Wednesday, October 27, 2010

How welfare cuts hammer low paid workers

In 2008, David Cameron declared that the abolition of the 10p tax rate for low paid workers was "punishing the low paid". Vince Cable called for "fully costed proposals on how to make those on low incomes better off" and Nick Clegg said that "this was a matter of principles - remember them?"

They were right to do so. So how have they been putting these fine words into action since they took power in May?

The abolition of the 10p tax rate left some low paid workers worse off by up to £4.46 per week. Households with two adults, each earning less than £18,000 per year, were, therefore, hit by up to £8.92 per week - a substantial sum for people in low paid work at a time when the cost of living was rising, as Mr Cameron and Mr Clegg pointed out.

So let's use that as an uncontentious baseline measure for measuring the impact of policies on low income workers. Everyone now agrees that the abolition of the 10p tax rate was a shameful attack on the working poor. Instead of the overheated political rhetoric about social cleansing, or competing graphs from government departments and research institutes, let's just compare any recent policies which the government has announced, and compare them in magnitude to the impact of abolishing the 10p tax rate.

In the Comprehensive Spending Review, George Osborne announced that the percentage of childcare costs covered by tax credits would be reduced from 80% to 70%. A technical sounding change, which a casual listener might presume would have minimal impact.

This will cost a low paid worker with two children up to £30 per week, or rather more than three times as much as the maximum impact of the abolition of the 10p tax rate.

Osborne also announced that after one year, people would lose their entitlement to contributions- based Employment and Support Allowance. Probably fewer than 1 in 100 people know what contributions-based Employment and Support Allowance is. How bad could that be?

It means that a family where one adult is in low paid work and the other is currently receiving Employment and Support Allowance could lose up to £91.40 per week, or rather more than ten times as much as the maximum impact of the abolition of the 10p tax rate. Even if they are then able to claim Jobseekers' Allowance instead, they will lose more than £30 per week.

What of housing benefit? Inside Housing magazine calculates that 936,960 of the 939,220 local housing allowance claimants will lose out by an average of £12 per week - rising to £22 per week in London. The average loss from technical sounding things like "setting rents based on the 30th percentile of private sector rents rather than the median" is more than one and a half times the maximum amount which the abolition of the 10p tax rate cost any family. That's the average - some low paid workers will lose far more.

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That's just the initial impact (it is possible to calculate the effect of other cuts using the same measure). It doesn't consider what happens to the low paid lone parent who has to try to find an extra £30 per week to pay for childcare, and is forced to quit her job as a result. It doesn't consider the health impacts where one person is trying to hold down a low paid full time job and care for their sick partner, when they suddenly have to manage with £90 per week less. Or someone who has to find £12 a week or more in extra rent every week out of the wages of their minimum wage job, and who ends up getting into debt and getting evicted.

But even if you just consider those policies in cash terms, without making any further assumptions, then it shows that the government has already, within its first six months in office, announced three separate policies, each of which hit low income workers far harder than the abolition of the 10p tax rate.

7 Comments:

At 12:25 pm , Blogger Peter @Equilibrium said...

Excellent analysis

 
At 12:42 pm , Anonymous Paul Sagar said...

Spot on, as usual.

 
At 2:37 pm , Blogger MatGB said...

"Everyone now agrees that the abolition of the 10p tax rate was a shameful attack on the working poor. "

Yes, pretty much. One question though. Why is abolishing the 10p tax rate shameful, but instead removing those paying it from tax entirely "regressive"? The Lib Dem response to the 10p abolishment was always to remove those hit by it from tax altogether, but some on the left (I don't think you, but others) now buy into the LFF "analysis" based on spurious grounds that says somehow it's regressive.

I'm deeply uncomfortable about some of the welfare changes, sanguine about some, and positively happy about others, hence I don't agree with your substantive analysis.

Except that it ignores the rise of the threshold to £10K, which will benefit those hurt by the 10p thing a lot more than simply reintroducing that.

 
At 2:59 pm , Blogger donpaskini said...

Hi Mat,

Hope all well.

