Summer Budget changes will push up to 200,000 working households into poverty

Published on Welfare & Tax Reform

Sharp increase in working poverty despite welcome pay boost from the ‘National Living Wage’

The number of poor working households will rise by up to an additional 200,000 over the course of the parliament as a result of policies announced in the Summer Budget, according to a report published today (Thursday) by the independent think-tank the Resolution Foundation.

The report, which assesses the outlook for poverty levels over the parliament, shows that the number of working households in poverty – defined as having an income lower than 60 per cent of median household income – will rise by 100,000 next year as result of cuts to tax credits and other benefits announced in the Summer Budget.

As many as 100,000 more working households could fall below the poverty line by the end of the parliament as a result of a second phase of cuts to in-work support that will start to take effect from April 2017. This includes the removal of the family element (worth up to £545 a year) for new claimants and the restriction of support to two children (worth up to £2,780 per child) which also affects existing claimants having more children.

The increase in working poverty over the parliament comes in spite of the welcome boost from the ‘National Living Wage’ (NLW), which an estimated six million workers are expected to benefit from. The Foundation says that while the NLW will transform Britain’s low pay landscape, it will not make a huge difference in terms of reducing the impact of £13 billion of welfare cuts. The NLW will reduce the losses of income faced by households in the poorest half of households by just 13 per cent.

The Foundation is urging the government to ease the losses faced by low-to-middle income households as a result of the welfare cuts announced in the Budget, and will publish new research on reducing the impact on incomes and work incentives of these changes to the benefit system in the run-up to the Autumn Statement.

It points out that many of the cuts – for example the reduction of work allowances in Universal Credit and the increase in the taper in tax credits – will reduce the incomes of working households and weaken incentives to work, making it even harder for families to earn their way out of poverty.

The note adds that the number of working households in relative poverty was already set to rise by 200,000 over the course of the parliament – from 1.6 million in 2016 to 1.8m in 2020 ­– as a result of in-work benefits rising slower than typical earnings. However, changes announced in the Summer Budget will push that total to somewhere between 1.9m and 2m households.

The figures come as the government seeks to enact the Welfare Reform and Employment Bill which will scrap the official child poverty target and remove the headline income poverty statistics from the government’s suite of poverty measures. The government intends to focus instead on measuring the number of children in workless households and educational attainment at age 16.

The Foundation says that while measuring poverty requires a broader approach than focusing solely on relative income poverty, the new emphasis on worklessness is odd given the extent to which it has already diminished as an issue over recent decades.

It warns that the government’s decision to abandon measuring and targeting income poverty risks allowing working poverty – which already accounts for two-thirds of all children in poor households – to continue to grow under the radar during this parliament and beyond.

David Finch, Senior Economic Analyst at the Resolution Foundation, said:

“The Summer Budget included a surprise and welcome pay boost to the UK’s lowest earners. But it won’t be enough to prevent up to 200,000 working households falling below the poverty line as a result of welfare cuts announced alongside it.

“Many of those looking forward to a pay rise this April will soon learn that those gains will be dwarfed by reductions to tax credits. And by weakening work incentives in the benefits system, the government has made it even harder for families to earn their way out of poverty.

“The government may have abandoned measuring income poverty but 400,000 working households falling below the poverty line won’t go unnoticed, nor will the fact that many low-income workers will get to keep just 20p of every extra pound they earn. The Chancellor should prioritise easing the squeeze on low-to-middle income households in his Autumn Statement.”

Notes to Editors

RF projection for changes in relative poverty over the parliament for working age households

Poverty projection 

Source: Resolution Foundation analysis using the IPPR tax-benefit model, Households Below Average Income, 2013-14

Notes: Flow measures refer to the removal of the family element to new claims to tax credits or Universal Credit from April 2017 and the limiting of the child element to two children for new claims and births for families entitled to tax credits or Universal Credit. Differences may not sum due to rounding.

The key Summer Budget measures analysed by the Resolution Foundation include:

  • The national living wage (NLW) will help boost incomes for those aged 25 and over earning around the minimum wage (NMW). The NLW is projected to be £1.10 an hour higher than the NMW in 2020.
  • Cuts to Working Tax Credit – an increase in the rate at which tax credits are withdrawn as earnings increase, from 41 pence in the pound to 48 pence in the pound, alongside a reduction in the threshold at which this taper starts to apply from £6,420 to £3,850 – will leave many working families worse off in 2016, creating an overnight shock to income (carried forward in Universal Credit through a reduction in work allowances);
  • A four year freeze to working-age benefits – as opposed to the default uprating with CPI inflation –will reduce their value by a projected 4.7 per cent by 2020;
  • Measures taking affect from April 2017 – the removal of the family element (up to £545 a year) for new claimants and restricting support from the child element to two children (up to £2,780 per child), which will also affect existing claimants having more children.
  • Increasing the personal allowance for income tax to £11,000 in April 2016 and to £11,200 in 2017, a £200 a year rise in each year, as well as the £300 increase to the basic rate limit in both years. Both are then indexed by CPI inflation to 2020.