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 For example, increasing the work allowance (the amount a household is allowed to earn before UC starts to be withdrawn) each time the tax threshold is increased would be one way to do it.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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Donald Trump promises quick Brexit trade deal - but the pound still falls

The incoming President was talking to cast out Brexiteer, Michael Gove. 

The incoming President, Donald Trump, told the Brexiteer Michael Gove he would come up with a UK-US trade deal that was "good for both sides".

The man who styled himself "Mr Brexit" praised the vote in an interview for The Times

His belief that Britain is "doing great" is in marked contrast to the warning of current President, Barack Obama, that Brexit would put the country "at the back of the queue" for trade deals.

But while Brexiteers may be chuffed to have a friend in the White House, the markets think somewhat differently.

Over the past few days, reports emerged that the Prime Minister, Theresa May, is to outline plans for a "hard Brexit" with no guaranteed access to the single market in a speech on Tuesday.

The pound slipped to its lowest level against the dollar in three months, below $1.20, before creeping up slightly on Monday.

Nigel Green, founder and chief executive of the financial planners deVere Group, said on Friday: "A hard Brexit can be expected to significantly change the financial landscape. As such, people should start preparing for the shifting environment sooner rather than later."

It's hard to know the exact economic impact of Brexit, because Brexit - officially leaving the EU - hasn't happened yet. Brexiteers like Gove have attacked "experts" who they claim are simply talking down the economy. It is true that because of the slump in sterling, Britain's most international companies in the FTSE 100 are thriving. 

But the more that the government is forced to explain what it is hoping for, the better sense traders have of whether it will involve staying in the single market. And it seems that whatever the President-Elect says, they're not buying it.


 

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.