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Will low income families’ ability to afford the necessities of life stop declining?

The mood music on welfare cuts may finally be changing. The new Work and Pensions Secretary Damian Green has explicitly sought to distance himself from the stance of the past six years by stating that there “will be no new search for cuts in individual welfare benefits”.  The cuts of the past few years have contributed to a significant decline in the ability of low income families, both in and out of work, to contribute to the cost of a child. The proportion of all families unable to afford the minimum has risen from just over 30 to just over 40 per cent since 2010. But with low inflation, rising minimum wages and new support for childcare, the deterioration in the ability of families to afford the minimum has levelled off, according to my latest study of the cost of a child.  Have we turned a corner on family living standards?

The answer has to be at best provisional. There are certainly some promising signs. This year, when you exclude rent and childcare, the minimum cost of a child actually went down for some family types, for the first time since we started doing these studies in 2012. This is partly because the prices of some essentials such as food are declining. Another contributing factor, however, is that when minimum needs are defined, for this research, by members of the public, they have started to adapt to a leaner world. Some aspects of life such as being able to eat out occasionally with the family, while still considered essential, are being specified at a more modest level in recognition that norms have changed in line with more frugal times.  So it’s not just that living at a defined minimum level has become a bit cheaper, but also that the public definition of that minimum level has adapted downwards.

So costs have stopped rising and fallen slightly, although nobody knows how long this may last. On the income side, the signals are more mixed. Yes, the National Living Wage means that the worst-paid parents will have substantial pay rises, if they are aged over 25. This however is tempered greatly by clawbacks through in-work benefits. In particular, by not raising the amount you can earn before tax credits or Universal Credit (UC) are severely cut back with rising income (and indeed by lowering this level in UC), the government has greatly limited how much people can gain from higher pay, and in many cases caused a net cut in incomes.

And despite Damian Green’s promise of no new cuts, don’t forget the ones in the pipeline. Next year, for example, all families newly claiming means-tested benefits, in or out of work, will lose £10.45 a week, through the abolition of the family element of the Child Tax Credit. Much more savage cuts will hit larger families, through the removal of additional means-tested support for new claims for a third or subsequent child and through the Benefit Cap.

Without a rethinking of these cuts, the new regime may speak more kindly yet preside over further retrenchment of working age benefits. And should inflation return, there will be an important litmus test of how seriously the “no new cuts” pledge should be taken. Under David Cameron and George Osborne, benefits started to fall in real terms for the first time since the 1930s, when systematic uprating at least by inflation was stopped.  This has subtly shifted the baseline of benefits policy, by making the “default” option to keep benefits frozen, and therefore allow their value to eroded. If Mr Green and his master Philip Hammond interpret “no new cuts” as preserving the value of benefits in real terms, by restoring the link with prices, at least one important corner will have been turned.

Bringing up a family on a low income involves chances and choices

Campaigners seeking to draw attention to the worst effects of hard times on family poverty rightly cite the growing use of food banks to illustrate severe deprivation in the UK. But while about 200,000 children were in families using foodbanks last year, about 30 times this number – six million children – were on low income, as defined by being below the Minimum Income Standard (MIS), the centrepiece of our research at CRSP.  As with foodbank users, the numbers have been growing steadily.

This begs the question of what life is like for families below MIS. The standard is based on what members of the public consider to be an essential minimum to meet physical essentials and participate in society.  But do people experiencing a lower living standard feel that they are going without?

Our research team, Katherine Hill, Abigail Davis and Lydia Marshall, talked in depth to 30 parents with incomes below MIS but not in deep poverty, to find out.  The report, out today, paints a varied picture about families who feel that they are getting by, and others who are clearly struggling on a low income.

The study provides valuable evidence demonstrating that people below MIS – many of whom are working and not below the official ‘poverty line’ – face the risk of both social exclusion and material hardship, with outcomes ranging from never being able to take a holiday as a family to parents skipping meals to provide for their children. These findings confirm previous studies of low family income, but show that its consequences affect a wide range of families today: over a third are below the MIS line.  However, the two most interesting areas of the study’s findings, in my view, concern the factors affecting the chances of low income families and the choices that they take.

