We know that tackling child poverty and pensioner poverty was a priority of New Labour, and that they succeeded in doing so to a remarkable degree. The introduction of the Minimum Wage and Tax Credits, which also boosted work incentives in the old system, played a central part in this. But an equally significant part was played by a slightly dull and technical action taken by Gordon Brown: increasing the child and pensioner elements of means-tested benefits well above inflation for a series of years in a row. This was a rising tide that lifted the household incomes of millions of families with low incomes, whether or not they were working.
Since 2010, the Conservatives continued one element of this approach: the Minimum Wage has increased well above inflation, lifting the per-hour income from employment of low-paid earners. The annual Income Tax personal allowance, £6,475 in 2010, will have almost doubled to £12,500 in 2019 following the latest announced increase in this year’s Budget, the cause of the latest set of arguments within Labour. This has represented a huge configuration of the tax system – over 40% of adults now pay no income tax.
But of course, at the same time, the benefits system has gone in the opposite direction, with a multitude of different cuts affecting different people in different ways, including the ongoing benefit freeze which is in effect a large annual cut for everyone claiming benefits (now in its third year of five), and the controversial and complex introduction of Universal Credit. The impact of these changes has been disastrous for many low income households.
After the Budget, Conservative MP Chris Philp tweeted the following:
“just computed someone working 40 hours a week on Min Wage has annual wage up from £11,200 in 2010 to £17,100 next April. That’s +38%. But *post tax* income up 44% due to personal allowance increases. Inflation over the period c.25%. Those on lowest wages see big real increase.”
This prompted me to do some ‘computing’ of my own. My calculations pretty much agreed with Chris Philp’s: someone working 40 hours per week on the minimum wage would have earned around £12,064 gross in 2010 and will earn around £17,077 gross in 2019, an increase of around 42%. Because of the growing personal allowance, their net earnings would have risen from around £10,248 to around £15,058 over this period, an increase of around 47%.
But if that worker had children, the picture would be completely different. A single parent with two children might have an overall household income of £19,544 in 2010, consisting of net earnings, Tax Credits and Child Benefit. In 2019, the household income for an equivalent household will be £20,998, consisting of net earnings, Universal Credit and Child Benefit, including the increase in Universal Credit work allowances announced in the budget. This is an increase of just over 7%.
With inflation over the period roughly 25%, as Chris said, that actually represents a cut in their household income in real terms of around £3,400 a year.
Because benefits are clawed back as earnings increase, it’s always been the case that the impact of tax cuts, and even rising wages, are blunted for the lowest earning households. On top of this the many cuts introduced in recent years, including the benefit freeze, has created a bleak picture for many households on benefits. According to the Joseph Rowntree Foundation, the income provided by working on the minimum wage (and topped up by benefits) now provides only 80% of a minimum household budget for a single parent with two children, compared to 97% in 2008. With a complex mix of different cuts and ‘welfare reform’, the overall picture varies a lot for different types of households and different circumstances. Some families have lost much more, for example, large families who are (or will be) excluded from claiming an additional amount for their third or subsequent children; people with disabilities receiving lower entitlements under Universal Credit; and people affected by various Housing Benefit restrictions and the benefit cap. As the safety net has been eroded, incomes have dropped for working and workless households, although of course those with lower earnings are more exposed to the impact of benefit cuts.
Let’s say the single parent from the example above became pregnant, had a third child and left work. The benefits system as it was in 2010 would have provided £153.65 Child Tax Credit, £33.70 per week Child Benefit and £65.45 Income Support per week. The current system would instead provide £190.75 per week Universal Credit and £34.40 Child Benefit. This is a dropin annual income of 11%, while living costs have increased by around 25%. As a result this family would have an annual income around £4,300 less than if things had stayed as they were – well over a third of their total income. Although not the only cause, the biggest factor in this case is the two-child limit. Measures like the two- child limit have been particularly pernicious as they arbitrarily remove the crucial link between a family’s level of need and the financial support they are entitled to, purely by accident of personal circumstances.
As the social safety net has been eroded and no longer meets peoples’ needs, more and more families have been pushed into poverty and material deprivation, and many more families than before are destitute. Because the safety net that tops up incomes to a minimum level is lower than it needs to be, a move into employment or an increase in wages is no longer sufficient to guarantee that a basic minimum standard of living can be met. And of course, millions are not in a position to work at all, for many of whom an ability to meet a basic decent standard of living recedes further and further out of view.
This should all act as a reminder that the social security system is absolutely vital. Rebuilding and investing in it must be at the heart of the policy platform of any party that can call itself progressive or socialist. Increases to benefits lift millions, and cuts harm millions, whatever policies there are towards jobs, earnings and tax. The safety net of social security benefits remains the only single available mechanism to lift the income and living standards of all those with the lowest incomes.
What is Labour’s approach going to be if it wins power? John McDonnell seems to have very much focused on rebalancing the economic system, addressing workers’ rights and pay and collective bargaining. If successful this would represent the kind of long-term structural economic change that New Labour neglected during its years in government. The labour market policies, and the commitment to large-scale council house-building, are great policies which could also help with reducing poverty and cutting the social security bill. But if we want to really tackle living standards, poverty and hardship, then there is unfortunately no alternative but to make social security a central priority and commit significant amounts of money to it.
So far, Labour has been patchy and inconsistent on social security, as shown by the recent backtracking and confusion over whether or not it is Labour policy to end the benefit freeze and return to uprating with inflation. A huge amount of money is going to need to be invested just to undo the worst effects of recent years (there will need to be above-inflation increases just to repair the damage to living standards). But unlike in other areas of policy such as education, Labour’s response has been weak, with neither the financial commitments needed nor the priority it merits. The financial investment will be needed whether Universal Credit is scrapped or retained, a question Labour is reviewing – although this hasn’t stopped there being inconsistent announcements about its policy.
A stronger social security system is the single most important thing that a Labour government could do in order to address these problems. Building a safety net at a higher level through increasing the rates of cash benefits is one of the most powerful levers that a government has to redistribute income and bring about structural change of the kind that is badly needed in the UK. The multitude of Conservative cuts has brought about a massive erosion in the wellbeing, incomes, and living standards of millions of people. Tackling this crisis, a historic mission needed now as much as ever, should be at the heart of Labour’s very purpose. Without a strong safety net benefits system, poverty and destitution will remain a permanent scar on the British social landscape.
Perhaps it is never going to be politically possible to give the benefits system the money and level of priority it needs, and the UK will forever be stuck with a highly unequal society and entrenched institutionalised poverty and deprivation. But surely we at least need to try. The current politically volatile climate, with growing public opposition to austerity, and a radical Labour leadership elected after refusing to abstain on the 2015 Welfare Reform and Work Bill (which implemented many of the harshest cuts), should present the opportunity we need.