Not a workers’ budget
Massive and unfair cuts in tax credits and benefits are going to hit low-paid workers. Can the Chancellor hope to justify his claim that this is a “one nation Budget”?
The key to any Budget is how it answers the question who gains and who loses?
The big picture is explained well in the latest Economic and Fiscal Outlook from the Office for Budget Responsibility. They describe a “striking” change from the plans for public spending in the March Budget. The March plan was for a “roller coaster”, with spending cut substantially for three years and rising again in 2019-20. The government now plans smaller cuts each year, with spending in 2019-20 £17.9 billion lower than in 2015-16 (compared with £30 billion planned in March) and the rising to being just £2.5 billion lower in 2020-21. As the OBR comment with their usual understatement, this autumn’s Spending Review should be “a lot less challenging than it appeared in March.” (But don’t run away with the idea that services aren’t going to be cut – the spending cuts in this Parliament will be of a similar size to those in 2010-15; the Outlook points out that, by 2019-20, spending on services will have been reduced by 6.4 per cent of GDP from 2009-10, with 3.3 per cent cut in the last Parliament and 3.1 per cent in this one.)
This means that, by 2020-21, the government can look forward to being able to pay for more public services spending, a budget surplus and £9.4 billion of tax cuts, neatly timed for the general election.
So the main burden of the cuts is being borne by benefits and tax credits. In 2020-21, when the next general election is due, the policy decisions in this Budget will reduce net public sector borrowing by £18,885 million. £12,990 will be the result of benefit and tax credit decisions and £5,760 million from measures to deal with “imbalances in the tax system” and “avoidance and tax planning”.
There’s some nasty little surprises in the list of benefit cuts – turning the support for mortgage interest in means-tested benefits into a loan will make it harder for people who’ve fallen on hard times to hang on to their houses. Ending 18 – 21 year olds’ entitlement to Housing Benefit will only save £40 million a year by 2020-21, but it will lead to more young people sleeping on the streets or on friends’ sofas.
The Conservative manifesto said a Conservative government would cut the Benefit Cap from £26,000 to £23,000. The Chancellor has decided this wasn’t nasty enough and, outside London, the Cap will be £20,000. As I’ve mentioned before, three quarters of the people hit by this policy are children.
And Employment and Support Allowance for people in the Work-Related Activity Group is to be cut to the same level as Jobseekeer’s Allowance for new claimants. This will cost disabled people who receive this benefit £29 a week – and make no mistake, whatever the newspapers say, this is a disability benefit. Everyone who has been through the Work Capability Assessment for ESA has been found to be unable to work because of sickness or impairment. People in the Work-Related Activity Group are expected to be able to move into employment eventually, but they will need help and it may take a long while.
There are two really big items. One is the decision to freeze working age benefits right up till the next election. This is expected to save over £4 billion a year by 2020-21. This will hit people on in-work benefits and it will also hit Employment and Support Allowance (producing a double whammy for disabled people whose impairments aren’t quite severe enough to qualify for the Support Group). Child Benefit will be frozen; during the election the Prime Minister promised that CB would be kept “as it is”, and I suppose he’s relying on a particular interpretation of that promise. As our report, Eroding Child Benefit reveals, this extended freeze will mean that, by 2020-21, Child Benefit will be £1.20 a week lower for first children and 75p a week lower for others.
But the worst cuts of all are to tax credits and Universal Credit. Totalling £5,835 million by 2020-21, they will hit low-paid workers and people who can’t get jobs. These cuts will be enormous:
- The income thresholds in the tax credits will be lowered from £6,420 to £3,850, with equivalent reductions in the Universal Credit work allowance, where the cut will be worse for some groups than others – a non-disabled person with no children will have no work allowance at all.
- The child element will be limited to 2 children for new births in the tax credits and new claims in Universal Credit. Couples who had three children in good times, when they never expected they’d ever need benefits will be hit by this policy.
- The family element – worth £545 a year – will be abolished in tax credits and Universal Credit and the family premium in Housing Benefit.
- The taper rate – the rate at which tax credits and Universal Credit are withdrawn as earnings rise will be increased from 41 to 48 per cent. A recipient who also pays income tax and National Insurance Contributions faces a net deduction rate of 65 per cent under the current system. Under the new system UC will be tapered away so quickly that the number of recipients who earn enough to pay income tax is likely to be drastically reduced, but those who do will face a net marginal rate of over 70 per cent.
What these cuts will mean is that life will get tougher for workless families with more than two children. And the implications for low-paid workers will be profound. People with very low earnings will still qualify for tax credits and Universal Credit, but people who are still on very low incomes but not quite that low will get much less support. Many will lose all support.
Take someone earning £7,000. Under the current system, their tax credit would be cut by 41% of £580: £237.80. Now it will be cut by 48% of £3,150: £1,512. And the amount they get will be £545 lower with the loss of the family element. Although existing claimants will be protected it will be quite easy for someone to be two thousand pounds worse off under the new arrangements. In Reforms to Universal Credit, the report we recently published with CPAG, we calculated that a five point increase in the taper rate would reduce the gains from moving into full-time work by 2.7 per cent for potential primary earners in couples, and 2 per cent for non-working lone parents (we didn’t look at an 7 point increase, which we thought unfeasible).
The government’s answer to all this is that they are raising the income tax personal allowance and introducing a National Living Wage. Well, the increase of the personal allowance to £11,000 will make a low-paid worker about £80 a year better off (though not our worker on £7,000, who already earns too little to pay any income tax). And even the government’s target of £12,500 would only increase a worker’s net income by £380; certainly not enough to make up for losses on this scale. The National Living Wage is certainly welcome, and it validates our argument that a substantial increase in the minimum wage was possible without any ill-effects. But even someone who benefited in full from this increase would see a net increase in their pay that was less than the cuts in tax credits.
This has been a budget that cut corporation tax and inheritance tax. For the price of those cuts (£3,415 million by 2020-21) we could have kept the current work allowances. The government would rather this money went to corporations and people with £1 million houses. This is not a one nation Budget and definitely not a workers’ Budget.