How can the Chancellor improve the prospects of people who are struggling to make ends meet while boosting the economy? Helen Barnard has four suggestions.
The Chancellor has a difficult balancing act to achieve in the Autumn Statement. With projections of weakening public finances, the Government has set two goals; to boost the economy and to help the ‘just about managing’ (JAM); people in work but struggling to make ends meet.
The precise definition of this ‘just about managing group’ isn’t entirely clear. Theresa May has suggested that they may be earning around £20,000 – but whether this income would enable someone to have a comfortable way of life or leave them struggling to afford essentials depends on factors such as:
- their housing costs
- whether they have children, and
- whether other adults in the family are also working.
Our research suggests that the Government could best define this group using our threshold for a Minimum Income Standard. Families falling short of this standard cover about the bottom 30% of the income distribution. Some of these have incomes above usual indicators of poverty (which roughly cover the bottom 20%), but they are not financially secure and often find it difficult to deal with unexpected shocks to their incomes such as illness or a broken washing machine.
There are four ways in which the Chancellor could improve the prospects of this group of people:
1. Reverse the benefit freeze
The Treasury’s current plans for tax and benefits fail the ‘JAM test’. The Chancellor is widely expected to continue with George Osborne’s plans to raise the Personal Tax Allowance to £11,500 and the higher rate tax threshold to £45,000. This is predicted to cost £2 billion in 2017/18. Currently he also plans to continue the four-year freeze on working-age benefits – a measure that saves £500 million in 2017/18 (although if inflation rose, it would become more expensive to reverse). It’s important to note that benefits make up a considerable chunk of many working families’ incomes. The freeze means that many will find themselves falling short of what they need, especially as inflation is predicted to rise over the next few years.
JRF’s modelling shows that continuing the benefit freeze will wipe out most of the tax cut gains for low-income working families. For instance, in 2017/18:
- A lone parent working full-time on the National Living Wage (£7.65 per hour) would gain £28 per year from the tax allowance increase, but will lose £49 per year from the benefit freeze.
- A couple both working full-time on the National Living Wage (just under £14,000 per year), or even both earning £20,000 per year, would gain £160 per family per year from the tax allowance, but would lose £109 per year from the benefit freeze.
The planned tax cuts are more expensive than reversing the freeze on benefits and they are badly targeted: 85% of the gains go to those with incomes in the top half of the country, with a third going to the richest 10 per cent in the UK. Reversing the freeze would be a more cost-effective way to help low-income working families and protect them against predicted inflation rises.
2. Restore the work allowances in Universal Credit
The Chancellor should use the tool his own Government developed to give targeted help to working families who need it most: Universal Credit. Reductions to Universal Credit work allowances set out in the 2015 Budget will reduce the incomes of many low-income working families and weaken the incentives to work for some.
For example, a lone parent working full-time on the National Living Wage and claiming Housing Benefit will lose £572 a year due to the cuts to Universal Credit work allowances made in the 2015 Budget. Likewise, a lone parent working 22 hours a week loses about £2,700 a year under Universal Credit due to these cuts. Cancelling the planned cuts to work allowances within Universal Credit would cost about £1.2 billion a year – less than the cost of the planned tax changes – and would be a better way of helping people who are ‘just about managing’.
3. Make low-pay sectors central to productivity and infrastructure plans
In addition to direct support through Universal Credit, the Chancellor should tailor plans for infrastructure and productivity to ensure that they achieve the maximum value for money by benefiting those on low incomes. The Government is to be applauded for putting productivity at the heart of its economic approach. Industrial strategies traditionally focus on sectors such as manufacturing and engineering but the Government also needs to include measures to boost low-paid sectors like retail, hospitality and care. Low-pay sectors make up 23% of the UK’s economy, but a third of the productivity gap with other Western economies. A million people working in these low-pay sectors are in poverty. A targeted industrial strategy to improve management and innovation in these sectors could increase growth and help lead to higher pay, which would help many of the just managing families working in these areas.
4. Invest in more affordable housing
High housing costs are hitting more and more of the UK’s low-income families. A third of those on low incomes now rent in the private sector, where high costs and instability lead to poverty and have driven recent rises in homelessness. Theresa May’s Government recognises that increasing access to home ownership is not enough – more affordable rented housing is required as well. It is vital to invest in increasing the supply of homes that are affordable to those on low incomes. England alone needs to build 243,000 houses per year, with at least 78,000 to cater to people for whom traditional home ownership is not currently a realistic or desirable option. Achieving this would support low-income working families hit by rising rents, and cut the Government’s Housing Benefit bill.
This is a crucial moment for the UK. The political and economic outlook is uncertain and the gains to low-income families from recent low inflation and high employment are under threat. The Autumn Statement is an opportunity for the Government to demonstrate that it truly understands the challenges facing families who are just about managing families; and its ability to get the most value out of every penny spent on boosting the economy.