Prices might be falling, but the gains to household incomes are fragile

Benefits and tax credits uprating policy must remain flexible to reflect future price rises and ensure the security and stability of household budgets, says Katie Schmuecker.

The cost of essential goods and services is an important and often overlooked part of the poverty debate. Between 2008 and 2014, these costs increased three times faster than average earnings and twice as fast as the National Minimum Wage, putting household budgets under serious pressure. So today’s news that inflation was -0.1 per cent in September will bring welcome respite to many struggling families.

Analysis for JRF by Loughborough University analyses the impact of the whole package of changes announced recently by the Government: tax credits, the increase in the personal tax allowance, the increased support with childcare and the introduction of the National Living Wage (NLW).

The graph below shows how household incomes will be affected. Some working households are set to see improvements in their living standards. But these gains are fragile because of the decision to freeze most working-age benefits – both for working and non-working families – until 2019. A substantial portion of their income will be exposed to future rises in the cost of essentials. 

In the past, benefit levels would increase with prices to ensure a consistent standard of living; for the next four years they will not change. To ensure security and stability for low-income working families, flexibility is needed: benefit uprating policy should be reviewed annually rather than set four years in advance.

Alongside this, the upcoming reductions in tax credits should be smoothed out, to ease the pressure some working families will feel when the reductions are introduced from April. Taken together, these measures would ensure security and more stability for low-income working families.