Economics, politics and the reality of the 'squeezed middle'

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The onslaught against working families continues

The government's response to youth unemployment will squeeze the "squeezed middle" even further.

If today's report proves correct then tomorrow Nick Clegg will announce a further blow for low-to-middle income families in order to pay for a new programme for the young unemployed.

Let's start with the better, latter, half of that sentence. The new programme will, according to insiders, walk and talk like Labour's "Future Jobs Fund", which offered incentives to employers to take on 18-24 year olds who had been out of work for more than 6 months. In case it has passed you by, this is the very programme that David Cameron likes to mock as being profligate and ineffective. Hence the new coalition version of it will under no circumstances be called by the same name (no doubt some Whitehall wag would have proposed the moniker "the fund for future jobs" -- but I'm guessing coalition ministers will have screened that out).

We'll find out tomorrow what the scheme looks like but if, as seems likely, the coalition has decided to swallow its ideological opposition to wage subsidies going to firms in order to encourage them to take on the young unemployed, then that is to be welcomed -- though it is scandalous that it's taken youth unemployment to reach 1 million to bring this about.

Now let's turn to how the nastier element of tomorrow's promised announcement: how it is to be paid for. Assuming the FT hasn't got it wrong, then the money will be found by the decision not to uprate tax-credits in line with inflation. Which is odd, iniquitous, and revealing all at the same time.

 

It's a bit odd because the Treasury has already banked the savings from freezing the working tax credit for the next three years. Which leaves the other big area of spending: child tax-credit. But here the coalition has sought to burnish their progressive credentials by announcing that they will over index the child element for the next few years (in an attempt to demonstrate some commitment to the child poverty target). Doubtless HM Treasury will have some wheeze up its sleeve for changing the indexing system for this child tax-credits - perhaps by uprating in line with earnings for this year, not inflation. But if this is the case they will face the charge they have broken with the spirit of the key spending commitment they have made on helping families with low-income children.

It's iniquitous because this will hit precisely those families who have already been on the end of the most severe squeeze of their lives. This April they already saw a major hit to support for childcare paid out via the tax credit system. This, along with other changes to tax-credits, mean that a single parent on £28k with two kids is losing £1,300 this year; or a couple with two kids on a joint income in the high £30ks is losing £2800 this year. And these cuts are a mere warm up for more than £1bn of further reductions to tax-credits that have already been announced and will commence in April 2012 - all of them targeted at the same families.

And let's not forget yesterday's news that median wages have plummeted 3.5% in real terms this year, far more for the low paid. So families whose wages are falling at a rapid rate, who have already been severely hit by April's budget cuts, and will be made poorer still in April 2012, are about to be told that they are first in line to take a cut to pay for a new programme.

Which is why this decision is also revealing. It demonstrates very clearly the knee-jerk response of ministers when pressed to find resources for a new funding pressure: take it from families getting tax-credits.

To be clear, I'm all for more action to deal with youth unemployment -- indeed, I suspect that I'd want something more ambitious than what is likely to be announced tomorrow. And that, of course, has got to be paid for. But not by low-to-middle income families.

It's not as if there are no alternatives. Labour will pursue their line that this should be funded through a tax on bankers' bonuses - and for all its well rehearsed feel, this will still strike a chord with many. But if the coalition didn't want to turn to the City there are other principled alternatives. The £7bn-£8bn spent on higher rate pension tax relief? Or stopping affluent pensioners receiving winter fuel allowance?

If this goes ahead, then don't let anyone say there was no alternative. Youth unemployment could be tackled without a further unnecessary squeeze on low-to-middle income Britain.

 

Tags:Economy