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Three messages for worse-off families in 2020: don’t be a lone parent, don’t have too many children, and do work all hours

The present government has rightly drawn attention to the fact that people will be at lower risk of poverty if they work, have two parents and do not have many children. However, the translation of these realities into “behaviourist” policies – incentives to conform to certain family norms – started out more tentatively than one might have expected under the previous, Conservative-led coalition. The married tax allowance was slow to arrive and tiny when it came. Iain Duncan Smith originally launched his flagship Universal Credit emphasising how it could make low-income working families better off, not punishing them with cuts. Even the benefit cap, while mainly hitting people living in large families or expensive areas, was sold mainly as a way of being fair to taxpayers in hard times rather than punishing people for having more children.

The July Budget decisively buried any such hesitancy. It withdrew means-tested support for third and subsequent children, born after 2017. More broadly, by increasing minimum wages for under-25s and cutting benefit support, in and out of work, in a range of ways, it recalibrated the incomes of the worst off families in this country.

In new projections for 2020, I show how gains and losses will be very different by family type. The biggest losers will be those not working and those in larger families. The results also paint a grim picture for lone parents, who will lose badly even if they work full time , since one person working at the enhanced “National Living Wage” (NLW) rate is not nearly enough to compensate for cuts in working benefits. In contrast to the previous emphasis on helping lone parents benefit from work, the Budget sharply cut the amount that they can earn before losing Universal Credit.

In contrast, families with two parents in full time work on the NLW will typically become better off. However, this is an unusual working arrangement: only 6 per cent of those on low incomes have two full time workers. Overall most families will lose out.

Stepping back from the detail of these calculations, two big themes emerge. Firstly, the changes ahead will create not just some carrots for “doing the right thing”, but many sticks for those whose life situation creates additional needs. The penalty you will face will be greater in 2020 than now if your partner leaves you, if you have three children and then later lose your job or if your zero-hours contract or lack of suitable childcare prevent you from working full-time. For many families, no “behavioural” incentive will alter these life situations.

Secondly, my calculations show that over the course of the present decade, the consequence of cuts for some low income families will be not merely to make them struggle a bit more, but rather to change fundamentally their standard of living. I show this by comparing living standards in 2010 and 2020, expressed as how far families fall below the minimum income standard – a level that members of the public think is adequate. Here is a frightening example of how much worse off some families will become:

blog graph donald

At the beginning of the decade, the tax credit system helped a low-paid lone parent earn about what she needed for her family to reach an adequate living standard. By the end of the decade, even with the enhanced NLW, a comparable lone parent will have nearly 30 per cent less in her purse than she needs to support herself and her child – producing a dramatic fall in her standard of living, nearly to the level of an out-of-work family in 2010. The work incentive will nevertheless be preserved, by a reduction in the out-of-work income to only half what is needed. Such policies are creating more sticks than carrots, making people worse off if they do not have a partner or a full time job – whether or not this is the consequence of a voluntary choice.

Tax credits and wage floors: battle lines drawn for a new 10p tax-rate moment?

