From the TUC

Low-paid workers: Worse off next year and even worse off in 2020

21 Oct 2015, by in Politics

One image from the TV coverage of George Osborne’s July Budget sticks in my mind. It hasn’t got anything to do with the Chancellor’s smirk as he announced the “National Living Wage” – it’s the cut-away shot to Iain Duncan Smith fist-pumping in apparent triumph.

I was surprised – in the same speech Mr Osborne announced massive cuts to in-work benefits. These won’t just hit the tax credits we have now, measures like limiting support to just two children per family and cutting the amount you can earn before your benefits start being taken away will also hit the Universal Credit. Which is, remember, Iain Duncan Smith’s baby, which he’s spent ten years nurturing.

It isn’t often you get to see parents cheering the evisceration of their own offspring, but that was what was going on, and new figures the TUC has just published confirm just how much harm the Chancellor’s Budget will do to low-paid workers and their families.

We commissioned new research on the changes announced in the budget using the IPPR tax-benefit model. In particular, we wanted to look at the claim – repeated again and again by the Prime Minister that the “National Living Wage” and the increases in income tax personal allowances will more than compensate for these cuts.

First of all, our research looks at what is going to happen to people currently claiming when the tax credit cuts hit families next year. Usually cuts like this are introduced with “transitional protection” – a guarantee that existing claimants will keep the cash value of their benefits (though they aren’t inflation-proofed) and only new claimants lose out.

The government has not announced transitional protection for these cuts and it doesn’t look as if they’re going to.

This means that, come next April, the working families in the poorest quintile (fifth) of the population will see their disposable incomes fall £560 a year on average; and those in the second poorest quintile will be made £670 worse off. By contrast, working families in the richest quintile will lose only £10 on average. Despite the government’s rhetoric about being the party of the workers (and the implied slur against unemployed people) these cuts overwhelmingly hit working families.

Mr Cameron says that this will be compensated for by a higher minimum wage and a more generous income tax personal allowance. The tax credit cuts will hit families next year, but the minimum wage will not reach £9 until 2020; and the tax allowance will not reach £12,500 until 2020 either.

Table 1: Distributional impact of tax credit cuts in the July 2015 Budget on UK households in 2015/16 by income quintiles

average change in annual income (GBP, 2015/16 prices)
Overall Not working Working
1st (poorest) -250 0 -560
2nd -340 -10 -670
3rd -210 0 -350
4th -70 -10 -100
5th (richest) -10 0 -10
ALL -180 -10 -290

Table 1 covers people still on tax credits (i.e., not yet moved over to Universal Credit) and takes into account the increase to the tax credit taper rate, and cuts in the working tax credit and child tax credit  threshold.

And low income working families’ net losses in 2020 will be even larger than in 2016 – even if you take the gains from the “National Living Wage” and tax allowances into account.

This is because next year’s cuts to tax credits will be compounded by other cuts to financial support for working households that are due between 2016 and 2020 – like freezing the rates for working-age benefits like Universal Credit until the end of the parliament.

Even accounting for the higher minimum wage and the higher personal tax allowance, in 2020 working families in the poorest quintile will be on average £1,020 worse-off; and those in the second quintile will be £720 worse off. By contrast, those in the richest quintile will be made £110 richer in 2020 by the government’s tax and benefit policies in the July 2015 Budget.

Table 2: Distributional impact of tax and benefit changes in the July 2015 Budget, and increases to the minimum wage, on UK households in 2020/2021, by income quintile

average change in annual income (GBP, 2015/16 prices)
Overall Not working Working
1st (poorest) -690 -430 -1,020
2nd -440 -160 -720
3rd -90 -60 -110
4th 40 -10 60
5th (richest) 100 60 110
ALL -220 -170 -240

Table 2 assumes all households have been moved from other working age benefits to Universal Credit and that take-up is 100%. The analysis does not include tax and benefit changes yet to take effect that were announced prior to the July 2015 Budget.

This table does not take into account the government’s proposal to raise the tax threshold for higher rate taxpayers, which was announced prior to the July 2015 Budget. If this policy was taken into account the gains for the richest two quintiles would be much larger.

