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13 July 2015

What does the budget mean for families?

The government is quite literally giving (to higher income families) with one hand and taking (from low income households) with the other. 

By Giselle Cory

Given the extensive pre-briefing ahead of the Budget, no one expected today to be a bed of roses for families on a low to middle incomes. Cuts to tax credits (TC) and universal credit (UC) will hit low income families the hardest. But the way these cuts are being made will undermine some of the stated objectives of the government – to encourage work, to give parents choices about childcare, and to promote gender equality. 

The Budget included a raft of measures to cut £12 billion from the welfare budget. The bulk of this has come from cuts to in-work benefits that help to make work pay, and cash transfers that are designed to ensure no child grows up in poverty. The government will cut completely the family element of the child tax credit and UC. As with all TC and UC elements, this is means-tested so it goes to the lowest income families, including those out of work. Families will also face a freeze in TC, UC and child benefit. 

None of this is good news for families – but it is consistent with the government’s chosen means of reducing the deficit. The same cannot be said of the increase in the TC taper rate (from 41 per cent to 48 per cent). This increase means that families will keep less of every extra pound they earn – taking into account benefit withdrawal and tax, low income families will keep as little of 20p of every extra £1 they earn. (It is also noteworthy that the increase in the personal tax allowance will benefit those on UC less than others, because UC entitlements are based on net not gross income, which means that every pound gained by lower taxes is offset by lower benefits – a measure presented as a boon for low-paid workers actually benefits them least of all.) High taper rates reduce or remove the financial incentive to work, because only a fraction of the increase in earnings goes into people’s pockets. The proposed decrease in income thresholds (the amount families can earn before their income affects the amount of support received) for UC and TC will have a similar effect.

These may sound like technocratic elements of an already complex welfare system (and they are) but they can have a big impact on families’ decisions about who goes to work and for how long. Even before these cuts, UC had very poor work incentives for second earners (the parent earning less in a couple family). These tend to be low income women – a group facing enough barriers to work without the government adding another one. This aspect of UC, exacerbated by the Budget, inhibits efforts to achieve gender equality. When the government first presented plans for UC, they were obliged to present an impact assessment showing who would be affected and how. That assessment is now out of date. DWP needs to present a new one, in order to be transparent and to meaningfully fulfil its legal duty to report on the impact of government policy. 

Two other changes strike me as odd. Firstly, under UC the government will now require parents to work when their children turn 3, and to prepare for work (training, interview prep, etc.) when their youngest turns 2. This includes lone parents. At the moment, this threshold is 5. Yet through the changes to taper and thresholds, the government has at the same time cut the amount of childcare support on offer, as these tapers/thresholds reduce the whole bundle of support for which a family is eligible, including the childcare element of the UC.

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The Budget states that these increases in conditionality come as a result of improvements in childcare support. Yet that improved support will not be available to the families now facing tougher benefit conditions, because it consists of (a) the extension of free childcare which is only for 3 and 4 year olds in working families, meaning that job seekers won’t benefit whilst they look for work and (b) tax-free childcare which benefits only richer families, not those on TC or UC. That doesn’t add up. Lastly, it is parents of young children that need flexible working options the most – and good quality flexible jobs are near-impossible to find. So this adds up to less support, still few decent work options, and yet more conditions (and likely, more sanctions) for parents of young children. 

The government is also drawing a line of what is an acceptable number of children for the modern British family in receipt of tax credits. The child elements in TC and UC (the extra bit you get to help deal with the additional costs of a child) will only be provided for two children. Have three and you don’t get extra support. The government is putting down markers for what low income families should look like. If Ministers are making moral judgements of this kind, they should be explicit about it.

Together these cuts will bring in £27 billion to HMT over the course of this Parliament. (As a side note, tax credit changes in response to fraud, error and debt will net £145m, or less than half a percent of the cuts.) This doesn’t include the cuts to housing benefit or employment support allowance, which will, in many cases, affect the same families. 

Other changes will partly offset the cuts. Increases in wages are good news, and increases in the tax-free allowance, though broadly regressive, will nonetheless help the majority of families to some degree. But for low income families with children these increases will be more than clawed back by cuts to tax credits and universal credit- the more you earn, the more you lose. The government is quite literally giving (to higher income families) with one hand and taking (from low income households) with the other. 

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