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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.

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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.

What next for George Osborne’s mission to reduce family dependency?

George Osborne’s scrapping of the tax credit cuts announced last summer is momentous in several ways. But it is by no means the end of his mission to reduce families’ dependence on the state.

First and foremost, the changes save millions of badly-off working families from some drastic reductions in their incomes next April, typically by well over £1000 a year. The day these cuts were announced in the Summer Budget, I pointed out that even people benefiting from the new ‘National Living Wage’ would lose out by these large amounts; but I did not dream that this argument would cause the cuts to be scrapped.  It was only when the evidence piled up – my analysis for Joseph Rowntree Foundation, alongside reports by the Institute for Fiscal Studies and Resolution Foundation – that it persuaded Conservative MPs, amongst others, that the backlash could be disastrous.

So a second important aspect of the reversal is that the evidence got through clearly to politicians, and made a difference – a rare enough event in social policy these days. The reasons it caused such wobbles are also revealing.  Unlike many welfare cuts, the 2016 changes to the tax credit allowances and withdrawal rate (a) came in one fell swoop, (b) affected existing recipients not just new ones and (c) were entirely borne by those in work.  In other words, they would have instantly and drastically hit the pockets of people seen as ‘deserving’.

This provides a seminal lesson to George Osborne about how not to do welfare cuts. Most of the time, the Government do them differently.  Both in the past five years and in remaining plans for the next five, support for working and non-working families is being progressively chipped away.  Some of this happens gradually through failing to uprate benefits, tax credits and disregards with inflation.  Some is through measures only affecting new claimants – so eroding our system of social support over time, without directly reducing support for individuals.  Other measures make selective reductions for people in particular situations – people with larger families, those with more expensive housing, social tenants deemed to be ‘underoccupying’ their homes and so subject to the ‘bedroom tax’.  These changes all add up over time, without delivering one single blow to be parried by a House of Lords revolt.

As things stand, this march to ever less generous support for people on low incomes continues apace. As the Chancellor has pointed out, the plan to replace tax credits with Universal Credit will mean that not cutting the former will make no difference to what is spent in a few years’ time.  (The summer Budget’s cuts to UC have not been modified.)  My post-Budget projections of living standards over the current decade remain unchanged, based on the Universal Credit regime in 2020.  It found, for example, that a working lone parent, who in 2010 had almost what her family needed for a minimum household budget, would be nearly 30% short of meeting this budget by 2020.  Cumulatively, this is not just a squeeze but a drastic assault on the living standards of such families.

A pessimistic view of the Autumn Statement changes, therefore, is that they change only tactics not strategy. In the long term, the Government remains on a mission to reduce means-tested support to families both in and out of work. As has been shown clearly in recent weeks, higher wage floors, while welcome, are nowhere near enough to compensate for these cuts.

A more optimistic view is that commentators, politicians and the public have woken up to the damage that this strategy can do to families struggling on low working incomes. Any future cuts to Universal Credit will be harder to dress up as cuts to ‘welfare’ for those who do not work, not least because UC merges the in and out of work benefit systems.  And any future Chancellor will be nervous of the potential backlash from reducing support to working families. If so, echoes of the 2015 tax credit row will have positive effects for many years to come.

 

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.