I’m not surprised that this government’s talk about supporting strivers has been proved wrong so quickly and so comprehensively. But I am left puzzling over that image of Iain Duncan Smith dancing with joy as his “friend” killed off the last progressive elements of the policy that had cost him so much effort.

Originally posted on CLASS blog

7 Responses to Low-paid workers: Worse off next year and even worse off in 2020

  1. Richard
    Oct 21st 2015, 4:39 pm

    I’m not sure if I totally agree with you – I think that having children should be a considered choice dependent on whether you’re able to support them or not. To receive support for more than two children to me, is frankly – unreasonable. There’s a lot this government is getting wrong but I think that their basic ethos is right (if adhered to): A person shouldn’t be better off through unemployment than they would be through being employed.

  2. Bill Burbridge
    Oct 21st 2015, 5:47 pm

    IDS, George Osborne and David Cameron should be put on trial for crimes against humanity.

  3. CABe
    Oct 21st 2015, 7:01 pm

    Our son fell in love with, and married, a woman who already has 4 primary-school-age children. Richard you have NO idea of the reality of people’s lives – we don’t live in China (where even conceiving twins mean one baby has to be adopted). Our son has worked full time since he left school – and often has a very anti-social shift pattern to boot. His wife sells make-up from home (but her self-employed income appears to be overlooked for a mortgage but declarable for benefits purposes). The kids are doing well at school and are known to be polite and well behaved. We, Grandparents, help to pay for after school clubs such as swimming and dancing. The boys love football and so they go to a professional match around their birthday times. My son doesn’t want to be made rich, but when a secondary school uniform costs £32 for a blazer alone, PE kit is over £25 and the rest of the clothing brings the total to over £150 and so September is as expensive as Christmas, smug remarks about “should have kept it in his trousers” are singularly unhelpful – and frankly patronising. He also has to pay a private landlord a lot of rent each month for a big enough house to fit the beds in the bedrooms. Are you suggesting that we should put any of our Grandchildren up for adoption or that we should be able to ask for a little bit of an income boost to make sure that the kids are happy and healthy, well fed and warm in the winter?

  4. Richard
    Oct 21st 2015, 9:46 pm

    As a person who travels fairly regularly to China and as a person who lives in the UK who came from a distinctly working-class background (parents with multiple jobs to make ends meet), please do not tell me that I have no idea about life – I know much much more than you realise so please spare me any prejudice or second-guessing. To further qualify my statement, the Chinese generally not have to adopt children; they were formerly paying a higher rate of tax for having more than one child. That law has since been relaxed. This is all first-hand knowledge. I maintain that if you’re not certain about how you’re going to make provisions for having children, you really shouldn’t have them – although we cannot help who we fall in love with. I hope that your grandchildren’s father helps provide for his children but realise that the world doesn’t always work like that. We have different opinions; I just happen to think that having children isn’t a right for anybody who wants them without any thought on how they’re going to provide for them, which ultimately means that I have to instead after making the decision that I don’t want children at this point of my life because there’s other things I’d rather do. That’s fair isn’t it. Why shouldn’t a country be responsible about its population? After all, it affects all of us.

  5. Karen
    Oct 22nd 2015, 1:51 pm

    I don’t believe that any child should have to suffer .But we do seem to be living in a world where families are getting bigger and more and more mothers are stay at home mummies we would all like the chance to stay at home but I find these so called stay at home mummies are still able to afford to run around in their people carrier at the expense of the taxpayer and holiday at the expense of the taxpayer and I agree why shouldn’t their child have the same as the rest but go out and earn it like the rest and show your children money doesn’t grow on trees .

  6. Bill Kruse
    Oct 26th 2015, 9:48 am

    Richard suggests “A person shouldn’t be better off through unemployment than they would be through being employed.” Why bring this up? People aren’t better off unemployed than in work. They never have been. In fact, in this response to an FOI on the subject, I was told “Ministers have never claimed that people out of work are likely to receive a greater income
    from benefits than the total income received by somebody in comparable circumstances and in full-time work. To the contrary the Government has widely publicised the in-work benefits that working people can receive and the fact that these can substantially increase a family’s overall
    income. ” So I’m not sure what you’re on about there.

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    Oct 27th 2015, 8:55 am

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