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

September 22, 2016

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.

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