What’s the best way to improve living standards?
Everyone in our society should be able to have a decent standard of living – and living standards, especially for people on low incomes, have rightly become a hot topic this election. Helen Barnard looks at the advantages and disadvantages of six ways we could boost living standards.
Proposals around tax thresholds are often hailed as helping low earners and are easy to understand and achieve; but they can often deliver more into the pockets of middle or higher earners. Social security offers much more targeted ways to boost living standards for families on low incomes, but that system brings its own challenges. And what about boosting living standards through high pay or more security at work?
There are lots of different ways we can boost living standards, so what are the pros and cons of some of the main ones being debated?
Cutting tax
The Personal Allowance in Income Tax has been raised very substantially in recent years, from £6,475 in 2010/11 to £12,500 this year. It could be raised further.
Advantages:
- Wide benefits; around 30 million people gain.
- It’s simple; the people benefiting from it don’t have to do anything and it is easy to understand.
Disadvantages:
- Very expensive compared to its benefits for people on low incomes. The cost of just the rise in the 2018 Budget was nearly £2 billion and the vast majority of the money goes to people in the richest half of the population.
- It doesn’t help many locked in poverty because they are already below the threshold.
- Most people in poverty are moving onto Universal Credit and so will lose 63% of the gains from any tax cut.
Changing National Insurance
The threshold to pay National Insurance is now much lower than that for income tax – £8,632. It would be possible to raise the threshold closer to that for income tax.
Advantages:
- Wide benefits; everyone in work pays National Insurance contributions if they earn more than £8,632 a year.
- It’s simple.
- It helps more people on low incomes than raising the Personal Allowance. Analysis in 2015 showed that 1.8 million low earners would gain who do not from Personal Allowance rises.
Disadvantages:
- Still expensive and not well targeted to those on low incomes. Raising the threshold for employees and self-employed people would cost about £3 billion for every £1,000 it goes up; the Institute for Fiscal Studies finds only 3% of the gains go to people in the worst-off fifth of the population.
- When taking low earners out of paying National Insurance it’s important to make sure they are still building up contributions towards their entitlement to the state pension and other contribution-based benefits.
- As with tax cuts, people on Universal Credit will lose 63% of any gain.
Basic income
Various forms of basic income have been proposed and trialled in different parts of the world. The pros and cons depend on which form is used and whether it is intended to replace more targeted social security support, replace the Personal Allowance in taxation or be in addition to one or both of these.
Advantages:
- Gets money to people without onerous means-testing.
- Wide benefits (in theory everyone would benefit, although some people might lose out overall if it replaced more targeted benefits or was financed by higher taxes).
Disadvantages:
- Extremely expensive; analysis of two ‘modified’ schemes showed costs of implementation ranging from £177 billion to £210 billion.
- Requires a new system to be designed and introduced.
- Doesn’t meet needs arising from high costs, large families, disability or other factors.
- Some forms of Universal Basic Income could increase poverty, if they pull resources away from being targeted on those who need them to those in the middle.
Raising the minimum wage
The minimum wage for over-25s has risen from £3.60 in 1999 to £8.21 and is intended to rise further. Lower minimum wages for other groups could also be raised.
Advantages:
- Increases incomes without requiring more public spending.
- Benefits lots of workers in poverty including many women and part-time workers.
- Can lead to employers increasing productivity, which improves business performance. No sign of significant impact on employment.
Disadvantages:
- Doesn’t help those out of work or earning more than the minimum wage but still in poverty due to low hours, high rents or other needs.
- In recent years workers haven’t felt the benefits due to high rents and cuts to social security.
- We can’t be sure that increasing the minimum wage further wouldn’t cause employers to create fewer jobs and reduce hours of work.
- People on Universal Credit will lose at least 63% of any gain.
Creating more and better jobs
The UK has record high employment but there are parts of the country where employment rates are much lower than the average. There is also a lot of poor-quality work, not only low paid but insecure and with little training or opportunities to progress. There is a growing body of evidence on how we can create more jobs, better jobs and open them up to people who need them.
Advantages:
- Creates sustainable routes out of poverty.
- Revitalises local areas and lets people feel hope and pride in their communities.
- Good for the economy overall.
Disadvantages:
- Requires action from a wide range of people: UK and devolved governments, local and regional bodies, business, employers, individuals and communities.
- Takes longer to achieve than changes to tax, social security etc.
- While there is a growing body of evidence, we still don’t know for sure that policies will definitely achieve their aims.
Boosting social security
Boosting incomes through benefits, tax credits and Universal Credit is a major part of the UK’s economic and social system. There are many ways in which more support could be channelled to different groups through social security.
Advantages:
- Very cost-effective – the cheapest way to boost incomes for people locked in poverty.
- Ensures support is targeted to those who need it most.
Disadvantages:
- Only reaches people if they take up benefits and overcome obstacles in the system or mistakes that are made in assessments and delivery.