What should be done about the scourge of in-work poverty?

Red tie‘Poverty is no longer problem of workless and work shy’. This statement, coming from Alan Milburn as the first State of the Nation annual report into social mobility was launched last week whilst potentially challenging views some of us might have about who is in poverty and what the causes are (i.e. the unemployed on benefits who are lazy) shouldn’t really come as a huge surprise when we look at some of the figures around this issue.

The figures in Milburn’s report show us for instance that in actual fact, two thirds of poor children in the UK come from households where at least one person is in paid work (6.1 million people, 4.1 million being adults and 2 million being children, 1 million more than those in workless households.) In addition, research relating to the ‘minimum income standard’, that is, a minimum standard of income required to reach a ‘socially acceptable standard of living’ tells us that a household with a couple and two children where both spouses/partners working full time on the UK minimum wage would fall well short of this standard, they would in fact need to be both earning £9.91 per hour, more than £3 greater than the current minimum wage.  Combine this with yet more research which reveals that living standards for those on low to middle incomes have been faltering and Milburn’s declaration becomes much more understandable.

But what should be done about this scourge of in-work poverty? Whilst the causes are numerous, from low pay, to stagnating wages, to cuts in tax credits, Milburn has focussed in on social mobility as key to improving the outcomes of those who are working and in poverty, and perhaps more importantly their children.

For a Prime Minister who has declared his desire to Britain to become an ‘Aspiration Nation’, where hard work and effort are properly rewarded; social mobility matters hugely. After all, if families where one or both parents are working full time, and they and their children aren’t ‘getting on’ and climbing the economic and social ladders then the end result could be rather embarrassing for the Prime Minister. Hence, it makes great sense for David Cameron and his Government to be thinking about adequate solutions to the problem of in work poverty that places social mobility at the centre and which ultimately and takes more of the lowest paid out of poverty. If the worrying figures in this report aren’t enough to spur Cameron and his Government into action, then a fast approaching 2015 General Election (which according to a recent Ipsos Mori poll which has the Conservatives and Labour neck and neck could be fiercely competitive) surely should.

Coming back to potential solutions though, whilst elements such as an adequate education for the UK’s children are massively important, I wish to focus on what can be done through the UK tax and benefits system. I believe this is not only a vehicle for improving the aspirations of those already in work but also children currently in education who will enter the labour market in the future. In other words, social mobility and the tax and benefits system go hand in hand.

Indeed, let’s take the current tax credits system as an example. Whilst (internationally speaking at least) it supports the lowest earners relatively generously, the comparatively sharp rate at which this is withdrawn means that for a family where one spouse is in work and the other is not means that the reward from any increase in earnings from the minimum wage to the living wage for example (£6.31 to £8.55 per hour in London or an increase of £2.24) or what economists call the Marginal Effective Tax Rate, will be 73%. This means that for every extra £1 earned, the family will only see 27p come into the household. Or take to our minimum to living wage example, from the £2.24 increase, the family will only ever see around 60p of that come into the household.  Thus, as noted by the OECD, this obviously has a significant impact on in work poverty and it would be worthwhile for Political parties of all colours to think about ways in which workers can keep more of their earnings as they progress in the world of work.

The Government will argue that taking people out of income tax altogether will help towards in work poverty and social mobility. Yet evidence shows us that whilst this does have some benefit, it disproportionately benefits those in the upper half of the income distribution and does nothing for those in poverty already not paying any income tax.

In my view, if we are going to focus in on the benefits system, we should look at ways in which withdrawal rates can be reduced particularly at the lower end of incomes. If this can be done, then this will show that Government is willing to support people in work not just at very low incomes, but as they progress up the income distribution. This as a result could have a positive impact in terms of social mobility. What better way to say ‘we’re in it together?’ Critics will say lessening withdrawal rates is expensive, but in the context of the billions spent increasing the income tax allowance, is it really, especially given its potential long term benefits?

Yet we’re missing a trick I think if we only focus on the benefits system. What can be done in terms of our tax system? Well, in terms of recent announcements, David Cameron recently revealed a transferable allowance for married couples, which due to having a positive effect in reducing the tax burden of one-earner couples with children will reduce the METRs faced by these families. No one is pretending however that at the level currently proposed (benefitting families by about £3.85 per week) the effects of in work poverty or social mobility are going to be significant. However if substantially bolstered they certainly could be, and this should be something all parties consider in the run up to 2015 and beyond.

Other things worth considering in terms of the tax system include reintroducing the married couples allowance (MCA) and additional person’s allowance (APA.) Like the transferable allowance, this would maintain independent taxation, but would also benefit two-earner couple and single parent families.[1] A couple more radical options would be to introduce joint taxation, as is the case in a number of OECD nations, or move support for families currently present the benefits system back in the tax system[2]. Doing so could have really positive effects on work incentives, whilst maintaining financial support for families who need it.

In summing up, it’s great to see that Alan Milburn has flagged up in work poverty as a key issue to social mobility. Whilst there are many reasons why social mobility has remained stubbornly hard to combat for decades, the current tax and benefits surely has to feature in the mix. Thus, our  tax and benefits system that promotes social mobility should not only promote work, but also support earners within families (and the responsibility they have for non-earning spouses and children) as they aspire and progress up the earnings ladder. If progress is made towards this end, then I believe we could really see progress being made.

[1] Draper and Beighton, Independent Taxation – 25 years on. Does it meet today’s needs? CARE, London, 2013, p.78

[2] Ibid, p.79


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