Wages and welfare benefits are not comparable

Robert Henderson

The Coalition’s line on benefits will not hold water.   The Work and Pensions Secretary Iain Duncan Smith claims it is unreasonable for benefits to rise in line with inflation when wages are not doing so (http://www.telegraph.co.uk/news/politics/9787094/Iain-Duncan-Smith-raising-benefits-with-inflation-would-be-absurd.html). This ignores two things: what it costs to live even at a subsistence level and the effects of those in work drawing benefits, especially working tax credits.

To compare benefits with wages is nonsensical. Wages may be at any level from the plutocratic to that which is insufficient to fund  even a basic standard of living.  Benefits are fixed and are far from generous.  The real question to ask when considering the uprating of benefits is not whether they are too generous but whether they are sufficient to allow someone to live at the subsistence level.  To do this the distribution of expenditure at  different levels of income must be taken into account. The poorer a person is the more of their money will go on essential such as housing, food, clothing travel and energy.  These are items which apart from clothing have been rising rapidly over the past year or two. It could reasonably be argued that those on benefits (whether in work or not) require an increase much larger than the average wage rise.

The idea that people can live the life of Riley on benefits  does not hold water. For those who have signed on as unemployed the Jobseekers Allowance is £56.25 (single person under 25), £71 (single person over 25)  and £111.45   (couple both aged over 18),    £71  (Lone parent 18 or over) £56.25  (Lone parent under 18) https://www.gov.uk/jobseekers-allowance/what-youll-get .  If you are single without children or a childless couple,   living on benefits is self-evidently not going to be a great deal of fun. (The figures and qualifications for benefits I shall give are those under the  present circumstances. These will change when the Universal Benefit goes live in April this year).

What pushes benefits payments up to the high figures often cited by the media are child related benefits and above all housing-related benefits to pay   mortgage interest or  rent and Council Tax. But to bring in the money for  children you need quite a few.    Child Benefit is £20 for the first child and £13.40 for each subsequent child.  If a family has ten children this would mean they received £140.60. Useful, but not a vast amount when applied to the costs of raising ten children.  The benefit goes in full  to anyone with children whether working or not, provided their income does not reach £50,000 and in part for anyone earning between £50,000 and  £60,000.  (http://www.hmrc.gov.uk/childbenefit/payments-entitlements/payments/rates.htm#1).  In addition, both the unemployed and employed can draw Child Tax Credit for dependent children (under the age of 18) , which can be up to £2,690 for an able bodied child and up to  £4,140 for the most disabled children (https://www.gov.uk/child-tax-credit).   Those figures are of course dependent on the family’s total earned income where the claimants are in work and the amount of savings whether in work or unemployed.  Someone claiming Job Seekers Allowance or Income Support  and not breaching the maximum savings  before benefit starts to be withdrawn  (currently £6,000),  the parent (or other responsible adult) will receive  £64.99 per week for each child (http://tinyurl.com/anpea3u).  The notional family with ten children would get £650 a week in addition to the £140 child benefit, but of course  such a family  would be very much the exception.  The average family with two children wholly dependent on benefits would (excluding mortgage interest or rent and council tax benefit) have £274.85 (£111.45 for the couple; 2 x £64.99 for the JSA/Income support payments for the children  and £33.40 child benefit).

The real poison in the benefits system is the cost of Housing Benefit.   Those who are unemployed or on low incomes are likely to be living in rented accommodation. Rents have gone through the roof in the past few years as mortgages become hard to get and new build housing has slowed to a trickle. (http://www.standard.co.uk/news/london/families-facing-squeeze-as-rents-rise-fastest-in-the-suburbs-8442313.html). To get private rented accommodation in London suitable for a family of four  ( a minimum of a three bedroom flat) would cost between £1-2,000 per month even in the cheaper areas.  A rental of £1,500 per month is £18,000 per year which takes around 70% of the new proposed cap of £26,000 for total benefits paid to any family.  Outside of London rents are not so high,  but in many places , especially the South East, they have risen substantially.  Here is an example from Croydon in Surrey:

“Henrietta Bergman-Janes lives with her husband Michael and their daughter Adelaide, three, in a privately rented two-bedroom flat in south Croydon.

The family survives on an income of about £19,000 from his job in a bank and £400-a-month housing benefit. The rent of £825 a month leaves just enough to live on — but nothing more. They hardly ever go out, cannot afford holidays and saving for a deposit is out of the question.

Mrs Bergman-Janes, 24, said: “We would love to buy our own place and stop being at the mercy of the whims of a landlord, but we can’t even stay out of our overdrafts or pay off our credit cards, how are we supposed to magic up a £25,000 deposit?”

She said rents in Croydon were rising steadily. When the couple were first looking in 2008 small flats were about £600 to £650 a month. “But before we moved into this place we were going to estate agents and said £800 was the most we could afford. They just started laughing at us saying ‘you can’t get anything for that price’.” (Ibid)

An added complication is that millions of those who work also draw various working tax credits or income support (paid to those working less than 16 hours a week – https://www.gov.uk/income-support/overview) which raise incomes to subsistence level. In addition, many of the employed also draw housing  (vide the £400 per month claimed in the example above) and council tax benefit.  If all benefits are claimed, no individual or couple without children  should  probably be no worse off than those under state retirement age who are unemployed because in work benefits are on a sliding scale. A  family with children  or a single parent could be worse off  if they have to pay a professional child minder, although even there the state provides subsidy through Childcare tax credits  with up to 70% of the costs up to a maximum of  £175 per week for a single child and £300 for two or more children. (https://www.gov.uk/help-with-childcare-costs/childcare-tax-credits) .  However, those in work will often be no better off than someone  who is unemployed.

