The tax credit reversal is great news – but Universal Credit is what matters

Reversing Tax Credit reductions will give families valuable breathing space but it’s Universal Credit that’s important in the long term, says Katie Schmuecker.

The Chancellor’s decision to stop the cuts to tax credits is welcome. It will give valuable respite to working families, many of whom would have been facing a significant drop in their incomes - as JRF research showed. But with the Tax Credit system being phased out over this parliament and replaced by Universal Credit (UC), in the long run it’s what happens to UC that matters.

If the UK is to successfully move towards a higher wage economy with lower need for welfare, it’s vital that people have the opportunity to progress at work, gain new skills and move into higher paid work. We need a welfare system that supports this. UC will address some of the failings of the current system, which can trap some people in poverty. As an integrated system it should help smooth people’s passage into and out of work, an important feature for a twenty-first century benefits system, given the insecurity many experience in the labour market.

But over recent months the focus has been on Tax Credits, meaning that changes to UC were less remarked upon. Support for working households on low incomes getting UC was also reduced in the Summer Budget – looking ahead to 2020, these changes will have quite profound effect on living standards for different groups, some good and some bad.

The graph below shows the combined effect on working households of reductions to UC, the increases to the personal income tax allowance, the introduction of the National Living Wage (NLW) and the announced extra help with childcare. This analysis, by Loughborough University for JRF, looks at people’s projected living standards on the NLW compared with the Minimum Income Standard (what the public says is needed for a minimum acceptable standard of living).

Minimum income standards in 2020

There are important implications here about expectations for families’ working lives. For couples with children, both will have to work full time on the NLW to get close to a decent standard of living. But this is a model of family life that few choose – only 6% of low income families with children have both parents working full time. For a lone parent with a young child, even working full time on the NLW doesn’t achieve a decent living standard.

To make the sums add up it needs to be made easier for people to juggle work and family life, which means more jobs that offer a decent rate of pay, security and opportunities to get on. It also needs to be easier for people to afford to meet their needs by taking action to lower living costs, such as building more genuinely affordable homes – including homes for rent. Through this we can begin to address the drivers of poverty, and sustainably reduce the cost of welfare by bringing down need.

We also need to make sure that people are getting the support that they need to get into employment, and to gain the new skills which will help them to progress while in work. This is not just an issue for Government. To achieve a high wage and lower need for welfare economy, government, businesses, housing providers and local leaders need to work together.