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 For example, increasing the work allowance (the amount a household is allowed to earn before UC starts to be withdrawn) each time the tax threshold is increased would be one way to do it.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)

Photo: Getty
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Who will win in Stoke-on-Trent?

Labour are the favourites, but they could fall victim to a shock in the Midlands constituency.  

The resignation of Tristram Hunt as MP for Stoke-on-Central has triggered a by-election in the safe Labour seat of Stoke on Trent Central. That had Westminster speculating about the possibility of a victory for Ukip, which only intensified once Paul Nuttall, the party’s leader, was installed as the candidate.

If Nuttall’s message that the Labour Party has lost touch with its small-town and post-industrial heartlands is going to pay dividends at the ballot box, there can hardly be a better set of circumstances than this: the sitting MP has quit to take up a well-paid job in London, and although  the overwhelming majority of Labour MPs voted to block Brexit, the well-advertised divisions in that party over the vote should help Ukip.

But Labour started with a solid lead – it is always more useful to talk about percentages, not raw vote totals – of 16 points in 2015, with the two parties of the right effectively tied in second and third place. Just 33 votes separated Ukip in second from the third-placed Conservatives.

There was a possible – but narrow – path to victory for Ukip that involved swallowing up the Conservative vote, while Labour shed votes in three directions: to the Liberal Democrats, to Ukip, and to abstention.

But as I wrote at the start of the contest, Ukip were, in my view, overwritten in their chances of winning the seat. We talk a lot about Labour’s problem appealing to “aspirational” voters in Westminster, but less covered, and equally important, is Ukip’s aspiration problem.

For some people, a vote for Ukip is effectively a declaration that you live in a dump. You can have an interesting debate about whether it was particularly sympathetic of Ken Clarke to brand that party’s voters as “elderly male people who have had disappointing lives”, but that view is not just confined to pro-European Conservatives. A great number of people, in Stoke and elsewhere, who are sympathetic to Ukip’s positions on immigration, international development and the European Union also think that voting Ukip is for losers.

That always made making inroads into the Conservative vote harder than it looks. At the risk of looking very, very foolish in six days time, I found it difficult to imagine why Tory voters in Hanley would take the risk of voting Ukip. As I wrote when Nuttall announced his candidacy, the Conservatives were, in my view, a bigger threat to Labour than Ukip.

Under Theresa May, almost every move the party has made has been designed around making inroads into the Ukip vote and that part of the Labour vote that is sympathetic to Ukip. If the polls are to be believed, she’s succeeding nationally, though even on current polling, the Conservatives wouldn’t have enough to take Stoke on Trent Central.

Now Theresa May has made a visit to the constituency. Well, seeing as the government has a comfortable majority in the House of Commons, it’s not as if the Prime Minister needs to find time to visit the seat, particularly when there is another, easier battle down the road in the shape of the West Midlands mayoral election.

But one thing is certain: the Conservatives wouldn’t be sending May down if they thought that they were going to do worse than they did in 2015.

Parties can be wrong of course. The Conservatives knew that they had found a vulnerable spot in the last election as far as a Labour deal with the SNP was concerned. They thought that vulnerable spot was worth 15 to 20 seats. They gained 27 from the Liberal Democrats and a further eight from Labour.  Labour knew they would underperform public expectations and thought they’d end up with around 260 to 280 seats. They ended up with 232.

Nevertheless, Theresa May wouldn’t be coming down to Stoke if CCHQ thought that four days later, her party was going to finish fourth. And if the Conservatives don’t collapse, anyone betting on Ukip is liable to lose their shirt. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.