Issue date
21 Oct 2015

21 October 2015

New research commissioned by the TUC, and published today (Wednesday), shows that the Prime Minister is wrong to claim that low-paid workers will be compensated for tax credit cuts by changes to the minimum wage and tax allowances.

The analysis, which uses the IPPR tax-benefit model, focuses on changes announced in the July 2015 budget. It finds that the losses faced by working families on low incomes are much greater than any gains they can expect.

When the tax credit cuts hit families next year, the direct financial loss to working families in the poorest quintile will be £560 a year on average; and those in the second poorest quintile will be made £670 worse off. By contrast, working families in the richest quintile will lose only £10 on average.

The Prime Minister has claimed that the losses from his government’s tax credit and Universal Credit cuts will be compensated for by a higher minimum wage and a more generous income tax personal allowance. However, while the tax credit cuts hit next year, the minimum wage will not reach £9 until 2020; and the tax allowance will not reach £12,500 until 2020 either.

Furthermore, the net losses in 2020 for working families on low incomes will be even larger than in 2016 – despite gains from the minimum wage and tax allowances. This is because next year’s cuts to tax credits will be compounded by other future cuts to financial support for working households – for example freezing entitlement rates for working-age benefits like Universal Credit until the end of the parliament.

Even accounting for the higher minimum wage and the higher personal tax allowance, in 2020 working families in the poorest quintile will be on average £1,020 worse-off; and those in the second quintile will be £720 worse off. By contrast, those in the richest quintile will be made £110 richer in 2020 by the government’s tax and benefit policies in the July 2015 Budget.

The government has been criticised by Lord Trefgarne, the head of the parliamentary committee that has scrutinised the regulations to implement the tax credit cuts, for failing to provide an adequate impact assessment. In particular, he has criticised the failure of the Chancellor George Osborne to provide a clear analysis of the immediate impact of the cuts on families, and also the absence of a clear distributional impact assessment to show the extent to which the cuts affect richer or poorer households.

The TUC says that the analysis published today fills these gaps and confirms fears that the cuts will have a very significant negative impact on working families at the bottom and in the middle of the income spectrum.

TUC General Secretary Frances O’Grady said: “People in work deserve a decent income. But instead of helping low-paid families, the government is planning to make them hundreds of pounds worse off each year.

“The Prime Minister needs to come clean. He should admit to families that next year’s tax credit cuts will cost millions of families at least a tenner a week. And he should admit that, even after the minimum wage goes up, they will still be hundreds of pounds a year worse off.

“This isn’t only bad news for families. If you own a business that relies on families having money to spend, then you’re going to take a hit too. That’s what makes it such a bad policy for the economy.

“With so many Conservatives now warning against the tax credit cuts, it is time for the Prime Minister and Chancellor to think again. Next month’s spending review should be used to scrap these unpopular and unfair cuts altogether.”

NOTES TO EDITORS:

Table 1: Distributional impact of tax credit cuts in the July 2015 Budget on UK households in 2015/16

 

average change in annual income (GBP, 2015/16 prices)

 

Overall

Not working

Working

1st (poorest)

-250

0

-560

2nd

-340

-10

-670

3rd

-210

0

-350

4th

-70

-10

-100

5th (richest)

-10

0

-10

ALL

-180

-10

-290

Table 1 covers people still on tax credits (i.e., not yet moved over to Universal Credit) and takes into account the increase to the tax credit taper rate, and cuts in the working tax credit and child tax credit  threshold.

Table 2: Distributional impact of tax and benefit changes in the July 2015 Budget, and increases to the minimum wage, on UK households in 2020/2021

 

average change in annual income (GBP, 2015/16 prices)

 

Overall

Not working

Working

1st (poorest)

-690

-430

-1,020

2nd

-440

-160

-720

3rd

-90

-60

-110

4th

40

-10

60

5th (richest)

100

60

110

ALL

-220

-170

-240

Table 2 assumes all households have been moved from other working age benefits to Universal Credit and that take-up is 100%. The analysis does not include tax and benefit changes yet to take effect that were announced prior to the July 2015 Budget.

- The analysis above does not take into account the government’s proposal to raise the tax threshold for higher rate taxpayers, which was announced prior to the July 2015 Budget. If this policy was taken into account the gains for 4th and 5th quintiles – the richest two quintiles – would be much larger than shown above.

- The government has been heavily criticised over the lack of an adequate impact assessment for the tax credit cuts by the Secondary Legislation Scrutiny Committee. The Committee has a remit to examine the merits of new regulations brought forward by statutory instruments – the form of legislation by which the tax credit cuts will be implemented. As well as the Committee’s most recent report on the tax credit regulations before parliament, correspondence between the Chair of the Committee, Lord Trefgarne, and the Chancellor of the Exchequer, George Osborne, is included in an appendix to the 9th report of the Committee, which was published on 15 October 2015. In a letter to the Chancellor on page 23 of the report, Lord Trefgarne states: “The Committee was concerned that the assessment could have done more to set out the short-term impact on household incomes; and also that the presentation of some of the material, notably on distribution, was difficult to understand, even for those used to economic analyses.” The full report from the Committee can be found here: www.publications.parliament.uk/pa/ld201516/ldselect/ldsecleg/38/38.pdf

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