Gordon Brown devoted just 62 words to the two measures in last Tuesday’s Budget that will have the greatest long-term impact on Britain’s tax and benefit system.
The first is the integrated child credit, which will systematise and entrench Brown’s so far ad hoc efforts to tackle child poverty. The second is the employment credit, which should help everybody in low-paid jobs to raise their heads above the poverty line, but which could also make it hard for them to increase their living standards much further. (Confusingly, the much-vaunted working families tax credit, which has not yet come into full effect, will be absorbed into these two new credits.)
Why was the reference so cursory? Partly, perhaps, because these huge changes will not come into effect until 2003 – well, after the next general election. In the meantime, the Chancellor is working hard at wooing Middle England voters with more tangible promises of resources now for education (apparently to be mailed directly to head teachers by the Chancellor rather than getting lost in local-authority accounts), and of sustained increases for the health ser-vice. But he also had plenty of cause to trumpet the help he has given to needy groups over the course of the present parliament.
The bad news is that he has steadfastly refused to do what poverty campaigners would most like: give poor people an automatic share of rising affluence by reconnecting benefit upratings to average earnings. The good news is that he has been generous to a wide range of specified groups that each sound deserving – such as children, working parents and old people. Between them, they make up a large proportion of poor households (and the 2003 changes will bring in some of the rest). But justifying help for each separately is politically more appealing than giving a “welfare handout” through across-the-board benefit increases.
First, take children. The working fami-lies tax credit, which will become fully operational next month, helps obviously deserving families where parents are struggling on low earnings, and takes many hundreds of thousands of children out of poverty very quickly.
But what about the poorest of all – the two million children in families without any work? The Chancellor announced last year that a new child tax credit would be available only to parents with jobs. It looked then as if children in non-working families could continue to be neglected, just as they have been neglected for the past 20 years.
The 2000 Budget confirms, however, that Brown enjoys being a generous uncle to children in the poorest families, almost as much as he likes playing the stern taskmaster to their parents, using carrots and sticks to get them to work. The table on page 10 shows just how much difference the first Labour term will have made to poor families, working or not.
In 1997, no group of parents received anything like enough money from the government to cover the true cost of bringing up children, as estimated in research by Loughborough University. Parents of young children who relied entirely on benefits spent, on average, about 50 per cent more than their child allocations. They often sacrificed their own needs or went into debt to make up the difference. Their allowances have now gone up to something close to what they actually spend on their children. So have allowances in the working families tax credit.
The figures in the table are fairly broad estimates; they slightly understate actual spending on the first child, which tends to be higher than the average for subsequent children. But they show how the £4 a week boost in child allowances announced in the Budget was part of a fundamental improvement in the adequacy of such payments. Given that so many parents neglect themselves in order to protect their children from the worst hardship, the improvement is likely to do most to alleviate the sheer misery of being a parent on income support. Combined with Budget measures to help parents to stay at home when their babies are first born, this is all a far cry from the American version of welfare reform, which has been geared to forcing lone mothers back to work.
All this presages integrated child credit, a fundamental change in the whole system. The four payments shown in the table will then become a single payment. Although it will be means-tested, the amount given to non-working and low-paid families will in principle be the same, and will go directly to the mother. At a political level, this will make it more straightforward to address child poverty, without getting mixed up with measures to improve work incentives (again, a huge contrast with the United States). At a practical level, it will for the first time guarantee poor mothers a substantial sum of money, which will not change with family circumstances.
Now for the employment tax credit, which is designed both to alleviate low income and to underpin incentives to work. The working families tax credit offers these advantages only to parents; the new system will extend it to every low-income worker. Even though parents and over-50s might get more generous allowances, the idea that anyone who is low paid gets some kind of top-up potentially transforms the bottom end of the labour market.
This carries dangers. While the minimum wage remains relatively low, the state credits could entrench and exacerbate low pay, as employers realise that paying more than the minimum will have little effect on their workers’ living standards. Much could depend on how sharply the means test is applied, and on how the government reforms housing benefit if it ever gets round to doing so. The problem with too many means-tested entitlements for low-paid people is that most of any pay increase tends to get offset when benefits and tax credits are taken away.
Increased means-testing is also the catch in much of the Chancellor’s largesse to pensioners. It is true that winter fuel payments (with another £50 slapped on this year) and free television licences are age- rather than income-related. But most of the extra money is going to the income guarantee, which is paid to pensioners whose other sources of income don’t come up to a certain level. The income guarantee rises in line with average earnings; the state retirement pension, which people can claim by right, rises only with prices. So pensioners must plead poverty to get a fair share of rising national income, which they hate doing. The Budget puts more pensioners on to means-tested incomes because it raises the amount of savings they can hold while still claiming income support. In the longer term, however, the Chancellor will consider giving at least something to those with pensions somewhat above the minimum income guarantee.
Nobody, then, can complain that Brown is ungenerous to the poor. He has been a redistributive chancellor, helping a wide range of needy groups. But, at the same time, he has completed the move away from William Beveridge’s welfare state, in which security was based on income when you worked and based on insurance payments when you didn’t work.
Britain may be moving back towards something more resembling postwar full employment than anything seen these past 20 years, but it is not a form of full employment that is providing Beveridgean security. For those among the retired, sick or unemployed who lack private means, the remnants of the insurance system rarely staves off poverty. Nor are pay rates enough to do so for those in work.
This is why we have a burgeoning edifice of means-tested benefits and credits, which was extended substantially in this Budget.
It may be the only realistic way to fight poverty in the 21st century. But as a strategy it is not without risks.
The writer is special adviser to the Joseph Rowntree Foundation
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