by Steve Beasant on 10 September, 2015
What do you think should be the first duty of government? Maintaining public order? Looking after the vulnerable? Defending the nation? I guess most people would include these and add some preferences of their own.
So let me add one of mine: it should be a duty of government to provide the best possible incentives to work.
Work is not just an economic necessity. It brings identity and self-reliance. It is a spur to ingenuity and a catalyst for growth. Work demands the learning of new skills. It sustains communities and nourishes families. Without work, society crumbles.
So I take an old-fashioned liberal view that supporting work — rewarding and fairly-rewarded work — should be one of the first duties of government.
That is why seven years ago — shortly after I became leader of the Liberal Democrats — the party started arguing in favour of lifting the income tax personal allowance. It seemed a little technical at the time — harder to explain than headline-grabbing reductions in tax rates — but the aim was simple enough: working taxpayers, especially those on low pay, should keep more of the money they earn as an incentive to work.
It seemed indefensible at the time that the taxman was taking money off you the moment you earned £6,035. The rest, as they say, is history: the aim of lifting the tax allowance to £10,000 and beyond became the principal tax reform of the Coalition. It took millions of people on low pay out of paying income tax and proved to be so popular that the Conservatives now claim it was their idea all along.
So I thought, reasonably enough, that this emphasis on promoting work would surely be one of the legacies of the Coalition which would be continued by the new government even if so much else — green jobs, our place in Europe, civil liberties — has been called into question.
Imagine my dismay, then, at George Osborne’s Budget in early July. It was all going so well: an excellent new commitment to lift the minimum wage; a welcome further increase in the personal income tax allowance; and then the bombshell — an extensive dismantling of the working incentives for millions of low-paid workers. Tax credits — a subsidy for work — slashed. Universal credit — an attempt to get people off benefits and into work — shredded to the bare minimum.
The effects will be dramatic. The amount you can earn before you start to lose your tax credits is being reduced to a mere £3,850. As soon as you earn as little as £2,304 with housing costs your universal credit now gets pared back. And the amount you can earn before your child tax credit gets withdrawn has been slashed too.
These are big cuts to the household incomes of the poorest working families. But they also seriously undermine the incentive to work. People will think twice about taking on more work when the amount of money they can keep before their benefits disappear has been so dramatically reduced. Tax credits will be withdrawn much faster than they are now. The “effective marginal tax rate” — the combined effect of the imposition of tax on earnings and the withdrawal of means-tested benefits — for families in receipt of in-work tax credits earning more than a meagre £11,000 will rise to a whopping 79 per cent. That means for every additional pound earned, your family will only get to see 21p of it. Some incentive.
I’m no slouch when it comes to welfare reform: the last government pared back the tax credit bill but did so by focusing the reforms on those who earned much more. These changes remove the work incentives for precisely those low- income families who should be supported to work more.
The increased minimum wage will have almost no effect in softening the impact — most people on the higher minimum wage won’t be on tax credits in the first place. Instead, the burden will fall entirely on the workers at the bottom end — the changes to universal credit alone will cost more than three million low-income working families £1,000 per year.
So where’s the outcry? If Osborne can find millions of pounds to give dead property millionaires an inheritance tax bung and spend £2.5 billion cutting corporation tax, surely fair-minded Britons will object to the poorest workers being singled out in this way?
Why should, say, a single mother with a young son at home working as a nurse for 28 hours a week earning £18,000 lose a staggering £2,000? Or the couple with three children, both working 37 hours a week on the minimum wage, one in a restaurant and the other as a shop assistant, suddenly lose more than £1,200 of their household income? Their income may rise in line with the minimum wage but this will be offset by cuts to tax credits. What possible incentive do they have to work more hours?
Of course it’s easier to get away with this kind of thing if your opponents are licking their wounds — both Labour and the Liberal Democrats were immersed in leadership contests at the time of the budget.
But there are other reasons for the lack of reaction. For a start, almost nobody in the media and the Westminster village — myself included — receives tax credits or is likely to receive universal credit. By contrast, if anyone even mentions the possibility of a “mansion tax” affecting fewer than 0.5 per cent of homes, Westminster hyperventilates.
Tax credits and universal credit are also fearsomely complex — a Rubik’s cube of taper rates, work allowances and eligibility criteria.
Osborne is nothing if not wily — he will have calculated, correctly, that this dramatic impact on the fortunes of working people can best be camouflaged in the technical undergrowth of a system most of his political and media audience don’t care to understand.
But next time you hear the claim that the Government is standing up for working people, just remember — it’s A-grade, 24-carat baloney.Leave a comment