Will the new Chancellor pass the first major test of support for ‘just managing families’ in his Autumn Statement?

Published on Public Finances and the Economy

We are approaching the time of the football season where managers start to lose their jobs. New appointees inevitably face lots of problems, but they have an opportunity to make a name for themselves by turning things around. The key is to identify where problems are and take effective and rapid action. Even with intense media scrutiny flaws can remain hidden away. But in some instances even a casual observer can see the all too obvious.

The new Chancellor is approaching his first Autumn Statement, arguably the most important of the parliament, with huge challenges – notably a possible £84bn borrowing black hole. But indicating that he’ll press the fiscal reset button has created some important leeway allowing him to put his plan into action and make his mark.

What might that plan entail? Even since Theresa May made her first address outside No. 10, we’ve heard a lot about supporting ‘just managing’ families – those in work but with below average incomes. Yet, as our new report shows, the inherited weaker economic outlook and substantial cuts to working age benefits already in train mean that almost half of all households are set to be worse off by the end of the parliament.

However the more recent mood music has played down prospects of a bold shake-up of existing plans. This creates a tension: the Autumn Statement is the first big test of the government’s support for just managing families and the Chancellor won’t want to fall at the first hurdle. But is set to do just that unless he takes significant action. Here we outline the past record on living standards, and how the government can start to bring outcomes back on track.

Despite strong employment led growth in recent years ‘just managing families’ have experienced a lost decade of income growth

The record the Chancellor inherits makes for uncomfortable reading but poor performance dates back to the turn of the century. Just managing families have experienced a lost decade of growth, with typical incomes yet to reach pre-crisis levels and sitting no higher now than in 2004-05. And that is despite a recent pick-up in growth driven by terrific employment gains.

unmhistory

Inherited tax and benefit plans are set to worsen the position for ‘just managing’ families

The tax and benefit policy plans bequeathed by the previous incumbent are set to make the outlook worse. Delivering on the government’s rhetoric of supporting lower income working families will therefore mean ripping up the previous game plan.

The coming £12 billion of cuts to working age benefits make future growth in living standards for the bottom half of the income distribution increasingly tough. Once fully in place cuts are set to reduce incomes by an average of 1.8 per cent across deciles two to five, in spite of a boost to income from the National Living Wage and lifting the personal allowance to £11,500 in April 2017.

unmtaxandbenefits

Half of all households could be worse off than today by 2020

The consensus among economic forecasts puts the government on the back foot, suggesting we’ll experience higher inflation, weaker real pay growth and a rise in unemployment in the coming years.

While these forecasts carry huge uncertainty – though higher inflation looks a dead cert given the recent fall in sterling – the average weakening of the economic outlook, coupled with coming policy changes, mean that the poorest half of households will face flat or falling incomes over the parliament.

unmdistrib

An opportunity opens up for the Chancellor at the coming Autumn Statement

So far so bad, but in many ways the Chancellor has the advantage of being able to change the rules of the game. Pressing the fiscal reset button, and ditching the budget surplus rule, provides some fiscal headroom for the Chancellor. Costly past mistakes can also be reversed before they take affect – cancelling further cuts to income tax (£2 billion) and corporation tax (£2 billion) would free up some space to rebalance his plans.

The first key move is rowing back on the coming freeze to most working-age benefits – set to squeeze benefit income by over 6 per cent in 2020, equivalent to £720 a year for a working couple with two children. Higher expected inflation will tighten this squeeze. At a minimum the Chancellor should uprate benefits this April, providing some short term relief to a coming sharp spike in the cost of living, while remaining on course to save £3.6 billion in 2020.

unmbenefitfreeze

Reversing work allowance cuts would best support low income working families

If you wanted to pinpoint a way to squeeze just managing families then cutting Universal Credit would be the way. And yet that’s exactly what the new Chancellor inherits. The coming £3 billion cuts to work allowances, a core component of Universal Credit, is set to repeat the past high profile tactical error of slashing in-work support through tax credits – only this time in slow motion.

Reversing these cuts – which both reduce incomes and weaken incentives to work – would target support where it is needed most. A focus of investment on single parents (who may become stuck at low levels of earnings) and second earners (who lose around two-thirds of any earnings from work) would deliver the greatest improvement – and a significant employment boost to women.

unmfamilies

Longer term there is the opportunity to build a lasting legacy, through greater investment in the grassroots of UK infrastructure and securing the best deal with overseas counterparts. But in the immediate term a clear focus on the domestic agenda is required to prevent a decline. If the country is to buy into the long term plan making good on short-term targets would set the tone for a government set on delivering what it promises.