Work hard, do the right thing – and get screwedPosted: July 9, 2015
How has George Osborne got away with a Budget that will hurt the very people he claims it will help most: hardworking families?
The headlines are all about One Nation, National Living Wage and tax cuts but, as the dust settles, the calculations that have emerged so far make clear that the poorest households are going to suffer significant cuts in income. While a series of cuts such as the lower benefit cap will hit out-of-work households hard, people in work face a series of technical changes to tax credits and benefits that will make many of them substantially worse off.
To give some idea, here are the three main cuts:
- A four-year freeze in working age benefits saving £4 billion by 2020/21. The Institute for Fiscal Studies estimates that this alone means that 13 million families will lose an average of £260 a year. Of those, 7.4 million are in work and will lose £280 a year. The freeze will also hit child benefit, which David Cameron promised to protect.
- £6 billion worth of cuts to tax credits (and subsequently universal credit) and associated housing allowances from April 2017. The IFS says new claimants will lose credit entitlement for more than two children, losing the average of £3,670 a year that currently goes to 872,000 families (548,000 in work). On top of that, the family element in credits for the first child will be cut for new claimants and housing allowances associated with both will be cut too. Kate Webb of Shelter calculates that just one change – the removal of the family premium, an allowance of earned income before housing benefit starts to be withdrawn for working families with children – could cost a single mother working 20 hours a week at the new national living wage £11 a week. That’s not much less than the bedroom tax.
- Cuts to work allowances that mean working households will lose tax credits/universal credit much more quickly than now. At the moment, credits start to be withdrawn once family earnings rise above £6,420. That will fall to just £3,850. This will cost 3 million working families just over £1,000 a year each. Credits will also be withdrawn at a faster rate once they hit that threshold.
The Budget headlines George Osborne wanted were all about the gains to working families from raising the income tax threshold and the new National Living Wage. However, these go nowhere near to making up for the losses above. The threshold rises to £11,000 from 2016/17 but someone earning below that gains nothing and most of the benefits go to people up the income scale. The National Living Wage will be introduced at £7.20 an hour from April 16. That means people on the £6.70 an hour minimum wage will gain 50p an hour but even a couple both working 35 hours a week only gain around £1,820 a year. In addition, it does not apply to people under 25 and it remains to be seen whether employers will seek to cut back other job perks (if there are any) to pay for the increase.
So back to the question I started with, one answer is a lack of scrutiny in the media and an opposition in disarray in parliament. Labour seems too busy trying to avoid falling into Osborne’s traps to be able to call him out on what he’s doing. However, another answer is that he has found cuts that are difficult to understand. The delay in implementation beyond 2017/18 enabled him to use a benefit freeze that will save £4 billion but is much less noticeable than measures like the bedroom tax that save far less. In contrast, raising the income tax threshold and the National Living Wage are easy for most people – and headline writers – to understand.
Beneath these appearances, the substance is that the biggest losers from this Budget will not just be workless households but also working families with children. As Richard Exell of the TUC puts it:
‘What these cuts will mean is that life will get tougher for workless families with more than two children. And the implications for low-paid workers will be profound. People with very low earnings will still qualify for tax credits and Universal Credit, but people who are still on very low incomes but not quite that low will get much less support. Many will lose all support.’
Here are some examples from the Resolution Foundation:
- A low earning single parent with one child, working 20 hours a week at £9.35 an hour, will be £1,000 a year worse off. To offset this fall in disposable income would require an increase of £3,400 in earnings – equivalent to a one off 35 per cent rise in earnings, 15 years of steady 2% pay rises, or increasing their hours by seven hours a week.
- A low earning dual-earner couple with two children both earning £9.35 an hour will be £850 a year worse off. They would need a one-off rise in earnings of 10 per cent.
- In contrast, a middle earning dual-earner couple without children where both earn £15 an hour will be £350 better off as a result of increases in personal tax allowance.
The other effect to note is the impact on work incentives. Analysis by the Social Market Foundation finds that someone on the National Living Wage will lose 80p out of every extra £1 they earn (32p in tax and national insurance and 48p in tax credits) as a result of the changes. This begins to make the system look very like the one that a more generous Universal Credit was meant to improve.
The net effect, according to the SMF, is that a couple with two children with one full-time earner will lose almost £1,300 a year by next year and still be worse off than now even after increases in the National Living Wage by 2020/21:
A couple with two full-time earners will be better off – just – next year but gain more as the National Living Wage rises to 2020/21 because they will no longer be eligible for tax credits and so can’t lose them:
So, broadly speaking, it seems low paid workers without children may benefit, couples who are both able to work long hours should benefit, and lone parents will lose. However, these examples do not include cuts in tax credits in the last parliament or future increases in the minimum wage that would have happened anyway. They also do not include housing benefit – and renters they are also set to lose progressively more in housing support.
If the couple are private tenants, depending on what their rent is, they will be squeezed by the four-year freeze in the local housing allowance, meaning that as rents rise they will automatically face bigger and bigger shortfalls.
If they are social tenants, they stand to gain from the fact that rents will now fall by 1% a year rather than rise by CPI plus 1%. However, those gains could be more than wiped out by the Pay to Stay policy of forcing social landlords to increase rents to market levels once their tenants’ household earnings rise to £30,000 a year (or £40,000 in London). Advance Treasury briefings said this would apply to ‘higher income earners’ who would lose their £3,500 a year social rent ‘subsidy’ (which it isn’t).
As the SMF example shows, a couple both in full-time work will already be earning £26,000 on the National Living Wage from April 2016 – which puts that ‘higher income earners’ claim into perspective. Say one of them finds a job paying an extra £2.20 an hour or £4,000 a year. That will be enough to trigger a rent increase of around £70 a week or 90 per cent of the pay rise. It will only be worth taking the job because housing benefit will cover some of the rent increase (about £50 a week under the current system?) but the shortfall will increase year by year as rents rise, benefits are frozen and taper rates are increased.
These housing changes will amplify the losses faced by millions of working families with children as a result of a George Osborne Budget that was apparently meant to protect them. It’s quite some end to the welfare ‘merry go round’, some incentive to want to get on and some reward for working hard and doing the right thing.