Tax Credits can't be reduced in isolation - we need to tackle the drivers of poverty too

The debate on Tax Credits highlights a deeper question about the right balance of responsibilities between individuals, employers and the state, says Julia Unwin.

There can no longer be any doubt that Tax Credit reductions will leave many low-income working families struggling to make ends meet. The Government is right to say that the National Living Wage will benefit some low-income workers, and be a very welcome step towards an economy with lower need for welfare. But independent research from organisations like the Institute for Fiscal Studies, the Centre for Social Justice and the Resolution Foundation – who are hosting an event looking at this issue today – have found that, overall, many families will be out of pocket as a result of the Summer Budget.

Our own research has found that low-income families with two parents in full-time work will be better off, as will pensioners and most workers without children. But lone parents, those with more than two children and families with one main breadwinner will see their living standards stagnate or even fall. It is important to note that only 6 per cent of low income families with children have two-parents in full-time work, and the average across the population is 1.6 full-time workers per family. This, to my mind, raises a question around how these plans pass the Government’s laudable ‘family test’, which pledges to consider how new policies will support strong family relationships.

Tax Credit cuts cannot be easily balanced simply by raising wages. The National Living Wage was developed to boost the income of individual workers and make sure that businesses reward their workforce fairly. Tax Credits were introduced to support working families by recognising the extra expenses of raising a family, a role businesses cannot be expected to fill, and are paid to households rather than to individual workers.

We need to consider how poverty affects whole households and communities. Looking at the issue as a simple matter of raising incomes across the board ignores the huge impact that individuals’ circumstances have on their needs, and so will leave many families behind. As a benefit which is paid to households rather than individuals, Tax Credits are a vital piece of support for many families who need to bridge the gap between low-paid work and the costs of raising a family.

This is not just a question for low-income families with children. The discussion around Tax Credits gets to the heart of a deeper debate about the right balance of responsibility between individuals, employers and the state. Child poverty costs the UK £29 billion each year, giving the state and the taxpayer a direct interest in supporting parents and children. Stagnant productivity makes it more difficult for individuals to climb the career ladder and increase their earnings, as well as affecting businesses’ bottom lines.

To make sure that this three-way responsibility is respected we must seriously consider what support the Government should offer to low-income families. Universal Credit’s great strength is that, if implemented properly, it will smooth the impact on the lives of the many people moving in and out of work. The Government’s current approach to Tax Credit reduction risks undermining this.

If welfare, including Tax Credits, is reduced without measures to tackle the underlying drivers of poverty, the impact on low earners will be disastrous.  The Government must expand their plan to include tackling high living costs, building more genuinely affordable homes of all tenures and creating more good jobs with genuine opportunities for progression.