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30 September 2016updated 29 Jul 2021 3:27pm

Theresa May wants to help “just managing“ families? Start with the 14p stealth tax

The rise in housing costs is the equivalent of a hike in income tax for poorer working families. 

By Torsten Bell

Judging new governments‎ is hard. Without decisions taken, let alone results delivered, we are left to judge the early months of an administration by the purpose that ‎motivates it. On this measure, how does the first three months of Theresa May’s Government measure up? 

First and foremost of course this Government is about delivering Brexit. But, just this once, let’s leave Brexit aside – after all, that’s a choice made by the British people, not May. ‎Instead, let’s consider the second pillar of her government – an intention to focus support on “just-managing families”. This is a group she has broadly described as working but not well off, with low incomes, but not the very poor who are reliant on benefits. 

So who are the roughly 6m low and middle income families that fit this description? Five in six of these families have at least one member in full-time work, with nearly four-fifths of those workers earning less than the typical worker’s wage of £21,000. And while they represent a third of the workforce, only a minority are in professional jobs and they are half as likely to be graduates as those on higher incomes.

These families are also doing the vital (and expensive) job of reproducing Britain – 40 per cent have kids. As a result tax credits do matter to this group – averaging £3,500 a year for just managing families with children.

If that is who “just managing” families are, how exactly are they managing in 21st century Britain? Badly is the short answer. Here are three things to keep in mind:

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1. Pay

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First, this part of Britain has seen no income rise in the last decade. While individual households will obviously have received some pay rises during that period, a like for like comparison of families in this group over time shows a lost decade of growth – typical incomes for the group in 2014-15 only just surpassed the level in 2004-05. Now, most of Britain hasn’t seen strong income growth over this period, but this group has been particularly badly hit by the combination of a slowdown in earnings growth in the mid-2000s, big falls in incomes following the financial crisis, and cut backs to tax credit support in recent years.

These changes have overcome the boost to incomes that the fast employment growth of recent years has provided, or the signature tax cuts of the last parliament. After all, for many of this group, their ability to boost their incomes is severely constrained by the fact that they only keep 27p of each additional pound earned if they pay tax and receive tax credits. 

2. Housing

Second, living standards are also about outgoings. Housing is the biggest expenditure that families face. It’s hard to overstate how damaging the impact of rising house prices, falling home ownership and thus soaring housing costs has been. 

These families are now spending almost a quarter of their income on housing, up from 18 per cent in 1995. To put this catastrophe in perspective, for a dual-earning, low-to-middle-income couple with children, it’s the equivalent of a 14p income tax rise. If a government openly announced a policy like that, there would be riots on the streets, but it is successive governments’ failure to see homes built that lies behind much of these families’ status as “just managing”.

3. Savings

Third, what do overall spending patterns by low and middle income families mean for their ability to save? This is a key determinant of a families’ sense of whether they are just managing, or making progress. On average, these families actually spend 101 per cent of their income each week, with nearly half going on the basics of housing, transport and food. The result is that most report having no savings or assets at all and two-thirds of families have savings equivalent to less than one month’s net income. This matters a lot when it comes to how families manage difficulties, be they large unexpected bills (a broken washing machine) or reduced income (less hours at work).

So the last few years have not been easy ones for just managing families. Squeezed incomes, soaring housing costs, and difficulty getting your head above water to put any savings aside – all are good reasons for the new Government to look very long and hard at what is going wrong in what our country offers. It is a worthy focus for the new Government. But it is not an easy one. Just as with Brexit, we’ll have to wait and see what policy substance the Government has to address these major challenges. After all, it is worth remembering that Gordon Brown entered Downing Street promising an agenda focused on Britishness and constitutional reform. A financial crisis and expenses scandal later, that agenda had fallen by the wayside.

But just because something is difficult doesn’t mean it’s not the right thing to try to do. Both substantively and politically, a focus on just managing families is the right response to the state of Britain today. This is not least because, in the end, Theresa May and her ministers will not only be judged by the Brexit they deliver, but the Britain they build.