A tax on aspiration?

The complex new student support system will result in eye-watering effective tax rates for many low-

Governments, like individuals, often like to believe their varying instincts and aspirations all fit comfortably together even when they don't. They prefer to try to keep these tensions under wraps and sometimes don't even like to admit them in private to themselves. And the coalition is a case in point.

One of its favourite claims is that, despite the fact that all sorts of welfare support is being removed from families on middle incomes, when it comes to the very poorest they are doing more than their predecessors. The pupil premium usually gets a mention here, followed by the expansion in student support for the most disadvantaged.

Another cherished claim is that punitive marginal tax rates for those struggling on modest incomes seeking to earn their way up will be reduced - a point  made with great passion by David Cameron in his 2009 Conservative party conference speech when he railed against an example of a 96 per cent tax rate hitting a single mother. At this point, the coalition tends to highlight the Olympian ambition of the Universal Credit and its effort to integrate benefits and tax credits and create a single, smoother means-test in our welfare system. 

A final claim is that it is right and proper to localise decision making about how to allocate scarce financial support – for instance through the decentralisation of council tax benefit.

Many would want to challenge each of these claims; but let’s leave that to one-side. What should be beyond dispute – though this is rarely recognised – is that these three agendas don’t make for comfortable bed fellows; indeed, they don’t really belong in the same room at all. Try and defend them individually if you so wish, but don’t pretend they add up to a coherent strategy.

The recent Child Benefit saga gave daylight to some of these tensions, demonstrating in vivid terms how poorly designed middle-class welfare retrenchment can generate nasty means-testing problems that then have to be mitigated.  As of next January the removal of Child Benefit from households with someone on over £50k will mean a new 50p or higher effective tax rate for these families if they have one child, and 60p for those with two kids. If the Budget hadn’t had so many other highlights the dragging of the 50p tax rate from the super-rich down the income scale would surely have received more notice.  

Now a new report by professor John Hills, perhaps the UK’s foremost authority on the welfare state (together with his LSE colleague Ben Richards), provides us with another dramatic case study of how different policy objectives combine to form a nasty cocktail. The perhaps unintended and unforeseen effect of a shift to greater private contribution in welfare (this time in the form of higher tuition fees), combined with efforts to protect the position of the very poorest (increased bursaries and grants aimed particularly at families with earnings under £17k), and a nod towards localism (universities run their own support system) is to create a new aspiration trap – truly eye-watering effective tax rates hitting families in low-to-middle income Britain sending a child to university this autumn.

This stems from the way in which the complex patchwork of student support gets withdrawn as household earnings rise. Some of the resulting ‘cliff edges’ soar high above those that triggered the Child Benefit row. 

To understand how this will actually play out in practice Professor Hills considers two families each with a child about to go to the University of Oxford. One family has earnings of £17k and the other £44k – so a difference in gross earnings of £27k.  After we take account of the impact of the overall tax and benefit system the difference between these families falls to £13,250. But once we factor in the additional impact of all the different elements of the new student support system the gap collapses to a grand total of £200 (yes, you read that right).

To restate: an initial difference in gross earnings of £27k between (broadly speaking) a low-income and middle-income family is completely wiped out. The withdrawal of student support, together with the tax and benefit system, creates an effective 99 per cent tax rate on earnings between £17k and £44k. There is no point being better off. And that’s before we consider some truly scary effective tax rates at particular points in the earnings distribution (see chart). I think it is fair to say that the coalition hasn’t fully got its head around the politics of this.

And don’t think this is just some quirky Oxford phenomenon, though the issue is most dramatic there (which, to be fair, is because the support on offer at Oxford for those with the very lowest incomes is most generous). Hills surveyed the support at our largest 52 universities representing 60% of all HE students and finds that it is common for small differences in parental earnings to lead to several thousand pounds less support. 

Now, we can ask questions about aspects of this. There will be some parents who couldn’t care less about the financial position of their 18 year old, so they won't view a drop in support as any sort of hit on the family budget. And the report significantly understates the extent to which the withdrawal of some financial support, like cash bursaries and maintenance grants, may feel more like an effective 'tax rise' on the family than others, such as the removal of fee discounts (which may seem like a problem for the student tomorrow rather than the family today). Despite this the overall argument is strong.

The usually understated Hills concludes that despite the towering rhetoric about the what the universal credit will achieve, some parts of government are moving in “precisely the opposite direction”,  giving rise to new poverty traps. “It looks as if we will see a lot more of this in the future.  Already councils have each been told to work out their own way of making savings on Council Tax Benefit, which could result in them withdrawing benefit faster, adding to the poverty trap – but with rates and rules varying across local authority boundaries.  With budgets under pressure, it’s an obvious reaction to withdraw services from those with higher incomes, while keeping means-tested support for the poor. But what may seem a reasonable response to fiscal constraints while trying to protect the poorest in one sphere may overlap chaotically with other attempts to do the same thing”.