Some parents in the study seemed to be coping remarkably well on low income.  Typically, they were highly organised and worked hard to eke out their scarce resources, looking carefully for the best deals and being disciplined about not getting into debt.  Others were fighting an uphill battle, finding it hard to afford the basics, juggling debts, always feeling skint.  What distinguished these families was not just personal qualities but the situation they found themselves in – often because of factors beyond their control.

Extended family support can really help, in avoiding the worst effects of low income.  Grandparents often make it possible for mums to work, by being around for childcare, while others without this advantage found it hard to juggle work and care and some felt they needed to wait until their children were at secondary school to do more than very part-time work.  What struck me even more than this “informal care” advantage was how grandparents could be financial back-up – helping out when there was a crisis or helping fund a holiday, children’s activities or trips out.  These opportunities to do more than just survive can make a huge difference to a child growing up on a low income.

Another factor that struck me about a low income family’s chances and living standards was how many (in fact most of our sample) had at least one member with a health problem.  This probably reflects that ill health can be a contributory cause and not just an effect of low income.  It is certainly a limiting factor in many people’s lives, adding to costs and often restricting the capacity to earn of someone in ill health themselves or caring for a sick child.

Among other factors affecting families’ chances, the most important were those determining the stability of income and life situation. Precarious employment and the uncertainties of renting a home from a private landlord (which a quarter of families now do, more than in social housing), together with family instability, deny families the stability that they crave, because they fear uncertainty and lack of control.

A key research question of the study was what happens when a family does not have enough to afford a minimum living standard: what do they prioritise and what do they give up? Some of the answers were straightforward and unsurprising.  Keeping homes warm and food on the table have a high priority; having a holiday may have to go by the board this year.  Others reflected previous research on low income.  Parents prioritise the needs of their children – for example barely socialising as adults, rarely buying clothes for themselves, in order that children’s are not disadvantaged, both materially and socially.

But an interesting perspective was that when money is short, families do not simply meet what is described as minimum needs, minus a set of things that they choose to forego. Rather, they find different ways of structuring their spending.  For example, if you can’t afford to go on holiday or go out to the cinema, you may invest more in creating family entertainment in the home – potentially subscribing to paid-for television.  Middle class commentators who have a rich social life outside the home may consider this to be an unnecessary frivolity.  To the family concerned, it may be meeting the social need for family interaction in a highly cost-effective manner.  This helps explain a frequently lack of understanding in the public discourse on the lifestyles of people on low incomes. I hope that today’s report – which is full of fascinating examples and insights, and makes a good read – will help in a small way to inform that discourse.

 

It’s tough down south – Is it time to revive London weighting?

When I started my working life in London in the 1980s, there was some concept that London Weighting was a standard entitlement at a standard level that broadly reflected the additional cost of living in the capital city.

Today, it’s become a patchy entitlement at all sorts of levels, but generally not coming close to reflecting additional costs. You only have to compare how London supplements and London house prices have moved in the past quarter-century.  At the end of the 1980s, a standard London weighting was about £1500 and banks were paying around £3000.  Today, London weightings are generally £3-4000, with a very few employers paying up to £6,000 – so roughly double what it used to be.  Meanwhile, transport costs in London have quadrupled and house prices quintupled, with the gap with the rest of the country rising even more.

My paper for Trust for London on this subject suggests that it’s worth considering a more consistent approach to the London weighting, but this needs to be carefully thought out.

To a large extent, what remains of London weighting is a selective market mechanism designed to attract adequate labour where there would otherwise be a shortage. This leaves out many workers, and the idea of a system that truly reflects additional costs, tried in the 1960s and 1970s, has been long since abandoned.

There are reasons to be wary of any pure cost-based system. The risk is that you make higher costs self-perpetuating, by putting more money into workers’ hands only to bid up house prices further.

That would certainly be a risk in a London supplement based on a percentage wage premium, putting even more money into the hands of the highest-paid London workers.

