As IPPR and Resolution’s report shows, perhaps counterintuitively those households who benefit most from the living wage are those who are already slightly better off, with families in the sixth income decile gaining the most in income terms, followed by those right in the middle in the 5th decile.

This is (in summary) because it’s not just low income households which have low earners in them (4 per cent of the richest fifth of households contain someone earning the living wage and only one tenth of low earners live in poor households), because households with two incomes would gain more than households with one and because those with children will lose a proportion of their tax credit entitlement as their pay goes up. This also means that the largest gains also go to single people and couples without children.

The fact also remains that not all companies can afford a living wage – very many could pay more, but some would find that the additional costs would lead them to hire fewer workers or to make job cuts. This is why we need a statutory minimum wage (albeit one rising at a faster level than at present) setting a pay floor, and why we need new mechanisms above it to set pay higher where it can be afforded without job loss or recruiment impacts.

For too long poverty reduction focused only on taxes and benefits, and no where near enough attention was paid to the types of jobs our economy creates, to opportunities for in-work progression or to rates of pay (and rates of pay increases). But while it is welcome that more people are waking up to the reality of life in low pay Britain, and to the destructive impact that insecure, badly paid work can have for individuals, their families and the wider economy, that doesn’t mean we can forget about the vital impact redistributive policies need to continue to play if we are to create a fairer country. If we are to avoid making the lives of low paid workers far worse, we need to protect their tax credits.