I’ve been involved in a revealing debate via the IEA on the respective roles of wages and tax credits in supporting wages. The issue isn’t new (I published a book on it with Fran Bennett in 2001, referring to echos of the Speenhamland episode of the early 19th century!), but the success of the Living Wage campaign and the questioning of tax credits by the present government are having interesting effects on the shape and  politics of the debate.  Essentially it seems to be creating four camps, each represented on the comment string on the IEA site:
1) a simplistic view that capitalists mustn’t be subsidised into low pay by the state (some Living Wage advocates);
2) a welcoming of the role tax credits play in allowing employers to pay low wages and therefore improving jobs growth and profitability without impoverishing people (IEA);
3) a simplistic view that the state should just stay out of everything, so if you want to improve the wage at which people will work, cut out-of-work benefits don’t increase in-work benefits (traditional right-wing view);
4) the sensible view that tax credits are an important way of protecting family in-work income and providing work incentives, but since they can sometimes allow pay to be at levels below what employers can afford (especially in certain sectors), movements such as the Living Wage can help rebalance the respective roles of the state and employers in providing income, and indeed make it more affordable for the state to maintain adequate tax credit protection for those who need it (me; JRF response to cuts proposals)
How loudly will parts of the right defend the second view if the Budget slashes tax credits? Could the injustice of such cuts to hard-working families and attacks from his own side make this Cameron’s “10p tax rate” moment? Which would be ironic, since Gordon Brown’s removal of that lower rate and subsequent unpopularity represented the opposite of what the present government is arguing. Brown compensated a small tax rise with a greater boost in tax credits for families that needed it most. Cameron’s arguing that fewer tax credits will be compensated by taking low earners out of tax. As I’ve argued, his logic doesn’t work.

Why the “welfare merry go-round” is just spin

In its search for justifications for saving money on welfare, the government has placed  much emphasis on limiting out of work benefits in order to avoid perverse incentives. But cutting the welfare cap only produces around 1% of the £12 billion cuts required. A reduction in Child Tax Credit (and ultimately in the child element of Universal Credit) requires a totally different rationale. This is because it goes to people in and out of work, so reducing it harms “hard-working families” as well as those without jobs. It’s hard indeed to see how a large cut in these credits is compatible with Universal Credit being presented as a flagship measure that will help families work their way out of poverty.

This helps explain why David Cameron has put so much emphasis on the supposed illogicality of a system of in-work top-ups that coexists with income tax, so that the Treasury takes in income tax with one hand and pays out in tax credits with another, sometimes to the same families. This “merry-go-round” is made to sound just like a bureaucracy for recycling money.

Nothing could be further from the truth. First of all, the majority of adults in families receiving tax credits pay no income tax at all – they earn too little to do so (or nothing at all). Second and more importantly, income tax is based on individual earnings, while tax credits are based on family income. So unless the individual basis for income tax were unravelled (something nobody is proposing), cuts in income tax matched by reductions in tax credits will cause low-income working families to suffer big net losses, not matched by tax cuts.

This all sounds quite complicated but there’s a simple way to think about it. In very broad terms, there are six times as many taxpayers as families receiving tax credits. So if you cut tax credits and so were able to cut the amount each person paid in tax, there would be enough to reimburse about £1 per taxpayer for every £6 cut per tax credit family. The minority who actually are on the “merry-go-round” (families receiving tax credits that contain a taxpayer) would still lose £5. The neediest families, too poor to pay tax, would each lose £6. Only those too well-off to qualify for tax credits would gain.

But is the very existence of the merry-go-round illogical? No – in-work credits and income tax are doing different things. One is a social programme to help people who risk hardship as a result of low income. The other is a simple means for individuals to contribute a proportion of their earnings to meeting the cost of the state. We don’t think it’s illogical that some peoples pay income tax that funds the NHS to treat them when medical need arises. Neither should we worry that some people paid just enough to contribute some of their earnings to the state should get something back based on their family’s needs and the income of its other members.

Up a bit or down a bit, living standards are in the doldrums, and have fallen for many worse-off families

In his budget, George Osborne stated that the average household is now enjoying higher living standards than in 2010. Labour disputes this, saying that this is the first election since the 1920s when living standards are lower than the previous one. These statements sound like polar opposites, but in fact, there is not a lot between them.

There are lots of ways of measuring household incomes. You can look at the average of what people earn or what they have as disposable income; you can look at means or medians; you can include all sources of income or just wage income. Naturally, each party chooses the measure that best suits them.

Government figures tend to emphasise GDP per capita, which has risen very slightly according to the Office for Budget Responsibility. So has household income per head, if you include certain items such as imputed rent – the value of owning a home in which you live and can thus use free of charge, which is a kind of return on investment.

