Spending review will weaken work incentives

The spending review has further weakened work incentives and the financial support that working families really need, reports ippr's Kayte Lawton.

Kayte Lawton is a Research Fellow at the Institute for Public Policy Research (ippr)

We’ve heard a lot from this government about the importance of making work pay – so it was surprising to see a raft of measures in yesterday’s Spending Review that risk reducing work incentives for people on low wages. In the name of ‘controlling the costs of tax credits’, George Osborne presented three important reforms to the Working Tax Credit.

First, both the basic element and the 30-hour credit will be frozen for three years. The 30-hour credit provides a valuable supplement of just over £15 a week to people working more than 30 hours a week.

Second, the Chancellor’s new rules will mean that couples with children have to work 24 hours between them before they can claim working tax credits, with at least one parent having to work at least 16 hours. Currently, couples with children are eligible for working tax credits as long as one partner does a minimum of 16 hours a week.

So working families with children will now have to work an extra eight hours a week to maintain their eligibility for tax credits. In the context of high unemployment and major increases in ‘involuntary’ part-time working, this looks like a tall order. The risk is that we see more families deciding that work doesn’t pay, while some working families will simply lose tax credit cash, adding to already high rates of in-work poverty.

Third, the Chancellor is reducing the amount of childcare costs that can be covered by the childcare element of the Working Tax Credit. At the moment, parents on low wages can claim for up to 80 per cent of their childcare costs, but this will be reduced to 70 per cent from April 2011. Childcare costs remain one of the major barriers for parents returning to work, particularly lone parents.

The cost of childcare continues to increase at a much higher rate than inflation, with parents in England spending an average of £88 a week on 25 hours of childcare. Forcing parents on low wages to pay a greater share of their very high childcare costs could make some parents think twice about work and push others into even greater hardship.

These changes cut right across Iain Duncan Smith’s plans to improve work incentives for those at the lower end of the income scale. Mr Duncan Smith may have reached a settlement with the Treasury to fund his Universal Credit, but, given that this could take up to 10 years to implement, in the meantime the spending review has further weakened work incentives and the financial support that working families really need.

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