Which welfare changes do you like and dislike?

(on the thresholds - I agree in principle with raising thresholds, for each 1k you raise the threshold, low income workers benefit by approx £3.27/week).

 
At 3:07 pm , Blogger MatGB said...

I obviously like the pension changes (especially good for me medium term as I'm the part time worker/ childcarer in our household), and am fairly enthusiastic about the idea behind the Universal Credit, even if I need to really look into detail.

The stuff about disability allowances, especially mobility allowances, looks pigheadedly stupid to me.

For housing benefit, I'm undecided veering towards cautiously in favour. There's no doubt in my mind that the current system is a subsidy to landlords that works to put rental costs up across the board.

We're entitled to £8 per week LHA which we haven't bothered claiming for (as Jennie's income is variable it can get too messed up), and live in private rented. Rental prices are going through the roof and that's undoubtedly linked to availability of benefits tagged to market rates.

So, something needs to be done to change it, and while my preferred solution (land value tax and a citizen's basic income) would do it, that's not politically viable in the short to medium term.

And, um reeading my first comment, it was meant to say "don't disagree" with your analysis.

LAbour came to power in 1997 promising to "think the unthinkable" re welfare, instead we got tax credits (horribly bureacratic and error prone) and a skyrocketing HB bill. We need to be cautiously critical and really think through opposition to changes. Alternative solutions that solve the actual problems would be looked at sympathetically by some of those in power. Especially Steve Webb, who I've a lot of time for.

 
At 3:28 pm , Blogger donpaskini said...

I think these HB changes are an example of politician's logic, though ("something must be done, this is something, therefore we must do it").

The consequences, according to people who work in housing policy, will be that more people end up sleeping rough, and more people will end up being housed in unsuitable accommodation, some in (more expensive) temporary accommodation, and others in bed and breakfasts miles away from support networks. The result will be more tenancies failing, children doing worse at school, and worse outcomes for families who are affected. It undermines Clegg's rhetoric about social mobility, for one thing.

And there are plenty of alternatives:

If, for example, we capped private sector rents and then reduced them by 7% per year for the next four years, then you'd achieve greater savings, but without forcing low paid workers into debt or evicting thousands of people from major cities. (This would also be a massive boost for people who are in private rented accommodation).

Or we could give local authorities the power to levy much higher fines on slum landlords. Or invest money in building more housing, taking advantage of the cheap costs of borrowing at the moment.

Or even abandon LHA and go back to the previous system, where landlords aren't tipped off about how much the government will pay them to rent out their homes.

Now I know that our government is ideologically opposed to all of these measures (they even scrapped regulations of private landlords soon after taking power). But these are some really nasty changes which will have a far greater impact on people's lives than the abolition of the 10p tax rate.

/rant

 
At 6:57 pm , Blogger MatGB said...

"I think these HB changes are an example of politician's logic, though ("something must be done, this is something, therefore we must do it")."

Possibly. Hence the need if it's to be changed/stopped for actually workable alternatives.

But a rent cap would be unworkable. When we've had rent caps int eh past, all that's happened is the amount of housing available to rent is reduced. We have a shortage of rental accommodation as it is (so price increases can help with that) but capping rents will reduce both the amount and the quality of available stock.

Subsidising rents, however, increases prices without necessarily increasing availability.

"invest money in building more housing, taking advantage of the cheap costs of borrowing at the moment."

Which, it's worth noting, the Govt is doing (and started before the review, it was one of the things the LDs got in the initial round, £6bn cuts, of which £1bn goes to other things, some of which was increased social housing build)

"even abandon LHA and go back to the previous system, where landlords aren't tipped off about how much the government will pay them to rent out their homes."

I'd have no problem with that, except it'd also stop those eligible for knowing what they're entitled to.

The ideal, of course, would be to abolish all HB and merge it into other benefits, then people can choose whether to live in cheaper housing or have mor disposable, I'd choose the latter but others possibly the former.

Fining dodgy landlords is a good plan; I've only had one, and that was marginal for me, but I was glad I got out of that place soon after he bought it.

 

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