On Tuesday the Chancellor will give his Spring Statement, providing an economic update and reporting on the vital signs of the UK economy. Philip Hammond is already under pressure from Conservative MPs to loosen the purse strings and help the worst off.
By focusing on working families with low incomes, the Government can ensure that work pays, and that families can build a better life for themselves. Low income families have borne the weight of measures to balance the books since 2010 – but with little earnings growth, the cost of essentials rising and changes to tax credits, many have been running just to stand still. That isn’t right and the Government should take action.
Universal Credit (UC) is a tool the Government can use to provide help to people in work and in poverty. Allowing working people to keep more of what they earn by increasing the Work Allowances in UC would help support workers on low incomes while also helping encourage more people to move into work.
Restoring the Work Allowances in UC to their original design (before they were cut in George Osbornes’ 2015 Emergency Budget) would benefit some three million low-income working households, and protect 340,000 people from falling into poverty in 2020/21. This must be a priority for the Chancellor as he considers what to do with any additional headroom in the public finances this must be a priority.
Looking at what’s changed since 2010, here’s what we, at the Joseph Rowntree Foundation, found:
Earnings growth has been low since the early 2000s, and virtually non-existent since the recession, making it harder for people to work their way out of poverty. However, since 2014, weekly earnings have picked up for those at the bottom. This should be helping, but it swims against a tide that is pulling in the opposite direction, and the likelihood of experiencing in-work poverty has increased for families with children.
Cuts to support and rising costs are eating into incomes
Low-income working families rely on tax credits to top up their earnings. But cuts to tax credits and the Government’s decision not to increase them in line with the rising cost of essentials means they give less help than they used to.
This means that a lone parent with two children who works full time on the National Living Wage (NLW) and a couple with two children where one parent works full time on the NLW and the other doesn’t work will both be £450 a year worse-off compared to families with equivalent earnings in 2010. This loss rises to £600 a year for families with two children where one parent works part time and the other full time, both on the NLW.
Rising costs are also putting pressure on family budgets. Essentials such as food and energy take up more of the budget of low-income families – they spend twice as much of their income on food and energy compared to high-income families. When prices rise rapidly families’ choices are restricted; they either have to cut back, go without or borrow to make ends meet.
Families at the bottom are getting left behind
The recovery from the recession has been slow, but incomes are finally rising again. However, incomes at the bottom are growing more slowly than average, meaning low-income families are being left behind. The combined effect of cuts to support for low-income workers and the pressure of essentials going up in price means working people are struggling to make ends meet. Between 2010/11 and 2015/16 the incomes of low-income people increased by £200 per year whereas the middle gained £850. The top still gained £1,200 despite their income only increasing by a similar proportion to the bottom.
Universal Credit is an opportunity to release families from the grip of poverty
It is not right that working families are locked in poverty. Universal Credit (UC) presents an opportunity to right this wrong, but the rules of UC have been changed, and people now get to keep less of their earnings if they work. For example, a lone parent (who is getting help with housing costs) could earn up to £263 a month before their UC would start to be reduced under the original design of the system, but this has now been reduced to £192 a month. This makes it harder for them to escape the grip of poverty and build a better life.
The Chancellor should restore the Work Allowances in UC to their original level benefiting some three million low-income working households, and protect 340,000 individuals from falling into poverty. It would cost an estimated £3.4billion in that year.
This should be a priority for new spending, although some of the cost could be met by cancelling further increases to the income tax personal tax allowance. This is an expensive measure that mostly benefits people on higher incomes, whereas increasing the work allowance targets help at those that need it more.
By supporting working families and allowing those on Universal Credit to keep more of their earnings the Chancellor has the opportunity to put into practice the Prime Minister’s pledge to be on the side of ordinary working families.