The dilemma of in-work poverty

Nov 3, 2013

David Binder is a Family Fiscal policy Consultant for the Christian social policy charity, CARE, where he conducts in-depth research on Family Tax, Welfare and Benefits. He blogs at: thoughtsofbinder.wordpress.com/

Poverty is no longer a scourge for the unemployed alone. This statement summarises Alan Milburn’s first State of the Nation annual report on social mobility, launched last week. According to the report of the ex-British Labour Party politician, two thirds of poor children in the UK come from households where at least one person is in paid work (6.1 million poor people in working households: 4.1 million being adults and 2 million being children, 1 million more people than those in workless households). In addition, research tells us that a couple working full time on the UK minimum wage, with two children, falls well short of a ‘socially acceptable standard of living’. To meet this standard, they would in fact need to both earn £9.91 per hour, more than £3 more than the current minimum wage. Combine this with  faltering living standards for those on low to middle incomes and Milburn’s analysis 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 on social mobility as key to improving the outcomes of those who are working and in poverty, and perhaps more importantly their children.

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Whilst elements such as education are massively important, I wish to focus on what can be done through the UK tax and benefits system. Indeed, let’s take the current tax credits system (a key pillar of the UK benefits system) as an example. Whilst, it supports the lowest earners relatively generously, in comparison with international standards, the “Marginal Effective Tax Rate” (METR), for an increase in earnings from the minimum wage to the living wage for example (£6.31 to £8.55 per hour in London) will be 73%. This means that for every extra £1 earned, the family will effectively only gain 27p.

If we are going to focus on the benefits system, we should look at ways in which withdrawal rates can be reduced particularly at the lower end of incomes. This would show that the UK Government is willing to support people as they progress up the income distribution. This as a result could have a positive impact in terms of social mobility, lifting children out of poverty as their parents receive financial rewards through employment.

As far as the UK tax system is concerned, David Cameron recently announced a transferable allowance for married couples, which should reduce the tax burden of one-earner couples with children and so reduce the METRs faced by these families. At about £3.85 per week, however, the impact of such benefits will hardly be enough to reduce in-work poverty or encourage social mobility. If substantially bolstered, however, they certainly could be.

Other options worth considering, as highlighted in CARE’s latest taxation publication ‘Independent Taxation – 25 years on. Does it meet today’s needs?’, 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 couples and single parent families. A more radical option would be to introduce joint taxation, as is the case in a number of OECD nations, or switch support for working families from the benefits system back into the tax system. Doing so could have positive effects on work incentives, whilst maintaining financial support for families who need it.

In conclusion, 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. Our tax and benefits system 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.