But what my paper suggests instead is that middle to low earners should be guaranteed at least a flat-rate premium, based on the minimum additional costs calculated in ourMinimum Income Standard research.  This includes paying a modest rent, at a level that would help workers to keep up with the housing market, not drive it forward.

My calculations also differ from those made in the 1960s and 1970s, which broke down partly because they looked at differences in spending patterns, and therefore there was indeed a circularity in the sense that the more Londoners earned, the more the spending surveys showed that living in London was more “expensive” because they spent more. Basing the new calculations on what Londoners identify as the minimum they need to spend, rather than on actual spending, we can largely avoid this problem.

The magic number is £6,200. This is actually based on additional costs in Outer London, on the basis that people can in principle commute from there to jobs in Inner London.  An equivalent Inner London calculation is £7,700.

This may not be the best moment to ask London employers to give a substantial pay rise. But having as a benchmark the minimum that living in London actually costs, compared to elsewhere, can’t do any harm.  And the idea’s already been noticed by a man with some influence: Sadiq Khan’s manifesto stated as one of his objectives:

“Promote the uplift of London weighting, which over the years has fallen behind…”

The new National Living Wage marks a turning point in policy for low income working families

Today (1 April) sees the introduction of the National Living Wage (NLW): a compulsory £7.20 an hour for over-25s. Some see this as little more than a clever piece of branding by George Osborne a supplement to the National Minimum Wage (NMW), initially set at 50p an hour.  Its level today falls well short of the £8.25 voluntary accredited Living Wage outside London based on our MIS research on actual living costs, let alone the £9.40 London rate.

Yet the advent of the NLW marks two historic shifts in government policy, one of which created the underlying rationale for IDS’s resignation.

The first big change is in the aims of minimum wage policy. In 1999, the Labour government first introduced the NMW, a cautious £3.60 an hour compulsory minimum, against fierce opposition from the Conservatives for whom any state interference in a free labour market was anathema.  This created a minimal floor of clearly exploitative pay below which wages could not fall, but did little to alter overall pay inequalities.  Under the watchful eye of the Low Pay Commission, the NMW’s level has carefully been constrained to provide no threat to employment in an economy that’s better at creating relatively low-paid jobs than most of our European neighbours.  Osborne’s recent departure from this stance makes a virtue of creating a ‘higher wage economy’, with a wage floor, relative to average pay, forecast to be in the top quarter of similar countries by the time the NLW exceeds £9 an hour in 2020.  The policy could have unintended consequences, including some reassignment of low paid jobs to under-25s, who are not covered.  Yet the bigger picture is that a Conservative Chancellor is seeking to end our low-pay culture by legal means: a breathtaking turnaround.

Just as important a shift is the accompanying message from Cameron and Osborne that higher wages should go hand in hand with ‘lower welfare’.  This is a new departure in the ‘cut welfare’ rhetoric, which until now has been focused on limiting what you can get if you are not working.  For nearly half a century, UK governments have been offering in-work benefits to families with children who work on low income.  In the past two decades these payments (in the form of tax credits) have expanded greatly, as a means of ensuring that work pays, even for those with low-paying jobs and with high childcare costs.  The present government wants to reverse the growth in these payments, by instead telling employers to pay decent wages – and cutting taxpayer support for families.

Iain Duncan Smith’s biggest and most legitimate grievance with George Osborne is that this stance fatally undermines the whole rationale for Universal Credit (UC), whose implementation had become IDS’s raison d’être in government.  Despite being a huge structural reform of the benefits system, UC provides continuity in the principle of making work pay by topping up low family earnings.  Indeed, it extends this principle by making families with only a few hours of work eligible, and in its original form allowing people to earn more than previously before starting to lose their out-of-work benefits.  This policy has now been reversed, so a lone parent who would (at best) have had no reduction in benefits on up to £8,800 a year of earnings will now have them reduced by £2,600 on these earnings.  This change does the reverse of making work pay: even taking account of higher minimum pay, it makes low-income working families worse off.  Despite Osborne’s climbdown on cuts in tax credits in the autumn, his cuts to UC remain untouched.

