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The big dilemma in improving family living standards

June 12, 2014

Report: Wages, Taxes and Top-ups

Nobody is really arguing with the assertion that living standards have fallen for most households in recent years, because prices have risen while wages stagnate. Nor is it hard to see that some of the worst impact has come for a group who command considerable public sympathy – parents working hard for low wages to support themselves and their children. These families must face not only the general decline in real wages but the added impact of rapidly rising childcare costs and a recent reduction in the state help (especially tax credits) on which they have come to rely for a substantial part of their income.

Even if real wages start to creep up (and the latest figures shows they are hiccupping rather than surging into positive territory), this will not make a typical low-income working family better off. The government is not uprating tax credits, or the amount you can earn before they are reduced, in line with inflation. This cuts into the real disposable income of those who receive them, and indeed means that most of any wage increase will be clawed back by the government in reduced support.

A huge red herring in this debate is the potential for income tax cuts to improve such families’ incomes. Some do not earn enough to pay tax anyway; even those who do have typically gained only a fraction from the higher tax allowance of what they have lost from cuts in tax credits. The reason is not rocket science: a tax cut that benefits 25 million taxpayers will not go very far for any one family, compared to the same amount spent on (or cut from) help targeted on the most needy.

But this all creates a crucial dilemma. Our analysis in this report tracks how over the past 15 years, low income working families have become perhaps too reliant on state transfers in order to make ends meet. The good news is that for many families on low pay, especially those requiring childcare to work, the increasing generosity of tax credits had by 2008 made it possible to reach a minimum acceptable standard of living, where previously they had fallen short. The bad news is that when the cuts came, these families were exposed to fiscal austerity far more than they would have been in the past. Getting a boost from government is great when the government is flush with revenue, but bad news when it is trying to pay off a huge debt.

So should people who care about family living standards be calling for more public help for these families to get them to an acceptable level, or less reliance on these transfers in order to reduce their exposure to future fiscal austerity? Probably the answer is both. In the long term, better jobs and wages can improve self-reliance and provide a more stable base for a decent family income. But pull the rug of this support too quickly and families will suffer. As a minimum, uprating existing tax credits (and the Universal Credit which is replacing them) at least by inflation will provide a stable foundation of support. As real wages then improve – and if wage growth among lower-paid groups can especially be encouraged – this could start shifting the balance of family revenues back in favour of earned income. After all, being paid a living wage for a decent day’s work is one of the oldest, if most elusive, of social objectives.

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From → welfare system

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