Tax Credit cuts: an impending disaster?

“Tax Credits are a vital piece of support for many families who need to bridge the gap between low-paid work and the costs of raising a family.” – Julia Unwin, Joseph Rowntree Foundation

The debate on Tax Credits highlights a deeper question about the right balance of responsibilities between individuals, employers and the state, writes Joseph Rowntree Foundation’s Chief Executive Julia Unwin (above).

“There can no longer be any doubt that Tax Credit reductions will leave many low-income working families struggling to make ends meet. The Government is right to say that the National Living Wage will benefit some low-income workers, and be a very welcome step towards an economy with lower need for welfare. But independent research from organisations like the Institute for Fiscal Studies, the Centre for Social Justice and the Resolution Foundation have found that, overall, many families will be out of pocket as a result of the Summer Budget.

Our own research has found that low-income families with two parents in full-time work will be better off, as will pensioners and most workers without children. But lone parents, those with more than two children and families with one main breadwinner will see their living standards stagnate or even fall.

It is important to note that only 6 per cent of low income families with children have two-parents in full-time work, and the average across the population is 1.6 full-time workers per family. This, to my mind, raises a question around how these plans pass the Government’s laudable ‘family test’, which pledges to consider how new policies will support strong family relationships.

Tax Credit cuts cannot be easily balanced simply by raising wages. The National Living Wage was developed to boost the income of individual workers and make sure that businesses reward their workforce fairly. Tax Credits were introduced to support working families by recognising the extra expenses of raising a family, a role businesses cannot be expected to fill, and are paid to households rather than to individual workers.

We need to consider how poverty affects whole households and communities. Looking at the issue as a simple matter of raising incomes across the board ignores the huge impact that individuals’ circumstances have on their needs, and so will leave many families behind. As a benefit which is paid to households rather than individuals, Tax Credits are a vital piece of support for many families who need to bridge the gap between low-paid work and the costs of raising a family.

This is not just a question for low-income families with children. The discussion around Tax Credits gets to the heart of a deeper debate about the right balance of responsibility between individuals, employers and the state. Child poverty costs the UK £29 billion each year, giving the state and the taxpayer a direct interest in supporting parents and children. Stagnant productivity makes it more difficult for individuals to climb the career ladder and increase their earnings, as well as affecting businesses’ bottom lines.

To make sure that this three-way responsibility is respected we must seriously consider what support the Government should offer to low-income families. Universal Credit’s great strength is that, if implemented properly, it will smooth the impact on the lives of the many people moving in and out of work. The Government’s current approach to Tax Credit reduction risks undermining this.

If welfare, including Tax Credits, is reduced without measures to tackle the underlying drivers of poverty, the impact on low earners will be disastrous.

The Government must expand their plan to include tackling high living costs, building more genuinely affordable homes of all tenures and creating more good jobs with genuine opportunities for progression.”

Social Justice Secretary Alex Neil has called on the Scottish Parliament to unite in opposition to UK Government plans to slash the money working families receive as he gave an assurance that the Scottish Government would use all its powers to protect the poorest in our society.

Speaking in Wednesday’s Parliamentary debate Mr Neil urged the UK Government to dump its cuts to tax credits and support a Scotland Bill amendment that would devolve full responsibility for child and working tax credits.

He also welcomed a new amendment to the Scotland Bill that would allow the Scottish Government to introduce new social security schemes and confirmed the Scottish Government would be seeking clarity over the impact that would have on individuals.

Tax credits were worth around £2 billion to Scottish households in 2013/14, with two thirds of support directed at low income working families. The cuts introduced next April will mean an immediate loss of an average £1,500 a year to a quarter of a million low income working families.

Mr Neil said: “The UK Government must totally reverse its damaging changes to tax credits which are a lifeline for families on low-incomes. These cuts will have heart-breaking long-term consequences that will rebound on other public and charitable services.

“Once we hear the details of the Chancellor’s changes, have a clear final version of the Scotland Bill, and know the outcome of the comprehensive spending review the Scottish Government will set out credible proposals to support low income households.

“The Scottish Government has a long standing record on protecting the poorest and most vulnerable in our society. We are already spending £296 million on limiting the damaging effects of the UK Government’s welfare cuts, including £90 million fully mitigating the ‘Bedroom Tax’, the council tax reduction scheme, and the Scottish Welfare Fund. But we should be taking a long-term preventative approach to tackling poverty rather than continually having to fight the UK Government’s austerity agenda and continued attacks on low income families.”

Commenting on further amendments from the UK Government which deliver the commitment to allow the Scottish Government to introduce new social security benefits, Mr Neil added: “After nearly a year of pressure the UK Government has finally recognised that its bill did not deliver the Smith agreement. These new amendments should allow the Scottish Government to introduce new social security measures, in line with Scottish priorities.

“We welcome today’s amendment but we need clarity that any additional benefit provided by the Scottish Government will not be clawed back through reductions in UK benefits or through UK taxation – that would go completely against the agreement and make them meaningless.

“This will not substitute for having the ability to operate one unified system in the interests of the people of Scotland, and we continue to call for the devolution of tax credits in particular, but it is a welcome step forward.

“Our proposed amendments for full powers over child and working tax credits would enable a fairer approach to social security which will protect people in Scotland. The worrying fact of the matter is that by leaving tax credits and welfare in UK Government hands people remain at risk from further UK cuts.”