The Resolution Foundation – a think-tank which has done a lot of analysis of living standards – uses a slightly narrower measure that corresponds more with what people think of as their income. It has found that mean income has fallen by about 3%. The median has done better, but has still not quite regained its 2010 value.

Labour prefers to concentrate on average real (post-inflation) pay, which has fallen 8% since 2010. After years of pay freezes, or increases that fell behind inflation, it is only in the past yearor so that people have started to get real-terms pay rises, so there remains a lot of ground to make up. There are all sorts of ways of looking at pay and earnings, including average weekly earnings, average hourly pay and what has happened to the pay of those who remain in the same job. Each produces a slightly different result.

But these technical differences in measuring what has happened to real incomes should not obscure two underlying realities. The first is that, despite a recent upturn, the story of the past five years has indeed been unprecedented in the post-war period. Usually, income dips in a recession are short-lived, so real incomes rise significantly over any given five-year stretch.

The fact that we are arguing over whether we are slightly better off or slightly worse off than in 2010 shows that the normal promise of growth has not been fulfilled during this period. And there is enough variation around any average that, in a period during which there has been no significant household income growth overall, there will be plenty of people who have gone backwards.

The second is that many of the people who have gone backwards were badly off to start with. All the evidence is showing that fiscal austerity has hit the poorest the hardest. This is not surprising, since they depend the most on help from government. One indicator of this is how many people live in households with incomes below the minimum needed to reach a reasonable standard of living. My team’s research measures this standard after detailed consultation with the public over what that minimum should entail.

We have identified sharp and continuous increases in the number of households below that threshold between 2008/09 and 2012/13. Families with children have been hit the hardest: the numbers below the minimum standard in such households rose over that period from 31% to 39%. This does not pick up what has happened in the past two years, but there is no sign that for most of these families things have got any better.

I make this claim with confidence – even now that real earnings are starting to rise – because low income families with children face a particular claw-back of any improvement in their earned incomes. Their dependence on tax credits means that for each extra pound that they earn, they can lose 73p (and 76p under the new Universal Credit). This comes about because they pay more tax, while support is reduced with rising income.

This would matter less if the amount you could earn before claw-back kicks in rose in proportion with prices and earnings. But this level of “disregarded” earnings has been frozen. The consequence is that if you have a low income and children, you may have to wait a whole lot longer before you really feel that your living standard is rising – or even that it has stopped falling.

Good news on support for childcare could be made better with a bit of imagination and very little cost

My report for Gingerbread

An unsung success of government policy in recent years has been a great expansion in support for childcare, which has certainly helped more low income parents to work.  It’s easy to forget that twenty years ago there was virtually no such help, and this helps explain why parental employment remained much more resilient in the last recession than in the previous one, around 1990. It has also helped allow the majority of single parents to work, rather than a minority as in the past.

But that success has been undermined by soaring childcare fees, by the difficulty many families have in finding suitable forms of childcare and, since 2011, by a serious cut in targeted support. Families on tax credits currently have to pay 30 per cent of childcare fees, rather than 20 per cent previously. So it’s good news that the government has done an about-turn on this, and from next year will raise its own contribution (in Universal Credit, which is replacing tax credits) to 85 per cent, leaving only 15 per cent of the cost to the family.

The single parents’ charity Gingerbread has been bringing out a series of excellent reports giving a thorough insight into the incredibly tough time being faced by single parents, in its Paying the price series. The latest one, on childcare, shows that affording this expense remains so problematic for many single parents that half of them borrow money to do so. As part of this latest work, I looked at the extent to which the projected increase in childcare support would help single parents to work and allow them to afford a decent standard of living for their families.

The good news is that it will help make work worthwhile and in some cases allow families to bridge the gap between their present disposable income and what they need to make ends meet at a basic level. The subsidy will greatly reduce the number of working parents who would actually lose money by extending their hours, because childcare costs exceed additional take-home pay.  This will potentially allow more single parents to make ends meet by working more hours, though for those on low wages, even full-time work will still not be enough to meet the minimum needs of their family, as defined by members of the public in our research.

