£11 billion tax giveaway misses those needing help the most

13th Jun 2014

Higher wages and targeted support are the best way to ensure the worst-off people benefit from recovery.

Higher wages and targeted support are the best way to ensure the worst-off people benefit from recovery, says Chris Goulden.

It’s almost exactly 11 months to the 2015 General Election. In that time, we’ll hear a lot about the parties’ main policy offers on tax cuts – whether further increases to the personal income tax allowance (Liberal Democrats and Conservatives), bolstering the marriage tax allowance (Conservatives) or reintroducing a 10p starting rate of income tax (Labour).

These are often presented as a way of helping low-income working families and are attractive fodder for manifestos. But new research by JRF lays bare their shortcomings. The trouble lies in their design, and a lack of joined-up thinking, rather than mean spiritedness.

The report looks at what it will take to make a working couple on low wages (earning around £335 each a week) £20 better off with two children. This would help them to have a decent standard of living and not have to choose between buying food and heating their home. But to make up this modest shortfall through income tax cuts, it would cost the Treasury between £8 billion and £11.5 billion a year.

If policy-makers wanted to be sure working families in receipt of in-work benefits received the full £20 in their pockets, the cost would be about three times higher. This is because support through Universal Credit for working households is withdrawn on an after-tax basis: for every £1 gained through a tax cut, a family will lose 65p immediately as the benefit is clawed back.

A better, more targeted approach could deliver the same impact at a hugely reduced cost to the Treasury – between £1 billion and £4 billion. So, allowing a couple to keep £31 more of what they earn before support is withdrawn would provide the £20 windfall, benefiting four million parents for a cost of £2 billion – much lower than tax cuts. Likewise, policies such as extra support towards childcare costs are welcome, but they need to sit alongside improved wages and take-home pay as a twin-track approach to improving household living standards.

Policy-makers need to take a more sophisticated look beyond income tax cuts to support families on the lowest incomes. At a time when public money is scarce, the simplest way of ensuring work pays is to increase the amount people can keep from their earnings before benefits are withdrawn – this should be done automatically by the same amount as any increase in tax allowances to ensure they don’t lose out.

Universal Credit, despite its problems, remains a once-in-a-generation opportunity to make a huge difference to those on the lowest incomes, but it must be joined up with income tax policy.

Otherwise, the options currently on the table could end up wasting taxpayers’ money, and worst of all, failing to help those in most need.