2 April 2016

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UK: Why The Living Wage Won’t Compensate For Tax Credit Cuts

Will government cuts to tax credits hit Britain’s poorest the hardest? (Becky Stares/shutterstock)
By Chris Grover, Lancaster University

Wage poverty is endemic in Britain because wages are thought of as a price for a job, rather than as a means of earning a living.

The introduction of the so called “national living wage” – what really should just be viewed as an increase in the national minimum wage for the over 25s – will raise wages for the lowest-paid workers by 50p an hour. This should be good news for those receiving the increase, but it seems some businesses are using the national living wage as an excuse to cut overall pay and rewards for staff.

Pair this with concerns that businesses are scaling back recruitment to make allowances for wage increases and it’s clear the higher minimum wage isn’t all it’s cracked up to be.

It isn’t only businesses that are playing hard ball. Alongside the introduction of this higher wage the government is moving forward with its cuts to wage supplements through the introduction of universal credit – a new benefit which is set to replace job seekers' allowance and other means-tested benefits.

It is recognised that the cuts to wage supplements brought about by the introduction of universal credit will not be made up by the increases planned for the minimum wage. The Resolution Foundation, for instance, calculates that when all of the tax, benefit and minimum wage changes announced in 2015 are taken into account the average loss for the poorest half of households will be £650 a year by 2020.

Poor show for the low-paid. 1000 words/Shutterstock

Wage supplements such as tax credits help to address the problem of low wages, by adjusting the incomes of low-paid households to the number of people living in them. In this sense, wage supplements allow people to “earn” an income that is more related to their living costs than wages alone.

The reduction of these supplements alongside an increase in minimum wage, will do little to solve Britain’s longstanding problem with wage poverty.

As benefits for unemployed people are being eroded in value, working poor families face a bleak future. And while the shift to a higher minimum wage should increase the incentive to work, the mechanism that attempted to link wages to need is being put under pressure.

A history of wage supplements
Wage supplements have a chequered history in Britain. At various points they have been interpreted as being both deeply problematic and highly beneficial for working people – and for the economy and society more generally.

To understand the problems we face today with wage supplements, we need to go back in time in the 1800s when this difficult relationship with benefits was first unfolding. Between 1834 and 1971, the main thrust of policy was that the supplementation of wages by the state – at least on a means-tested basis – would destroy the incentive for people to work and would encourage employers to pay low wages.

The 1834 Poor Law Commission report’s argument, that wage supplements made working people “idle, lazy, fraudulent and worthless”, cast a long shadow over policy.

But from the 1970s the position was reversed – it was argued that wage supplements had the potential to encourage people to do low-paid work and to reduce pressure on employers to increase wages. During the mass unemployment of the late 80s wage supplements came into their own as a way to encourage people into low paid work in the hope of reducing unemployment levels.

The Central Policy Review Staff (the Conservative think tank of the time) argued this could be done through the further development of wage supplements – which was introduced in 1988 as family credit.

Replacing tax credits with the living wage will leave many people worse off  (Yulia Grigoryeva/Shutterstock)

Whether wage supplements are considered to be negative or positive, what has often been missing from arguments about them is reference to the way in which they might address in-work poverty.

It is not that such issues have been completely absent from debates about supplementing wages – quite the opposite in fact. The first benefit ever aimed specifically at people in low-paid work – family income supplement – which was introduced 1971, was the consequence of policy debates that had been revitalised by the “rediscovery of poverty” in the mid-1960s. Later, for New Labour governments, tax credits were partly a means of addressing child poverty.

However, in both these instances, concerns about poverty were either usurped by wider concerns with incentivising people to take low-paid work – in the case of family income supplement – or sat uneasily alongside them in the case of tax credits.

And of course attempting to incentivise unemployed people to take low-paid work is a very different exercise to addressing in-work poverty.

Waging war
It is because of this history surrounding wages supplements that the conservative government has found itself in difficulties in recent times. The government’s focus has been on shifting the incentive to work by taking away tax credits and increasing the national minimum wage, alongside lowering the real and relative level of benefits for workless people.

In this approach, the government’s belief is that the need for wage supplements is reduced. The problem with this belief is that even if it was not their original intention, wage supplements are important in relieving the poverty of poorly paid workers, as many people argued when resisting the cuts to tax credits.

The current proposal to reduce universal credit payments in favour of a higher minimum wage will not help to address the longstanding poverty of many people in paid employment. In fact it will only make things worse for those already living on the breadline.

The Conversation
About Today's Contributor
Chris Grover, Senior Lecturer in Social Policy, Lancaster University

This article was originally published on The Conversation

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