This week, the Chancellor spoke to staff working at a supermarket depot in Sittingbourne, Kent, about changes to the tax and benefits system. But would staff at Sittingbourne really be better off as a result of Osborne's tax and benefits changes?
This week, the Chancellor spoke to staff working at a supermarket depot in Sittingbourne, Kent, about changes to the tax and benefits system.
He told the assembled staff that nine out of 10 working families would be better off from this April as a result of the government’s reforms, which were “all about backing people like you“.
It so happens that the same supermarket depot is currently recruiting warehouse operatives. The job pays up to £6.80 per hour. For a 40 hour week, that’s around £272 per week, or £14,200 a year, before tax.
So would hard-working staff at Sittingbourne really be better off as a result of changes to the tax and benefits system?
Suppose the successful applicant is a single dad with two children. He privately rents a house for £120 a week with a council tax bill of £25 per week. He’ll pay tax on some of his earnings, but the family also receives significant benefits and tax credits to help them get by.
If he got the job before this month’s changes, his overall income after tax would be around £431.50 a week. While our single dad pays tax of around £38.50 per week, he receives support through tax credits, child benefit and housing and council tax benefits totalling around £223 per week.
Without the government’s changes to the tax and benefits system, at this rate of pay, the family’s overall income would be around £453.50 a week by April 2015. But with these changes, their income will drop to around £439.50 a week – a loss of nearly £750 for the year 2015 alone.
The government is increasing the personal allowance — the amount you can earn free of income tax — to £10,000 a year for everyone by 2014. But our Sittingbourne dad will gain very little from what the Chancellor has called the “largest tax cut in a generation”.
Even though the family will gain about £5.90 per week in earnings after tax as a result of the higher personal allowance, by being granted extra income after tax, they will lose out because they will be entitled to less help with Housing Benefit and Council Tax benefit.
In fact, about 85 per cent of the gain from the increased tax threshold is lost straight away, meaning the family will gain only around 88p per week – barely enough for a loaf of bread – as a result of the Chancellor’s changes.
In fact, the government is just giving with one hand, and taking away with the other. If the government is serious about making work pay, it needs to make sure that benefit recipients get to keep any additional help provided through the reduced income tax.
These changes aren’t the only ones that will affect this ‘Sittingbourne dad’.
For example, for simplicity it has been assumed that the localised Council Tax Benefit scheme will be as generous as the national scheme operating in 2012. In fact, in Sittingbourne, working claimants will see their help with Council Tax reduced by 15 per cent.
In addition, as a result of the abolition of crisis loans through the Social Fund, if the family gets in serious financial crisis, they will no longer be able to apply for help in the form of an interest free loan. Instead they will have to rely on a local service, which will only offer goods and services, such as emergency food, rather than a loan.
We’ve also assumed that despite being in private rental housing, the household won’t have had the amount of support they received cut as a result of changes to Housing Benefit.
But the Department for Work and Pensions estimates that the vast majority of families in private rental housing are affected and that the average loss for families privately renting two or three bedroom houses in Sittingbourne will be around £10 per week.
When taking into account the raft of other changes, the losses for our Sittingbourne dad could be much greater than £750 per year.
It is not benefits that trap children, it is poverty. With six out of 10 children in poverty in a working family, the benefits system plays a crucial role in alleviating in-work poverty and in helping to make work pay.
Given this, it is unsurprising that, by the government’s own estimates, 200,000 more children – half of whom are in working families — will be pushed into poverty as a result of its 1 per cent limit on benefit up-rating for three years.
I don’t know about nine in 10 families being better off this year. In fact, the Treasury has not given any details yet on how they calculated this.
But many of the Chancellor’s audience, particularly those with children, may be disappointed to discover that “backing people like you” does not match up with the reality they face as they struggle with rising bills and reduced support.
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