Friday 31 July 2015

The Budget and Benefit: Part 2 - some thoughts

In my last post, I laid out the basic information about the proposed changes. In this post I try to flesh out some of detail. I will look at the impact on some claimants, and express some opinions.

Some concrete examples

First of all, let's look at some concrete examples of how the changes might affect people. I'm not going to express any opinions here: the figures speak for themselves.

Low-paid workers with children, and out of work couples with children

Alex and Hilary have three children. It's March 2016. Alex works 35 hours per week, and earns the national minimum wage, 6.70 per hour (it is already scheduled to increase from £6.50 in November 2015. They would also normally receive £48.10 per week Child Benefit (which isn't going to rise for four years).

Let's look at how Alex and Hilary's situation develops:
  • In April 2016 Alex starts to receive the national minimum wage of £7.20 per hour: however the income threshold for the tax credit calculation is reduced from £6420 to £3850, and the rate at which income exceeding the threshold is increased from 41% to 48%;
  • In April 2017 the national living wage is increased: from the budget statement this looks likely to be to about £7.75.
Here's a summary of how the changes pan out. (the full calculations are available at the end of this post, in case you're interested, as are the assumptions I've used). I have also included the equivalent out of work benefit payable for comparison. For simplicity, I've not included rent or mortgage costs, and all amounts are rounded to the nearest pound.

March 2016 April 2016 April 2017
Net earnings £219 £230 £243
Child Benefit £48 £48 £48
Working Tax Credit £46 £6 £0
Child Tax Credit £170 £170 £168
Total income £483 £455 £460
- 6% -5%
Out of work benefits £333 £333 £333

Now let's look at two other couples:
  • Jo and Jean situation is the same as that of Alex and Hilary, in every way except one: their third child is born after the start of April 2017.
  • Ali and Jay do not make any claim for tax credits until after the start of April 2017
Here's a comparison of what each couple are likely to get in April 2017:

Alex and Hilary Jo and Jean Ali and Jay
Net earnings £243 £243 £243
Child Benefit £48 £48 £48
Working Tax Credit £0 £0 £0
Child Tax Credit £168 £115 £105
Total income £460 £406 £396

Out of work benefits £333 £280 £270

So if, for example, your third child is due to born in March 2017 but actually emerges in April you stand to lose about £54 per week (about £2800 per year).

You will also notice that an out of work couple with three children who make their first claim for benefits after the start of April 2017 will receive more than £60 less than an equivalent couple would have got before the rules changed, a reduction of around 20%, or £3,276 per year

Low paid worker without children, Universal Credit system

Ahmed single, has no children, and is looking for work. He is on Universal Credit.

Remember that one of the selling points of Universal Credit was that it made the transition into work easier, and made it more worthwhile working. A person on income based Jobseeker's Allowance is, at best, £5 per week better off, no matter how much they earn. If they were on Universal Credit, a specified amount of earnings are ignored: any earnings that exceed this reduce Universal Credit payments by 65p in the pound.

The problem is that, although the amount of earnings ignored for a single, childless, adult, is £111 per month (about £25.54 per week), from April next year it will be zero.

So this is what things look like for someone like Ahmed...

As you can see, for earnings up to about £25 per week, and above around £100 per week, the changes  remove any real advantage gained by introducing Universal Credit in the first place. Between those figures the post-budget version of UC effectively splits the difference. The maximum difference between the JSA rules and the post-budget UC rules is about £21 (and applies to earned income of £80).

Now here's the thing. The earnings disregard has been around for quite a while: Income Support - on which the rules for income based JSA and income related ESA are based - was invented in 1987, and the disregard was £5 then. It hasn't moved. If it had increased in line with inflation it would now be about £12.56. So the best that Universal Credit can offer compared to Income Support at its inception is an £8 per week increase.

For a wider analysis of the financial impacts of the changes, I strongly recommend the following (pdf) presentation by the Institute of Fiscal Studies (IFS):

The IFS predicts, amongst other changes, that changes to the tax credit work allowances will result in 'just over 3m families losing an average of just over £1,000 per year'.  It also notes that the freeze in benefit rates will result in a cut in real terms of 8% between 2013 and 2020.  And if you are in any doubt of the regressive impact of this and the previous government's policies, check out the graphs on the impact of government policy by income (copyrighted, so not here, but there about half way through).

Other observations

This is where I start to let my opinions show a bit more.

The 'National Living Wage'

The introduction by the government of an official 'National Living Wage' (NLW) is, from one perspective, a stroke of genius. By appropriating the term 'Living Wage' the ground is taken from under the feet of campaigner for a living wage: we've got it now, haven't we?

Well: have we? Not quite. The NLW is set at £7.20 for the year April 2016. The Living Wage Foundation sets the following rates for the previous year (i.e. this year) at £7.85 outside London, and £9.15 within London. So the NLW is less than the campaign's living wage: considerably less if you live in London.

