Two Budgets this year give the Government two opportunities to put in place the building blocks for a country that works for everybody.
The Brexit vote highlighted the urgency of this and the Prime Minister responded with a welcome commitment to make it her domestic priority. But if the commitment is to ring true with people on low incomes, two significant threats to their living standards must be addressed.
First, some households face declining living standards even when working full time. Second, poverty is projected to increase and to hit families particularly hard – with child poverty likely to rise by over a million by 2021/22. The Budget this week is a chance for the Chancellor to prevent families falling over a precipice.
Declining living standards even when working full time
Work should be the route to better living standards. This doesn’t simply mean people should be able to avoid poverty; they should be moving towards what the public thinks is needed for an acceptable standard of living (known as the Minimum Income Standard – MIS). People working all hours yet seeing their living standard erode poses a real threat to the Government’s commitment to prioritise ordinary working families.
The introduction of the National Living Wage (NLW) has undoubtedly helped improve the incomes of some working people. The rising personal tax allowance has also cut taxes for those earning above the threshold. However, these gains will be outweighed by losses. Rising prices (as forecast by the Office for Budget Responsibility and the Bank of England) will eat into the value of benefits, many of which are frozen until 2019. Simultaneously, changes to Universal Credit (UC) have reduced the level of support available to low income working households.
Analysis by Loughborough University for JRF finds some families will see their living standards decline by the end of the parliament, even when they’re working full time on the NLW, which is expected to rise substantially. Rather than moving towards an adequate income, some just about managing families will be moving towards poverty.
Using MIS as a benchmark of an acceptable living standard:
- Single adults or dual earning couples with children will be close to a decent living standard when working full time on the NLW in 2020 - so long as they have low housing costs.
- A couple with children and one person working full time on the NLW will see their living standards decline. By 2020 they will be £104 per week short of what they need for an acceptable living standard. Supporting these families to move to having both adults in work would help, but isn’t always possible; 27% have a child under five, 16% are sick, disabled or injured.
- Working lone parents will also see their living standards decline. By 2020 a lone parent working full-time on the NLW who has one child at school and the other in formal childcare will be £76 per week short of a decent living standard. Cuts to Universal Credit, in particular the amount people can earn before their benefits start to be withdrawn (the Work Allowance), hit working lone parents hard.
Increasing poverty damages prospects
Poverty is the point at which just about managing tips into not managing at all. Rising poverty is incompatible with the idea of a country that works for everyone, especially when policy choices drive much of the increase.
Poverty rates (as measured by 60% median income) have stayed fairly stable since 2007/8. This is thanks to the benefit safety net doing its job during the recession and immediate aftermath, and rising employment in more recent years. But the Institute for Fiscal Studies project poverty among children will rise markedly between now and 2021/22 – with 1.2 million more children likely to be in poverty, even if the economy does better than expected. This will damage children’s prospects – their health, their educational attainment and their future earning potential.
Tax and benefit changes since 2015/16 are a major driver of this increase. The freeze in benefits and the changes to UC – especially the cut to the Work Allowance which affects only low income working households – are again highlighted in this analysis. Reductions in Work Allowances alone explain a quarter of the increased poverty among children in working households.
Building blocks for a UK that works for everyone
To pass the test of being a country that works for everyone poverty should be falling and living standards for low income households rising. In the long-term this means the UK needs inclusive growth – growth that benefits all. The industrial strategy has potential to be a step in this direction. The recent Green Paper set out an ambition to “close the gap between our best performing companies, industries, places and people and those that are less productive”. This is the right ambition but it means moving beyond the traditional preoccupations of an industrial strategy to include concrete measures to boost the productivity of low-paid sectors and workers and rebalance the economy.
Such a strategy will take time to come to fruition, and will never entirely replace the need for targeted support for low income working families. More immediate measures are needed in 2017 to prevent poverty rising and the living standards of low income households falling. Two steps would show that the Government is serious about creating a society that works for everyone:
First, remove the freeze on working age benefits so their value keeps pace with rising prices. With inflation expected to rise to 2.8% by 2018 and to stay above 2% for the next few years, those already struggling to cover the cost of essentials will find themselves slipping further unless benefits and tax credits keep up.
Second, let low income working families keep more of what they earn before benefits start to be withdrawn. Lone parent families should be the priority for this help.
Undoubtedly the Government faces a constrained fiscal environment and economic uncertainty. But ultimately this comes down to policy choices, and many choices in recent years have favoured those who are already better off. The poorest third of households have lost out on average while the richest half gain as a result of tax and benefit changes announced since 2015/16.
Take for example income tax. Over three quarter of the gains from raising the Personal Allowance go to the top half of households, while raising the Higher Rate threshold only helps the highest paid 15% of employees. These tax cuts between them cost £11bn per year between 2010/11 and 2017/18. By contrast, cuts to Universal Credit Work Allowances took £3 billion from working families with the lowest incomes. Last year the Chancellor put a little of that money back into Universal Credit by raising the taper rate (the speed with which benefits are withdrawn), this amounted to £0.7 billion.
This Budget is a chance for the Government to boost incomes and increase opportunities for the lowest paid, ensuring that the economy does indeed work for everyone.