‘Higher pay, lower welfare’, as Osborne is applying it, is in fact deeply flawed. If all he had done last summer was to introduce the NLW, this would have cut the in-work ‘welfare’ bill, simply because people getting more adequate pay need less support from tax credits or UC, and the system rapidly withdraws this support as earnings rise.  But cutting means-tested support for families at a given level of earnings inevitably make people at those earnings worse off.  In-work poverty is not just a product of low hourly pay – short or erratic working hours and high childcare costs are just as important.  And someone on tax credits getting today’s 50p an hour pay rise may see only 13p of it after paying tax and having the credit reduced due to higher pay.  Set against the still-planned cuts, our calculations last year show that this will leave many families far worse off by 2020.

Yet this does not make pay irrelevant to improving family living standards.  A system in which employers were allowed to pay almost nothing in the knowledge that the state would top up working incomes would feel unjust and fiscally unaffordable.  Conversely, the current move towards higher minimum wages could make it more affordable for government to maintain, not cut, support for people still in need, because a higher earnings profile will automatically reduce the tax credit bill.  In other words, ensuring that working families have enough income to make ends meet should be a shared responsibility between employers and the state.

Policy makers should therefore now be asking, not whether pay or in-work benefits are the answer to low family income, but what should be the terms of a partnership between the two. To set down some principles, it helps to think explicitly about both minimum acceptable income thresholds and the minimum working hours that families might aspire to.  Our research on the minimum income standard does the first of these.  The long-term objective of minimum wage and tax credits policy combined could be to ensure that families at least have the possibility of reaching this standard on minimum pay, working a reasonable number of hours.  This might for example mean one full-time job and one part-time job for a family with young children.  The British public is unlikely, despite a recent DWP suggestion to the contrary, to agree that less state support can simply be compensated by working ever-longer hours.  But this is a conversation we now have to have.  Now that something that at least aspires to be a living wage is part of the policy toolkit, the time to set down such principles has never been better.

I will be setting out these ideas more fully in a public lecture in Loughborough on 27 April 2016. Details and free registration.

Will a £9 National Living Wage promise be sustained?

The trouble with long-term political pledges is that they often get taken over by short-term economic swings.

Last July, most of us were rather stunned by George Osborne’s pledge of a £9 ‘National Living Wage’ by 2020.  This figure was not quite plucked out of thin air: it’s based on the aim of setting it at 60 per cent of average wages for over-25s.  On that basis, with projected wages growth, the NLW would have been £9.35 by 2020, giving some wiggle room in meeting the political commitment.

There’s just one snag. This is that the average wages forecasts on which all this is based, made by the Office for Budget Responsibility, seem to be based on a rather optimistic approach. They always seem to show that, in the relatively foreseeable conditions of the coming year or two, there will be quite modest wage growth of one or two per cent, but in the longer term, the best guess is that they return to their long-term historic growth levels of three or four per cent a year. Looking over a five year period, this gives pretty healthy cumulative wages growth of around 15 per cent or more.

This expectation of a sustained period of steady growth in wages, however, seems constantly to recede into that imaginary future. As the Institute for Fiscal Studies has just pointed out, the OBR’s downward revisions of wages growth this week could hit general living standards. But will it also force the government to revise its commitment to a £9 NLW by 2020?

The immediate answer is “not yet”. So far the revisions since last summer put average wages about three per cent lower in 2020 – just about within the “wiggle room” the Chancellor gave himself. But any further downward revision will leave him with two alternatives: break the £9 promise, or increase even further than promised the level of the National Living Wage relative to average pay.

So in 2020 we can all still hope that pay will rise both generally and, more rapidly, for the least well paid over-25s. But unless things go pretty well from now on, maintaining current commitments will be tough. This will be a big test of how robust is the government’s new-found commitment to improve pay at the bottom.

The seductive charm of a citizen’s income

Like many very simple ideas, a “Citizen’s Income” only becomes complicated when you think through its implications. This fact at least was illuminated in a worthwhile debate I’ve just had on Radio 4 Moneybox with some of CI’s advocates.

