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Now we know for sure: we won’t be “all in this together” in a return to growth

December 17, 2013

Much has been written about how, leaving aside some bankers and their bonuses, the pain of the past five years has been shared across the social spectrum. This is true to the extent that most groups have seen falls in real disposable income, though this does not in practice mean evenly shared misery – both because it’s harder to cut back if you’re already living on the edge, and because people on lower incomes are more dependent on the public services and benefits that are being pared back in order to reduce the deficit.

But what of the future? In the final weeks of 2013, it has become clear that the economy has turned a corner. Yet at the same time, it has become just as clear that future jam will be spread extremely unevenly – and indeed that for many people on low incomes, an end to falling living standards is nowhere in sight.

Of course, as in any recovering economy, people able to move back into work will become better off. The number of workless households is already falling – though the recovery is least marked for young people.  But for those who are in work but low paid, prospects continue to look pretty grim. Average earnings have fallen sharply in real terms, and overall will only just keep up with rising prices in 2014. Moreover for the worst-off working families, falling living standards will continue at least until 2017.

How can I be so sure of this? It is hard to predict whether real earnings might start to rise, or at least stop falling, for this group. But what we do know about the next three years is that state support for struggling working families will be cut sharply in real terms. Tax credits and their successor, Universal Credit, will have capped increases of just 1%, well behind predicted inflation. And in its Autumn Statement, the government announced that the amount you can earn before Universal Credit starts getting taken away will not rise at all in the next three years.

Though this is a somewhat technical detail of the incoming Universal Credit system, its effects are central to prospects for the millions of families with children who will (once the new system is finally in place) depend on such support. It means that for every extra pound that such families have in their pay packets, they will have UC reduced by 65p. So if inflation is 3% and your employer gives you a 3% pay rise, you’ll actually only see your net income rise by 1% – the rest will be lost in the reduction in the credit. Put another way, you would need to have a 9% pay rise just to stand still.

Why is the present government bringing in a system to “reward work”, yet creating an uprating system that will make its beneficiaries steadily worse off? Quite simply because in order to balance the budget, it needs to contain overall welfare spending as a percentage of GDP – which is still forecast to be higher in 2017 than in 2008. Is this because benefits for people not working were protected against inflation in the recession, when working people had falling wages? No: working age benefits will have fallen significantly in real terms between 2008 and 2017, whereas GDP will be higher. The real reason is because of the “triple lock” guarantee for pensions, which comprise around half of the benefits bill. This allows pensions to maintain their value when real wages are falling, and to rise in value if real earnings start to increase or inflation falls below 2.5%.  So currently it’s pensions that are driving the growing cost of welfare.

It’s great news that protection for pensioners has proven so robust in such difficult times. But please, please let’s stop blaming the “generosity” of provision of working age benefits for the size of the welfare bill. And stop punishing their recipients, both inside and outside work, for the crime of being bottom of the heap.

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From → welfare system

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