But here’s the real catch. The government understandably puts limits on how much people on tax credits and Universal Credit can spend on childcare and get this subsidy.  But these amounts (£175 a week for one child, £300 for two) have not increased since 2005, since when childcare costs have risen 70%. So a limit previously  designed to avoid extravagance is now hitting people with average childcare costs. Under the new system, those who hit the limits will still be worse off working full time than part time.

How much would it cost the government to raise the ceiling on costs and avoid this problem? Possibly nothing: it may even cash in. This is because if families took advantage of this change and increased their hours, they would be paying more taxes and some of their gains would be recouped through means testing, offsetting the cost of higher childcare support. Since their wages would be higher, everyone would gain. This may be a case of the government using a bit of imagination to see that a higher entitlement could pay for itself, and most importantly bring its quest to make work pay that much closer to succeeding.

The ideal and realities of a citizen’s income

Debate about a basic income paid to every citizen needs to confront important choices about what kind of social support we are willing to pay for

MY PAPER PUBLISHED BY JOSEPH ROWNTREE FOUNDATION

The apparent popularity of the idea of a citizen’s income feels rather baffling when set against other indicators of public opinion. If we believe the British Social Attitudes Survey, taxpayers’ attitudes towards people on benefits have hardened even with today’s tight requirements to look for work if you’re not earning. Why then should an unconditional payment to each citizen be acceptable? The answer given by advocates, that people will support a citizen’s income because everyone will receive it, simply will not do.  The money has to come from somewhere, and any citizen’s income system will have net losers as well as gainers, once the taxation needed to pay it is taken into account.

The appeal at least of the idea of a baseline income for all citizens shows that we retain some sense of solidarity among our country’s core values. We do want to ensure that none of our fellow citizens are destitute. We like the idea that everyone should start from a common baseline, a minimum living standard, on which they can build. And the citizen’s income promise that this would create a simpler system of income support, in which means-testing becomes unnecessary and  people can therefore thrive on their own efforts, addresses many things people dislike about our present system.

If this idea is to get anywhere, however, people need to understand its huge implications. My analysis of the potential for a citizen’s income published today suggests that it would not only remove conditionality but require far greater tax rates, with income tax possibly at 50% or more if it were to pay for a citizen’s income providing a minimum, adequate standard of living.  Quite simply, to pay for an unearned income for everyone, you need to take earned income back in taxes much faster than you do now.

So a citizen’s income does represent a huge act of solidarity, and an acceptance that a much greater  proportion of the income we earn will be redistributed by the state. Such radical measures are unlikely to feature in party manifestos published in the next few weeks. I fear that the implications of a citizen’s income, once understood, will put it off the political map for the present

However, there are two implications of the citizen’s income idea which could be useful in guiding long-term thinking about what kind of protection we are giving to low income households. The first is that, under the Universal Credit as under tax credits, low income working families face extremely high effective marginal tax rates – typically 76 per cent, including the amount by which in-work support is reduced as income rises. A citizen’s income implies that effective tax rates would be no greater on a low income than a higher one, giving a big cash boost to such families. It would be perfectly possible to move towards a more unified rate of income withdrawal under the Universal Credit – by reducing taper rates and increasing income tax rates. Politics may not make this possible today, but it is a policy aspiration for the future.