The budget statement has a graph (on page 33) showing how the NLW is projected to increase compared with what the minimum wage would have been if it had continued. However it is a bit misleading, as it employs that ever useful trick, the non-zero y-axis. So here's my version...

I don't know about you, but that doesn't really look like a game changer to me.

And, if you're not yet 25, you don't benefit from it at all.

So that's why I put it in 'scare quotes': it's not really a living wage at all, just a rebadged and slightly increased minimum wage.

Removal of extra help for third and subsequent children

I've already discussed this at length in my previous post, possible-reductions-to-tax-credits, and I haven't got much to add here.

However, there's one little detail that needs noting. At paragraph 2.103 of the budget statement, the chancellor says: 'The Department for Work and Pensions and HMRC will develop protections for women who have a third child as the result of rape, or other exceptional circumstances'.

There's clearly a problem here: a woman who has a child as the result of rape will need to prove that she has been raped in order not to be penalised for having the extra child. How will she do that? The Guardian notes that Alison Thewliss, SNP MP for Glasgow, has raised this matter, asking, for example: 'How are you going to prove it? What if there is no conviction [for the rape] as happens in a lot of cases?...What happens if it becomes known in the local community that a woman is receiving tax credits for a third child? What assumptions will be made about that woman and her children?'

Keir Starmer raises a wider question (as comment in The Guardian): 'What about mothers who have a third child because of ongoing abuse within the relationship?' As he goes on to note: 'Power lies at the heart of most domestic abuse, and that includes power over sex, when to have children and how many'.

As it happens, I'm not completely unsympathetic to the government's wish to disincentive large families. However any change needs to be brought in via a much subtler tool than this one, and one that doesn't produce such problematic consequences.

Young people

What have young people done to deserve their treatment by the Chancellor? They will normally now not be entitled to any help with rent between the ages of 18 and 21, and will have extensive extra requirements placed on them if they want to carry on getting Jobseeker's Allowance or Universal Credit. They will be expected to participate in 'an extensive regime of support' from the outset of their claim: obviously 'support' here is a weasel word, which translated means 'hurdles, obstacles, meaningless check-box exercises, and opportunities for losing benefit'.

I can only assume that they are being targeted because, as generalisation, and as a result of disenchantment with conventional politics, they are relatively unlikely to vote. If the young start ever voting in significantly greater numbers, the government better beware!

And finally, that 'Merry-go-round'...

Before the budget was unveiled, the BBC reported the Chancellor as saying that 'the low paid would be compensated by tax cuts in an effort to end the "merry-go-round on which people pay their taxes and then get back benefits" and firms would be encouraged to pay higher wages'.

There are two different issues conflated here.

The first is the assertion that claimants are being taxed on the one hand, and then receiving tax credits and benefits on the other, and that this is ridiculous. This argument is disingenuous: a person on the NLW will be receiving paying very little tax anyway. There is no 'merry-go-round' here, except insofar that richer people pay tax which then helps poorer people: I may be naive but I regard that as a Good Thing.

The second issue is the - legitimate - concern that tax credits are, in effect, subsidising employers. However the implication that, by reducing tax credits, employers will increase wages to balance this, is unconvincing. So unconvincing that the government never quite says this.

So the working poor will see their income reduced, and the wealthy will be able to carry on making money. And as for the non-working poor: who cares what happens to them? You do. I do. But who else?

Appendix - details of calculations 

Bank of England inflation counter:

Monday 13 July 2015

The Budget and Benefits: Part 1 - the changes summarised

In last week's budget social security was centre stage, as reducing benefit expenditure seems to be the government's preferred route for deficit reduction. George Osborne's target is to reduce annual welfare expenditure by £12billion, although his initial target for fulling achieving this of 2017-18 has been delayed to 2018-19.

But what are the details? It's easy to lose these in all the political and media spin: some changes have been given greater prominence while others have been largely ignored. I've tried to lay out all the main changes here. I've also included some things, such as the 'living wage' and changes  to social housing rents, which are not benefits but are likely to have a significant impact on many claimants.

You can look at the details for yourself. The government has published the Summer Budget 2015 here: Most of the benefit related changes appear in the section headed 'Rewarding work and backing aspiration' (sigh).

