From the TUC

How to end poverty – trying the wrong way first

07 Jul 2015, by in Society & Welfare

This week two announcements will be designed to set the government’s course for the next five years. It looks as though the definition of poverty and how it can be eliminated will be at the heart of this undertaking. On Saturday the TUC and the Child Poverty Action Group published a new report which provides more evidence that one of the foundations of the strategy is defective.

On Wednesday there’ll be the Budget and on Thursday Iain Duncan Smith will be publishing his Full Employment and Welfare Benefits Bill. There has been so much kite-flying about the measures that are going to be in the Budget that it’s difficult to stay focused on what is going on.

The Conservatives’ election manifesto included a commitment to £12 billion of benefit cuts, and, as I’ve mentioned before, the political implications of this have always led me to believe that they were serious about this. They may be able to fudge things a little to knock a billion or two off this total, but it looks more and more likely that they’re looking for over £10 billion.

Now, benefit and tax credit spending plans can essentially be put in three groups:

  • I know it sounds like a big deal, but it isn’t really.
  • Well, I suppose that’s significant, but still …
  • Oh. Yes, that is a lot.

Over £10 billion is in the third group. Because benefits for pensioners are excluded the cuts will be applied to those under retirement age. The government’s benefit spending tables show that they expect to spend £94.6 billion on benefits and tax credits for working age people and children by the end of this financial year but about £10 billion of that is intended for Disability Living Allowance or Personal Independence Payment which is meant to be immune from further cuts. So this means a cut of one pound in every seven or eight for other benefits for this age group.

The cuts announced in the Full Employment and Welfare Benefits Bill – an extra two years’ freeze for working age benefits, lowering the Benefit Cap to £23,000, benefit cuts for under-21s – are unlikely to save more than a couple of billion.

Which is why we’re almost certainly going to see something like the massive cut to Child Tax Credit that the Prime Minister hinted at a couple of weeks ago. Indeed, we’re probably going to see two or three measures on this scale. Which is why they have decided to repeal the Child Poverty Act – it simply isn’t credible that we can have cuts on this scale and not see a massive increase in child poverty.

The government knows they have to go on the offence to succeed in an attack on the welfare state on this scale. There’ll be at least two elements to this front in the battle of ideas. One will be to try to persuade voters that it’s unpopular groups that will be hurt – migrant workers, young people who’ve never had a job and others dodging employment. This links to the claims about being the “workers’ party” – which does not mean that the Conservatives plan to adopt pro-working class policies, it’s about encouraging resentment of people without jobs.

Of course, this will come up against the fact that policies like the CTC cuts mainly hurt low-paid workers and a test of our opposition will be whether we can force Ministers to respond on this point. They’ll be very happy to spend their time arguing about the lower Benefit Cap for instance – it’s an atrocious policy and all our instincts are to make this a key feature of our campaigns. But the government’s weak point – and the bulk of the cuts by value – is that the benefit cuts hit low-paid working families.

The other front in the battle for the welfare state will be the Prime Minister’s claim that he’s simply getting rid of a stupid “merry go round”, taking taxes with one hand and paying tax credits with the other. The answer, the government will claim, is higher pay.

In the coming months, there may be some rhetorical changes that seem to be critical of low-pay employers, but we won’t see any measures that actually guarantee higher pay. And if pay doesn’t actually go up but tax credits come down, then the number of families in in-work poverty will rise and their poverty will deepen. As Gavin Kelly pointed out in a great post yesterday, if the child element of Child Tax Credit is indeed cut by £845 per child, a lone parent working 16 hours a week would have to get a 26 per cent pay rise to make up for this.

We need to ask the government “what are you actually doing to increase pay to make up for benefit cuts?”

Their answer will be their plans to increase the income tax personal allowance, which is repeatedly presented as an anti-poverty measure even though the large majority of the billions it will cost will go to workers who aren’t poor. Indeed, anyone earning less than £10,500 – equivalent to 31 hours a week at the minimum wage – will gain precisely nothing, because they don’t pay income tax now.

To take on this argument the TUC and the Child Poverty Action Group have just published Reforming Universal Credit, a new report based on unique research we commissioned from Howard Reed of Landman Economics. We compared the effectiveness of raising the income tax personal allowance to £12,500 with a series of reforms of Universal Credit. We looked at the impact of reducing the “taper” (the rate at which your UC is reduced as your earnings rise) and increasing work allowances (the amount you can earn before your UC starts to be reduced).

And, in what looks now like clever anticipation (I wish) we modelled the impact of increasing the element of Universal Credit that replaces the feature of Child Tax Credit that the government plans to cut: the child element.

And what we found was striking. Of the 13 reforms we look at in the report, the personal allowance increase is the 13th most efficient. Increasing the child element by 5 per cent would cost under £1 billion and take 125,000 children out of relative poverty. Raising the personal allowance to £12,500 would, if introduced in one go like the Universal Credit proposals, would cost £12.5 billion and increase the number of children in relative poverty by more than 9,000. (In fact, we didn’t have space to cover all the reforms we investigated; our research modelled 37 options for reform and increasing the personal allowance came 37th.)

Raising the personal allowance does increase work incentives, and might have some impact on poverty as people become more likely to move into work or increase their hours. But again it was outperformed by several of the Universal Credit reforms we looked at. A ten percentage point cut in the taper rate would do more to increase the “gains to work” for unemployed people who got jobs and to cut the “marginal rates” for people in employment who increased their hours – and only cost a third as much!

Mr Cameron and his colleagues are wrong – taking tax credits away from low-paid workers without guaranteeing higher wages will make them worse off, not better. And raising the income tax personal allowance is a particularly inefficient anti-poverty measure.

One Response to How to end poverty – trying the wrong way first

  1. John Gaines
    Jul 7th 2015, 10:37 am

    I have often overheard Unite staff commenting that the Union Executive ‘never do what they ‘preach’ which may explain their stupidity in actually wasting time and money on Milliband, despite being constantly alerted to the fact that he was a total A-hole, looking down his nose at everybody who had not been to Oxbridge.

    Now, could somebody inform me what the TUC is actually doing with regard defining exactly whether the Labour Party has any further relevance with regard to the working Man, you know—that poor sop the Labour Party voted to give Benefits to (wages Top Up) instead of forcing the Supermarkets to pay a living wage.

    I would also be interested in their opinion as to Zero hours contracts; strangely they are even dumber on that than they are on any other horror inflicted upon us by a so called LABOUR Government.

    Calling the TUC, COME IN PLEASE.

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