The second implication is that the citizen’s income idea should prompt a rethink of the measures we take to make decent housing affordable to low income families. Our main tool for doing this at present is Housing Benefit, a means-tested payment to help cover rent. Keep this system and you gravely undermine the objective of a citizen’s income, because a large proportion of the population will remain dependent on means-testing.  Yet it would be almost impossible to replace it with a flat-rate payment, as part of the citizen’s income, given today’s housing market. Set the payment too high and it would be absurdly expensive; set it too low and many families would be condemned to overcrowding or homelessness; adjust it to local housing markets and manual workers in Gateshead would be subsidising Kensington millionaires. In a Britain with a much better supply of genuinely affordable housing, on the other hand, these drawbacks would be lessened.  This strengthens the case for helping people afford housing by making it cheaper, not just by offering means-tested help to pay the rent.  Even without a fully-fledged citizen’s income, the availability of homes at reasonable rents at which anyone could access adequate housing would make it far simpler to set a safety-net level of income for all households.

Two cheers for low inflation

Low inflation is better news than it used to be for people on low incomes

Today’s record-equalling low increase of half a per cent in the Consumer Prices Index is short-term good news for the great majority of people in the UK, who have seen prices rising faster than their incomes in recent years. It increases the likelihood that after their long fall, living standards will finally start rising again in 2015.

But one thing that today’s commentaries are failing to note is that this applies more clearly to people working in the public sector, people on low incomes and to pensioners than to those whose main income is from private sector earnings.

For someone whose income comes mainly through wages, lower inflation is good for a given level of earnings, but earnings levels themselves are unpredictable, and partly related to inflation rates. So for example in March 2014 the Office for Budget Responsibility forecast inflation for 2015 at 2.0 per cent and earnings increasing by 3.2 per cent – a 1.2 per cent real increase. By December it had downgraded its inflation forecast to 1.2 per cent and earnings increases to 2.0 per cent, a 0.8 per cent real increase.  This means lower price rises but actually a slightly slower growth in real earnings.

For people working in the public sector, and for people on low incomes who rely on out-of-work benefits or in-work tax credits, the difference is that income changes have been pre-set to a large degree. This is very different from the situation up to 2010, when they rose at least in line with prices. Now, policies freezing or decreeing a one per cent flat increase in public sector pay or benefits have very different effects if inflation is high or low. When benefit increases were first fixed at one per cent in April 2013 and inflation was running at around 2.5 per cent, this represented a real-terms cut; by this April it looks like a 1 per cent uprating will be a real-terms increase. Moreover, people on tax credits have seen a freeze in the amount of their earnings “disregarded” before being withdrawn as their incomes rise. This disadvantages low income working families if both inflation and earnings increases are high, since most of the increases in earnings are clawed back by reduced tax credits (or Universal Credit, under the new system).

And don’t forget pensioners, whose “triple lock” protection is once again working in their favour. This says that state pensions will rise by the highest of inflation, average earnings increases and 2.5 per cent. If the OBR is right for 2015, the 2.5 per cent rule will kick in, with pensions rising faster than earnings and double the rate of inflation.

Whether these groups gain from low inflation over the longer term is harder to predict. If deflation sets in, a generally sluggish economy may worsen general job prospects. It will also harm the public finances in a way that further prolongs fiscal austerity: tax revenues relative to debt will fall. Looked at another way, inflation helps reduce the real value of accumulated public debt, and without it, slow or zero increases in benefits and public sector pay may be prolonged indefinitely. Perhaps the only (tentative) good news will then be that with no inflation, even an austere government will be reluctant to continue reducing the real value of benefits and public sector pay, because this would mean actually cutting them in cash terms. But don’t assume this could never happen: if there’s one thing we’ve learned about public austerity, 2010s style, it’s that the past is not a guide to the future.

Workers on the breadline

This Panorama documentary says more in human stories than I could ever say with data about working poverty. It corroborates what all our research is showing: that you can’t really get by adequately if you’re on a low working income, so poverty is structurally entrenched, not something that can simply be solved by reducing worklessness. I have a few things to say on the programme, but that’s not why it’s worth watching. If you have any interest in this subject, I promise you the half hour it takes to see it will  be well spent.

Do your maths please, Mr Cameron

Even by the standards of party conference knee-jerk politics, David Cameron’s promise to cut welfare bills by requiring under-21s to work for their dole after six months is audacious. It epitomises the importance of the political narrative over logic or substance.

