Welcome boost on low pay but severe welfare cuts will mean big losses for many low-income working families

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Today’s Budget lived up to its billing as it introduced major moves to boost low pay and fund apprenticeships on the one hand, coupled with severe cuts to welfare that could leave some families far worse off, the independent think-tank the Resolution Foundation said today (Wednesday) in response to the Budget.

On the “National Living Wage”

The Resolution Foundation welcomed the new ambition in relation to the minimum wage. It will mean a significant pay rise for around 2.7m low-paid workers, many of whose wages are still below the level they were at in 2008.

There is, however, a huge amount of detail to work out. The Low Pay Commission has played a successful role since its inception and it is absolutely vital – as the Resolution Foundation review of the future of the minimum wage (led by George Bain) argued ­– that they retain the freedom to determine the pace at which the wage floor moves towards its new ambition (60% of the typical wage). It should also retain the freedom to depart from this if economic circumstances demand it.

The Foundation notes that the government’s 60% ambition differs in an important way to that set out in its review. The former focuses on the wages of the over 25s, whereas the Bain review looked at the wages of all workers (including the young).

The Foundation also stressed that the National Minimum Wage (and Living Wage) and tax-credits complement each other. The current Living Wage would have to rise to a significantly higher level in the absence of in-work support.  For instance, the London Living Wage would jump from £9.15 to £11.65 without any in-work support. Even without taking account of today’s cuts to in-work support, RF estimates that the current national Living Wage would rise to £10 by 2020.

On tax and benefit changes

The cuts to working age welfare will delay the living standards recovery for many low-income families. The Foundation warns that cuts to the income disregard in tax credits and ‘work allowances’ in Universal Credit, together with a more rapid clawing back of tax credits as earnings rise, will weaken the incentive both to enter work and earn more.  This will also make it harder for families to earn their way back to their current position after losing out from tax credit cuts.

Some families will find that the introduction of the National Living Wage offsets these welfare cuts, but for many the gains will fall far short of the losses.

The Resolution Foundation has modelled the impact of the introduction of the National Living Wage alongside changes to tax credits, housing benefit and income tax thresholds on several typical family types. It finds that by the end of the parliament:

  • low earning single parent with one child, working 20 hours a week at £9.35 an hour, will be £1,000 a year worse off. That is, the gain associated with the increase in the personal tax allowance is more than offset by reductions in benefit entitlement. To offset this fall in disposable income would require an increase of £3,400 in earnings – equivalent to a one off 35% rise in earnings, 15 years of steady 2% pay rises, or increasing their hours by 7 hours a week.
  • low earning dual-earner couple with two children both earning £9.35 an hour will be £850 a year worse off. They would need a one-off rise in earnings of 10 per cent to recover these losses, equivalent to 5 years of steady 2% pay rises or a 5 hour increase in the second earner’s weekly working time.
  • middle earning dual-earner couple without children where both earn £15 an hour will be £350 better off as a result of increases in personal tax allowance.
  • More examples are in the annex.

Further cuts to tax credits and Universal Credit for new claimants – removing the first child premium and restricting support to two children – mean some families moving on to the benefit after April 2017 will see far greater losses than those set out above. For example, a low earning couple with three children making a new claim would be £3,600 worse off following the tax and welfare policies set out in today’s budget.

The Foundation welcomes the Chancellor’s’ moves to act on tax relief, notably by restricting interest-rate relief on buy-to-let properties. It has called for a wider review of the UK’s £100bn of tax reliefs and argued that control of tax expenditure should make a larger contribution to deficit reduction.

Gavin Kelly, Chief Executive at the Resolution Foundation, said:

“Any action to tackle the UK’s low pay problem is to be welcomed and the scale of the proposed increases in the minimum wage is highly significant. It’s vital, however, that this is taken forward in a way that builds on the expertise of the Low Pay Commission and gives them freedom to determine how best to move towards this new ambition.

“However, by concentrating £12bn of cuts from a limited range of working age benefits, the Chancellor has focussed a disproportionate part of that pain on the working poor.

“We shouldn’t think that a higher minimum wage will compensate all low income working families for their losses – many working households will be left significantly worse off.”

“It will take many struggling families years before they earn their way back to their current position. And lost under the budget headlines are a range of measures that will make work less attractive by increasing the effective tax-rate facing low-income families.”

Professor George Bain, first Chair of the Low Pay Commission, said:

“When I chaired the first Low Pay Commission, we weren’t sure if the minimum wage would survive. That’s why it’s a proud moment today to see this big pay increase for low earners, especially given the minimum wage is still below its 2008 level.

“As these proposals are debated and taken forward, it’s crucial that the Low Pay Commission’s great expertise and freedom to reach its own judgements is kept at the heart of the process.”

On the public finances

Relative to its previous plans, the Government has moved its target date for overall budget surplus out by one year to 2019-20. By letting economic growth do more of the work on deficit reduction, the Chancellor has introduced a significant fiscal loosening relative to the plans set out in March.

As a result, the Resolution Foundation expects cuts to public services to continue at broadly the same pace as in the previous parliament. It estimates that spending on public services is set to be around 16 per cent lower in 2019-20 in real-terms than it was in 2009-10.

Matthew Whittaker, Chief Economist at the Resolution Foundation said:

“The spending ‘rollercoaster’ of the March Budget appears to have been replaced by a smoother – if still turbulent – flightpath. The decision to delay budget surplus by a year means that economic growth can make a greater – and welcome – contribution to deficit reduction. Nevertheless, the various welfare and public service cuts outlined in the Budget remain extremely tough.

“With the Government accepting a higher level of borrowing over the middle part of the Parliament than it had previously indicated, the pace of departmental budget cuts is now set to broadly match the one recorded in the last Parliament. Clearly though, maintaining a steady pace becomes more difficult with each passing year. That’s particularly the case given the ongoing protection for services such as health and schools – a list to which we can now add defence.”

On productivity

The Resolution Foundation welcomes the introduction of an apprenticeship levy, which will provide vital investment in skills. It looks forward to further details of policy action on boosting productivity.

David Willetts, Executive Chair at the Resolution Foundation said:

“It’s absolutely right to get employers to fund more apprenticeships. Too many simply aren’t investing enough in their own staff. This measure will provide vital investment in skills, a key way to boost productivity and raise living standards over the long-term. I warmly welcome it.”

On future pay

The challenge of securing stronger wage growth remains huge, with typical wages not set to return to their pre-crisis level before the end of the decade. Using its own RPIJ forecast the Foundation estimates that typical real wages will rise to £440 by 2020, still £20 a week short of its peak.

The impact of key tax and benefit changes on different family types

BUDGET table

BUDGET median wages

BUDGET departmental spending