If this new twist to the student finance reforms sparks to life, as its impact on household budgets becomes clearer, it will send a shiver down the spine of leading members of the coalition. At the time they took the decision to bring in the new funding system they knew, of course, they were in for some choppy politics and that those on middle and high incomes would take a hit. But I very much doubt they grasped that it would lead to what many of them would consider to be totalitarian tax rates being imposed on families in the so-called striving classes whose kids are aiming high.

Students walk under the Bridge of Sighs along New College Lane on March 22, 2012 in Oxford. Photograph: Getty Images.

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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Debunking Boris Johnson's claim that energy bills will be lower if we leave the EU

Why the Brexiteers' energy policy is less power to the people and more electric shock.

Boris Johnson and Michael Gove have promised that they will end VAT on domestic energy bills if the country votes to leave in the EU referendum. This would save Britain £2bn, or "over £60" per household, they claimed in The Sun this morning.

They are right that this is not something that could be done without leaving the Union. But is such a promise responsible? Might Brexit in fact cost us much more in increased energy bills than an end to VAT could ever hope to save? Quite probably.

Let’s do the maths...

In 2014, the latest year for which figures are available, the UK imported 46 per cent of our total energy supply. Over 20 other countries helped us keep our lights on, from Russian coal to Norwegian gas. And according to Energy Secretary Amber Rudd, this trend is only set to continue (regardless of the potential for domestic fracking), thanks to our declining reserves of North Sea gas and oil.


Click to enlarge.

The reliance on imports makes the UK highly vulnerable to fluctuations in the value of the pound: the lower its value, the more we have to pay for anything we import. This is a situation that could spell disaster in the case of a Brexit, with the Treasury estimating that a vote to leave could cause the pound to fall by 12 per cent.

So what does this mean for our energy bills? According to December’s figures from the Office of National Statistics, the average UK household spends £25.80 a week on gas, electricity and other fuels, which adds up to £35.7bn a year across the UK. And if roughly 45 per cent (£16.4bn) of that amount is based on imports, then a devaluation of the pound could cause their cost to rise 12 per cent – to £18.4bn.

This would represent a 5.6 per cent increase in our total spending on domestic energy, bringing the annual cost up to £37.7bn, and resulting in a £75 a year rise per average household. That’s £11 more than the Brexiteers have promised removing VAT would reduce bills by. 

This is a rough estimate – and adjustments would have to be made to account for the varying exchange rates of the countries we trade with, as well as the proportion of the energy imports that are allocated to domestic use – but it makes a start at holding Johnson and Gove’s latest figures to account.

Here are five other ways in which leaving the EU could risk soaring energy prices:

We would have less control over EU energy policy

A new report from Chatham House argues that the deeply integrated nature of the UK’s energy system means that we couldn’t simply switch-off the  relationship with the EU. “It would be neither possible nor desirable to ‘unplug’ the UK from Europe’s energy networks,” they argue. “A degree of continued adherence to EU market, environmental and governance rules would be inevitable.”

Exclusion from Europe’s Internal Energy Market could have a long-term negative impact

Secretary of State for Energy and Climate Change Amber Rudd said that a Brexit was likely to produce an “electric shock” for UK energy customers – with costs spiralling upwards “by at least half a billion pounds a year”. This claim was based on Vivid Economic’s report for the National Grid, which warned that if Britain was excluded from the IEM, the potential impact “could be up to £500m per year by the early 2020s”.

Brexit could make our energy supply less secure

Rudd has also stressed  the risks to energy security that a vote to Leave could entail. In a speech made last Thursday, she pointed her finger particularly in the direction of Vladamir Putin and his ability to bloc gas supplies to the UK: “As a bloc of 500 million people we have the power to force Putin’s hand. We can coordinate our response to a crisis.”

It could also choke investment into British energy infrastructure

£45bn was invested in Britain’s energy system from elsewhere in the EU in 2014. But the German industrial conglomerate Siemens, who makes hundreds of the turbines used the UK’s offshore windfarms, has warned that Brexit “could make the UK a less attractive place to do business”.

Petrol costs would also rise

The AA has warned that leaving the EU could cause petrol prices to rise by as much 19p a litre. That’s an extra £10 every time you fill up the family car. More cautious estimates, such as that from the RAC, still see pump prices rising by £2 per tank.

The EU is an invaluable ally in the fight against Climate Change

At a speech at a solar farm in Lincolnshire last Friday, Jeremy Corbyn argued that the need for co-orinated energy policy is now greater than ever “Climate change is one of the greatest fights of our generation and, at a time when the Government has scrapped funding for green projects, it is vital that we remain in the EU so we can keep accessing valuable funding streams to protect our environment.”

Corbyn’s statement builds upon those made by Green Party MEP, Keith Taylor, whose consultations with research groups have stressed the importance of maintaining the EU’s energy efficiency directive: “Outside the EU, the government’s zeal for deregulation will put a kibosh on the progress made on energy efficiency in Britain.”

India Bourke is the New Statesman's editorial assistant.