The idea of a Citizen’s Income is that a single, unconditional flat-rate payment for each adult and child in the UK would replace most existing benefits. This would create a much simpler and easy to run system of supporting incomes, empower people to build on their state entitlement without being punished by means-testing and maintain social justice by ensuring that richer people pay more into the system while drawing out the same amount as everyone else.

My critique of this idea is that it would only work with a massive change in public attitudes which I can’t see even on the most distant horizon. When you look closely at CI proposals, large public costs are involved. One way of footing them is through extremely high income tax rates. In reality, we have not accepted an explicit increase in income tax since 1975, and would baulk at a basic rate (including NI contributions) that might have to be as high as 40-50 per cent, even with no tax-free allowance.  Alternatively, we might find other ways of paying for a Citizen’s income (like higher corporation tax or abolishing higher rate tax relief on pension contributions). But would the public feel a flat-rate, unconditional payment to every citizen would be the best use of the tens of billions raised? Public opinion surveys suggests that, on the contrary, attitudes towards income support have hardened, and most voters would reject the idea of giving people “something for nothing”.  The same money could be spent on improving people’s living standards by making some vital services free: it would pay for free childcare plus free care for the elderly with a lot left over to help subsidise  affordable housing. Public support for those things we do provide free universally – such as school education and the health service – suggests such measures would be more popular than free money.

However, as the Radio 4 discussion made eloquently clear, this does not stop us from thinking how you could achieve some of the aims of citizen’s income in different ways. In particular, it would be possible to provide a more stable and less complex way of supporting people with low and unstable incomes, without making free money a universal entitlement. The Universal Credit was supposed to give greater stability by combining  benefits for people in and out of work, and allowing people to earn a reasonable amount before these start to be withdrawn (the so-called Work Allowance). Some of its goals have been undermined by austerity: for example, the Work Allowance will be cut sharply this coming April.  Nor does Universal Credit feel like a stable base you can rely on, as its introduction comes at a time when entitlements are becoming ever-more contingent on draconian work-search criteria.

However, none of these trends are about having the wrong mechanism: they’re about becoming more penny-pinching and mean about how such funds are given out. This is the opposite of the utopian spirit of a Citizen’s Income. I have no objection to its advocates continuing to dream of a different world. But in the one we live in now – in which the social “safety-net” for the least well off seems to be lowered by the day – there are more urgent battles to be won.

Next time, George, just read my tweets and blogs sooner

I’m not usually one to say I told you so, but it just occurred to me that George Osborne could have saved himself a lot of trouble this year if he’d just paid more attention to my tweets and blogs.

In June, two weeks before the summer Budget, as rumours were building that tax credits might be severely cut, I wrote:

Could the injustice of such [tax credit] cuts to hard-working families and attacks from his own side make this Cameron’s “10p tax rate” moment? 

Did George listen? No, he went ahead and cut both tax credits and Universal Credit quite brutally.

His excuse, the introduction of the National Living Wage, was not good enough. A few hours after the Budget, I produced a blog with a clear graph showing that low income families would typically lose out in net terms by well over £1000 a year. Did George give his officials a rap over the knuckles for failing to notice this in advance, and quickly withdraw the cuts? No. It took a few weeks for various think-tanks to crunch the numbers to produce detailed reports concluding that… low income families would typically lose out in net terms by well over £1000 a year. Then a few weeks more for politicians to start jumping up and down about this, but eventually the message got through. So George floated some rumours about how he might give transitional protection to people on tax credits. This puzzled me since tax credits are supposedly about to be abolished, so how would temporarily letting claimants off their cuts be different from not making these cuts anyway. A month ago, as the Chancellor was designing his response I tweeted:

Tax credits being replaced with Universal Credit, so “transitional protection” largely reverses TC cuts. But UC being cut too: where’s IDS?

Finally, George seems to have started reading my comments. Yesterday, he said this:

The simplest thing to do is not to phase these changes in, but to avoid them altogether. Tax credits are being phased out anyway as we introduce Universal Credit.

Well done George, you’re doing our homework at last. But next time, do try and read my advice a bit sooner. You can make a start with my blog on yesterday’s statement.