David Cameron's tax cut is a blunt substitute for properly reforming the benefits system. Photo: Getty
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Raising the tax allowance has reached its limits for helping the poorest families

Labour and the Lib Dems risk making the same mistake.

In his conference speech, David Cameron pledged to take a further 1m of the lowest paid workers out of income tax by lifting the personal tax threshold to £12,500. But if your goal is boosting household income for those at the bottom, how useful is the policy?

On the face of it, anything that enables low income families to keep more of their earnings must help – especially at a time when half of those experiencing poverty live in working households.  Of course for some struggling families this will be the case, but there are three important caveats.

First, the income tax threshold has increased steadily throughout this parliament. By the time it reaches £10,500 next year three million people will have been taken out of income tax altogether. This group of low paid and/or part time workers will see no further gain from raising it higher. If the concern is to boost the income of the lowest-earning individuals, then the limits of this particular policy have been reached for a growing number of people.

Second, the arrival of Universal Credit will sap the power of tax cuts. This is because eligibility for support to working families on low incomes will be assessed on a post-tax basis.  This means that a low-earning household will lose 65p for every £1 it gains from a tax cut. This happens to some extent today as Housing Benefit is assessed on a post-tax basis, although not tax credits. The interaction between different policies needs to be thought about.

This particular problem is relatively easily rectified, however. For example, increasing the work allowance (the amount a household is allowed to earn before UC starts to be withdrawn) each time the tax threshold is increased would be one way to do it. But no party is proposing to do this.

Third, tax policy cannot be looked at in isolation - it must be considered alongside pay, in-work benefits, and the cost of living. Together these factors determine how much disposable income a family has. The picture here has not been pretty for low income families. Since 2008 the cost of essential goods and services increased 28 per cent, far outstripping the rise in the minimum wage (14 per cent) or average wage rises (9 per cent).  And in recent years the value of in- and out-of-work benefits has fallen as they have been uprated by just 1 per cent, more slowly than the general rate of inflation.  This will be further exacerbated by George Osborne’s announcement that working age benefits – including tax credits – will be frozen for two years, which far outweigh any positive impact of tax cuts.

And it is not just the Conservatives that are viewing tax changes as a way of assisting the low paid. Labour is talking about introducing a new 10p starting rate of tax, and the Liberal Democrats are toying with the idea of raising the threshold at which national insurance starts to be paid.

Any one of these measures would put more money in the pockets of some low income working households, but all are a fairly blunt – and expensive – instrument for doing so. Reforming the benefits system so low paid workers in low income families can keep more of what they earn is a more efficient and targeted means of achieving the same goal. But this must be complemented by other measures to address low pay and the cost of essentials.

The key point is that tax will only ever form one part of a strategy to reduce poverty, as JRF sets out in A UK Without Poverty. Improving prospects for people living in poverty has to go beyond changes to the tax and benefits system. This means dealing with the root causes of poverty including low pay, a lack of secure jobs offering enough hours, educational attainment and the high cost of essentials such as energy, housing and childcare.

David Cameron said in his speech it is not enough to pontificate about poverty. He is right. Forecasts show one in four working age adults and one in three children will be living in poverty by 2020. But poverty is not inevitable – with a comprehensive strategy and some political will we can do something about it.

Katie Schmuecker is Policy and Research Manager at the independent Joseph Rowntree Foundation (JRF)

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Why relations between Theresa May and Philip Hammond became tense so quickly

The political imperative of controlling immigration is clashing with the economic imperative of maintaining growth. 

There is no relationship in government more important than that between the prime minister and the chancellor. When Theresa May entered No.10, she chose Philip Hammond, a dependable technocrat and long-standing ally who she had known since Oxford University. 

But relations between the pair have proved far tenser than anticipated. On Wednesday, Hammond suggested that students could be excluded from the net migration target. "We are having conversations within government about the most appropriate way to record and address net migration," he told the Treasury select committee. The Chancellor, in common with many others, has long regarded the inclusion of students as an obstacle to growth. 

The following day Hammond was publicly rebuked by No.10. "Our position on who is included in the figures has not changed, and we are categorically not reviewing whether or not students are included," a spokesman said (as I reported in advance, May believes that the public would see this move as "a fix"). 

This is not the only clash in May's first 100 days. Hammond was aggrieved by the Prime Minister's criticisms of loose monetary policy (which forced No.10 to state that it "respects the independence of the Bank of England") and is resisting tougher controls on foreign takeovers. The Chancellor has also struck a more sceptical tone on the UK's economic prospects. "It is clear to me that the British people did not vote on June 23 to become poorer," he declared in his conference speech, a signal that national prosperity must come before control of immigration. 

May and Hammond's relationship was never going to match the remarkable bond between David Cameron and George Osborne. But should relations worsen it risks becoming closer to that beween Gordon Brown and Alistair Darling. Like Hammond, Darling entered the Treasury as a calm technocrat and an ally of the PM. But the extraordinary circumstances of the financial crisis transformed him into a far more assertive figure.

In times of turmoil, there is an inevitable clash between political and economic priorities. As prime minister, Brown resisted talk of cuts for fear of the electoral consequences. But as chancellor, Darling was more concerned with the bottom line (backing a rise in VAT). By analogy, May is focused on the political imperative of controlling immigration, while Hammond is focused on the economic imperative of maintaining growth. If their relationship is to endure far tougher times they will soon need to find a middle way. 

George Eaton is political editor of the New Statesman.