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Low-paid workers – worse off next year and even worse off in 2020

One image from the TV coverage of George Osborne’s July Budget sticks in my mind. It hasn’t got anything to do with the Chancellor’s smirk as he announced the “National Living Wage” – it’s the cut-away shot to Iain Duncan Smith fist-pumping in apparent triumph.

I was surprised – in the same speech Mr Osborne announced massive cuts to in-work benefits. These won’t just hit the tax credits we have now, measures like limiting support to just two children per family and cutting the amount you can earn before your benefits start being taken away will also hit the Universal Credit. Which is, remember, Iain Duncan Smith’s baby, which he’s spent ten years nurturing.

It isn’t often you get to see parents cheering the evisceration of their own offspring, but that was what was going on, and new figures the TUC has just published confirm just how much harm the Chancellor’s Budget will do to low-paid workers and their families.

We commissioned new research on the changes announced in the budget using the IPPR tax-benefit model. In particular, we wanted to look at the claim – repeated again and again by the Prime Minister that the “National Living Wage” and the increases in income tax personal allowances will more than compensate for these cuts.  

First of all, our research looks at what is going to happen to people currently claiming when the tax credit cuts hit families next year. Usually cuts like this are introduced with “transitional protection” – a guarantee that existing claimants will keep the cash value of their benefits (though they aren’t inflation-proofed) and only new claimants lose out.

The government has not announced transitional protection for these cuts and it doesn’t look as if they’re going to. 

This means that, come next April, the working families in the poorest quintile (fifth) of the population will see their disposable incomes fall £560 a year on average; and those in the second poorest quintile will be made £670 worse off. By contrast, working families in the richest quintile will lose only £10 on average. Despite the government’s rhetoric about being the party of the workers (and the implied slur against unemployed people) these cuts overwhelmingly hit working families.

Mr Cameron says that this will be compensated for by a higher minimum wage and a more generous income tax personal allowance. The tax credit cuts will hit families next year, but the minimum wage will not reach £9 until 2020; and the tax allowance will not reach £12,500 until 2020 either.

And low income working families’ net losses in 2020 will be even larger than in 2016 – even if you take the gains from the “National Living Wage” and tax allowances into account.

This is because next year’s cuts to tax credits will be compounded by other cuts to financial support for working households that are due between 2016 and 2020  –  like freezing the rates for working-age benefits like Universal Credit until the end of the parliament.

Even accounting for the higher minimum wage and the higher personal tax allowance, in 2020 working families in the poorest quintile will be on average £1,020 worse-off; and those in the second quintile will be £720 worse off. By contrast, those in the richest quintile will be made £110 richer in 2020 by the government’s tax and benefit policies in the July 2015 Budget.

This table does not take into account the government’s proposal to raise the tax threshold for higher rate taxpayers, which was announced prior to the July 2015 Budget. If this policy was taken into account the gains for the richest two quintiles would be much larger.

I’m not surprised that this government’s talk about supporting strivers has been proved wrong so quickly and so comprehensively. But I am left puzzling over that image of Iain Duncan Smith dancing with joy as his “friend” killed off the last progressive elements of the policy that had cost him so much effort.