In an attempt to keep this to a manageable length:

  1. All changes come into effect in April 2016 except where otherwise specified;
  2. Changes to Universal Credit that simply mirror changes in other benefits are marked '[& UC]'. 
  • There will be no inflationary increase in April 2016, April 2017, April 2018, and April 2019. The following are exempt from this freeze:
    • disability, carer, and pensioner related  benefits, elements and premiums;
    • Statutory sick pay, maternity pay, etc.
Changes to tax credits for new and current claimants
  • The income taper will be increased from 41% to 48% of gross income: in other words, for every pound over the threshold figure the claimant's tax credits will be reduced by 48p, rather than 41p (before 2011-12 it was 39%);
  • The threshold figure (see previous bullet point) will go down from £6,420 to £3,850: this means that any income over £3,850 will be taken into account now;
  • The income rise disregard will be reduced from £5,000 to £2,500 (at present, a claimant's income can rise by up to £5,000 during a tax year without affecting amount of tax credits paid for that year - this will change to £2,500);
  • No child element will be paid in respect to third (or additional) children born after April 2017. There will be exceptions for multiple births and disabled children. Compared to 2015-16 figures, this will reduce the maximum annual entitlement by £2,780 per child; [& UC];
  • The powers available to HMRC to recover overpayments will be widened.

Changes to tax credits for new claimants only

  • The family element (currently worth £545) will no longer be included for families whose first baby is born in April 2017 or later (I suppose this could also apply to existing claimants of Working Tax Credits only, but who don't start a family until April 2017). [& UC]

Employment and Support Allowance

  • For new claimants after April 2017 there will be no work-related activity component (currently £29.05). At present, after the initial assessment period, claimants  who are assessed as being potentially able to work in the future will usually receive £102.15 per week. New claimants affected by this rule will only receive £73.10 per week. [& UC]

Housing Benefit and social housing rents

  • Backdating will be limited to a maximum of four weeks (compared with a possible maximum of up to six months currently, in some circumstances);
  • For new claimants, or current claimants who start a family, there will be no family premium (currently worth £17.45 normally); [& UC]
  • There will be no personal allowances for children amounts in the Housing Benefit calculation to take account of third (or subsequent) children born after April 2017 (the same exceptions apply as for tax credits child elements); [& UC]
  • Social housing rents will decrease by 1% a year for four years;
  • Social housing tenants whose income exceeds £30,000 (£40,000 in London) will be required to pay a market rent, or near market rent (although as words in this section include 'consult', 'set out the detail', and 'due course', suggest that the timetable for this change is uncertain).

Mortgage Help (applicable to most means-tested benefits)

  • Claimants will normally have to wait 39 weeks before mortgage help begins (in fairness, the current 13 week wait was applied as a recession related provision, and was always intended to be temporary;
  • From April 2018 mortgage help will become a loan, repayable when the claimant sells the house or begins work.

Universal Credit

  • The amount people will be able to earn before their benefit is affected (the work allowance) will be reduced: For childless, non-disabled, claimants, the work allowance will go down to zero (currently £111 per month): for other claimants it will go down to £397 per month for those with no housing costs (compared to between £536 and £734 now) and to £192 per month for those with housing costs (compared with between £192 and £263 now);
  • Various changes are to be made reducing amounts for families with children. These mirror those applied to other benefits;
  • From April 2017 there will no longer be an extra amount payable for claimants who have limited capability for work and are in the work related activity group;
  • The work-related requirements placed on parents of young children will become stricter from April 2017. This is a bit tricky to explain. For simplicity, imagine you are a single parent of a child:
    • Currently, no requirements are placed on you until your youngest child is one year old. Then, until your child is three, you have to attend work-focused interviews. From the child's third birthday until they are five you also under work-preparation activities as well. Once your child is five, you have to be available for work;
    • From April 2017 there are no changes until the child is one. However, you will now have to undertake work-preparation activities once the child is two, not three, and will be expected to look for work when they are three, not five.

  • From September 2017, working parents of 3 and 4 year old children will be entitled to 30 hours of free childcare (compared with 15 hours currently).

Benefit Cap
  • The Benefit cap, which sets a limit on the total amount of benefits a household can receive, will be reduced from £26,000 to £20,000 per year outside London, and to £23,000 within London. 
Changes affecting young people 
  • From April 2017, 18 - 21 year olds will not normally be entitled to help with their rent (as part of Universal Credit - Housing Benefit is supposed to have been phased out by 2017). There are exceptions, including 'vulnerable' young people, those who may not be able to move back with their parents. Young people who have been working and living independently will also be able to get help with their rent, but only for six months;
  • From April 2017 18 - 21 year olds on Universal Credit will be expected to participate in 'an intensive regime of support' from the outset of the claim. After six months they will be expected to apply for an apprenticeship or traineeship, go on a work placement, or 'gain work-based skills'. All this is known as the 'youth obligation';
  • 18 - 24 year olds will not be entitled to the 'Living Wage'.

The 'Living Wage' (in my next post I'll justify my use of 'scare quotes' around this term.)

  • From April 2016, this will be set at £7.20, compared with the £6.50 national minimum wage currently (due to rise to £6.70 in September 2015);
  • It is intended that it reach at least £9 (60% of median earnings) by 2020.
  • It will not apply to workers who are younger than 25.

In my next post, due soon, I'll give some examples, and offer some opinions...

Main Sources

The Summer Budget 2015:
The resultant Welfare Reform and Work Bill: