Benefit reform 'more important for work incentives than income tax cuts'

But introducing a 10 per cent starting rate of Income Tax would achieve little additional reduction in the large numbers of men and women whose households would be left on the lowest rungs of the income ladder, according to a research study published by the Joseph Rowntree Foundation.

The report concludes that a different package of measures, including lower rents in publicly-subsidised housing and an increase in family credit payments to parents of younger children, would combine more effectively with the minimum wage to tackle family poverty and improve incentives to work.

The study, by Prof. Jane Millar, Prof. Steven Webb and Martin Kemp at the University of Bath, used data from the official Family Expenditure Survey to examine trends in the number of workers receiving low pay (defined as earnings below two-thirds of the national mid-point (median) for wages). They found that in 1994 there were 3.2 million women and 1.2 million men with earnings below a low pay threshold of £3.87 an hour.

The research also showed that the households of one in eight low paid workers - most often lone mothers and one-earner couples - had incomes below a poverty threshold*. This was more than three times the level of equivalent low-paid poverty that existed in the 1970s and early 1980s.

_{* The researchers defined their poverty line as households whose income was below half the national average.}

Policy options

The study tested the impact of a national minimum wage and other policy options on low-paid poverty and work incentives. Using a taxÜbenefit simulation model, it found that:

• A minimum wage set at £3.75 an hour would reduce the number of low-paid individuals living in poor households by about 300,000. It would save up to £1.2 billion a year through lower spending on in-work benefits and increased tax and National Insurance revenues.
• Extending Family Credit to low paid workers without children - the earnings 'top-up' scheme currently being piloted - would have a limited extra effect on household poverty, although it would improve the return to part-time work among men.
• Lowering the starting rate of Income Tax to 10p in the pound would do almost nothing to reduce household poverty or increase work incentives beyond the level achieved by the minimum wage.
• A big further difference could be achieved through a package of measures including increases in Family Credit for younger children and a reduction in social housing rents (reducing claims for Housing Benefit). These moves would have a broadly neutral effect on public spending, while lifting almost 750,000 people out of household poverty. Incentives to work would be increased.

Prof. Millar said: "It is clear that people will be combining work and welfare for many years to come. Even with a minimum wage in force, many families will still find that their household earnings are not adequate to lift the household out of poverty.

"However, the in-work benefit regime can be reformed in intelligent ways so that more people are encouraged to move off sole dependence on benefits and into work and so that those who spend long periods working for low wages are prevented from sinking into poverty."