Welfare cuts: who will lose out?

The working poor and their children will suffer when the 'merry-go-round' stops


David Cameron is preparing to unveil details of planned welfare cuts, having criticised the current ‘merry-go-round’ system which sees low earners taxed heavily, and then handed money back as benefits. The prime minister said it is time to build a ‘lower tax, lower welfare’ UK.

The government has thus far been frustratingly evasive about exactly where the cuts will fall, but from what we know so far it seems that the working poor will be the worst affected by the changes.

The Resolution Foundation, a think tank that works to improve the living standards of low to middle-income earners, has analysed proposals to cut the value of the ‘child element’ of the Child Tax Credit (CTC) back to its 2003/4 level. It suggests that:

  • Over two-thirds of affected families would be in-work
  • Families with two children would lose up £1,690 a year
  • Almost two-thirds of the cut would be borne by the poorest 30 per cent of households
  • Almost none of the cut would fall upon the richest 40 per cent of households

According to the Resolution Foundation’s briefing, a single parent with two children, working 16 hours a week and earning £7.50 an hour (less than the UK Living Wage) could expect their household income to fall by around £1,690.

Tax credits were introduced by Gordon Brown in his first term as chancellor, with the aim of helping families in low-paid work to make ends meet.

They are often credited with contributing to a major improvement in child poverty; between 1998/99 and 2012/13 the number of children living in families below the poverty line fell from 35 per cent of the child population to 19 per cent.

Critics says that they allow employers to pay poverty wages, in the knowledge that wages will essentially be topped up by the state. But even those critics are doubtful about the wisdom of cutting them.

Mark Littlewood, the director general of the Institute for Economic Affairs, said yesterday:

“Whilst important for getting cash to relatively poor families, tax credits discourage people from earning more money by creating high effective marginal tax rates, leading to bunching around part-time work hours.

“They could be reformed in a way which encourages full-time work. But simply salami-slicing the value of tax credits will hit certain households hard without creating this positive dynamic.”

The Institute for Fiscal Studies (IFS) says that the number of children living in poverty has increased again over the last three years, from 2.3 million to 2.5 million.

In a report written even before cuts to child tax credits were suggested, the IFS predicted that child poverty would rise by 4 per cent over the next five years. Add in plans to undo the work of tax credits, and the future currently looks pretty bleak for the children of low earners.

Ruby Stockham is a staff writer at Left Foot Forward. Follow her on Twitter

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