The rationale appears to be the idea that large numbers of teenagers are choosing to leave school to go straight onto permanent welfare benefits, where hard working people are paying for them to live the life of Riley (which apparently is possible on under £60 a week in a cheap-end-of-the-market room in a shared house).

As a start, this concept seems to show little faith in the Government’s own draconian sanctions regime, whereby anyone who can’t show beyond doubt that they are looking for work will lose benefits. To depict being on JSA as still a feasible lifestyle choice is to suggest that this strategy has failed.

But let’s now look at the facts. Among 18-24 year olds, about 80,000 have been claiming for six months or more – less than 2 per cent of the cohort. Interestingly, as unemployment has fallen, this has reduced by over 40% in the past year, making the “lifestyle choice” theory even thinner.

However, the audacity reaches new heights with the suggestion that saving from this measure will help to pay for three million apprenticeships. Do the maths Mr Cameron. Even assuming that the threat of working for your dole means that no under-21 year old claims it any more after six months, we’re talking about maybe 40,000 or so dole cheques contributing to funding eighty times as many apprenticeships. That means there’ll be a contribution of around 70p a week from this source towards hiring an apprentice. I’m sure employers must be queuing up already!

So this is where the story has got to going into the next election. A million miles from the hug-a-hoodie version of what Cameron stood for. It’s back to all the old strategies of demonising claimants. This has nothing whatsoever to do with deficit reduction. If it saves anything, it will be peanuts. That’s clearly not the point.

 

The old arguments against means testing need a reality check

New report: universalism or means-testing as a solution to poverty?

Should the state concentrate resources on helping the most needy, or favour “universal” provision delivering services and even income to all citizens? For many years, progressives have proclaimed with a grin on our faces that universal provision works both ways: not  only does it provide for all, but even gets more to the poorest groups because the public cake is allowed to be far bigger overall when everyone gets a slice. Means-testing, on the other hand, has been condemned as divisive, stigmatising and a recipe for a residual state which the middle classes will let shrink.

That grin has long since disappeared. It must be obvious by now to all but the most starry-eyed observer that the voting public and the markets want the public cake to shrink, not grow, regardless of where it is spent. This makes public resource allocation more of a zero-sum game. In a review I’m publishing today with Dimitri Gugushvili, we show that earlier evidence that countries with more universalist policies are also most effective in fighting poverty, if it was ever valid (it covered a very limited range of countries), is now out of date.

This does not mean that all public resources should be targeted through means-testing. For a start, there remain crucial areas where there is consensus that a state service should be provided for everyone – especially areas where it would be very difficult even for middle-income people to make their own provision. These include school education, healthcare and pensions (the last of these may be affordable for the middle classes, but most hate the uncertainty that private markets bring to something as fundamental as retirement income). Moreover, means-testing is not the only method of targeting. Helping groups with generally low incomes, such as lone parents (eg through childcare support) can be cost-effective even without an income test.

However, we also need to drop any knee-jerk resistance to means-testing and accept that whatever its drawbacks it will have an important role. An obvious example is the huge amounts of money that have been transferred to working families through income-dependent tax credits. This made a substantial dent in child poverty before the recession hit, and certainly did more to put money in families’ pockets than a universal child benefit ever could have.  We must also be wary of trying to extend a universal entitlement to a service such as long-term care for the elderly unless we are really willing to produce the extra cash to make this work. As Scots have found, free access for all can trigger higher thresholds of entitlement (you need to have very high physical needs to be eligible) if done on the cheap.

I would still love to live in a world in which taxpayers see the benefit of collective provision so much that they will vote to pay higher taxes in order to extend universal services: free childcare and free elder care would be top of my list. But I know that we do not live in that world. So it’s time we drop our scruples, recognise that resources need to be focused on lower income groups and look for the least-bad way of doing so.