The Working Tax Credits for the low paid are substantial.  For example, a couple with three children  with an annual income of £10,000 would qualify for tax credits of £11,815 (http://www.hmrc.gov.uk/taxcredits/people-advise-others/entitlement-tables/work-and-child/work-no-childcosts.htm ). Working Tax Credit can be paid if a claimant is off sick (http://www.hmrc.gov.uk/taxcredits/keep-up-to-date/changes-affect/work-changes/no-work-illness.htm).

There is the intriguing possibility  that a single parent in work  or a  couple  in work on a low income  with  two or more children might  receive more in overall benefits through Childcare  Tax Credit, Child Benefit, Child Tax Credit and Working Tax Credit than the £26,000 cap for the unemployed coming in with the proposed Universal Benefit in  April 2013.

There are pernicious effects of working tax credits.  These have the effect of a very substantial subsidy to employers who can keep their wages below subsistence level in the knowledge that the taxpayer will make up the difference between what they pay and what is needed to live.  Even if a worker is in full time employment,  this is highly unsatisfactory because it distorts the labour market and places an ever growing burden on the taxpayer.  It also provides encouragement to the immigrant  to work in Britain over and above the great incentive of earning even the minimum wage in the UK which allows them to save a few thousand a year, savings which are worth multiples in terms of purchasing power in their homelands of their purchasing power in this country.

But working tax credit are not restricted to full-time workers. At present the  rules for those under 60 who are able bodied are:

What hours do you need to work?

You don’t have children

If you’re not responsible for children, you need to work the following hours to get Working Tax Credit:

if you’re aged 25 or over, you need to do paid work of at least 30 hours a week

if you have a disability and are aged 16 or over, you need to do paid work of at least 16 hours a week

if you’re aged 60 or over, you need to do paid work of at least 16 hours a week

How to work out usual working hours for your tax credits claim

You have children

If you’re responsible for children you need to be aged at least 16, and work the following hours to get Working Tax Credit:

if you’re single, you need to do paid work of at least 16 hours a week

if you’re in a couple, your joint paid working hours need to be at least 24 a week, with one of you working at least 16 hours a week

So if you’re a couple and only one of you is working, that person will need to work at least 24 hours a week.( http://www.hmrc.gov.uk/taxcredits/start/who-qualifies/workingtaxcredit/work.htm#1)

These rules provide strong incentives for people to do just the minimum hours needed to qualify for the tax credit.  Imagine the temptation for a single parent who only needed to work for 16 hours a week  or a couple with one working who was only required to work  24 hours a week to prefer to do only the hours needed rather than a full week’s work.  If it is a mundane low paid job,   which almost certainly it will be,  in either case the pay for the hours worked plus working tax credit would probably be the same as if the person worked a 40-hour  week.

The rules also  provides an incentive to employers to offer  minimum wage part-time jobs with the minimum qualifying hours, which should also allow the employer to avoid both the employers’ and employees’  national insurance (http://www.hmrc.gov.uk/paye/rates-thresholds.htm#1).

The reality is that no firm line can be drawn between the working and the unemployed. The attempt at resurrecting  the Victorian idea of the deserving and undeserving poor, a part from being obnoxious,  is a non-starter when so many want a job or are forced  to work part-time or take jobs which do not pay a living wage.

Britain’s low wage economy

The problem is really Britain’s low wage economy.  This is a consequence of mass immigration , which has risen to alarming heights in the past ten years  and has resulted in both a reduction in wage levels and increased competitions for jobs,  the offshoring of huge numbers of jobs, the contraction of  public sector employment since the crash following Lehmann Bros failure in 2008 and the reckless inflation of the cost of housing, both purchased and rented, resulting from massive immigration, the loose monetary policy of the Blair and Brown governments and the failure of all governments since Thatcher to build sufficient social housing.

To remedy these ills Britain must regain control over its borders by leaving the EU and repudiating any other treaties which give foreigners the right to settle here; engage in a programme of social housing building on the scale of the 1950s;  reserve social housing for those born British citizens;  penalise private developers who  hoard land by placing a tax on the land while it remains unbuilt on ; subsidise public transport more heavily and engage in judicious protectionism to preserve necessary commerce and  industry.

The  new social housing and  further subsidy for public transport can be easily funded by reducing current public spending massively by  ending foreign  Aid (saves £11 billion); reducing the per capita Treasury payment to Scotland, Wales and Northern Ireland by reducing it to the English figure   (saves £16 billion)  and leaving the EU (saves £11 billion  on the difference between what the UK pays in and what it gets out  http://www.express.co.uk/posts/view/336667/Now-our-payments-to-the-EU-hit-53m-each-day) . That releases  £38 billion for the Government to spend.

These steps will have the effect of reducing the price of housing and raising pay both in real terms and because much less of a wage or salary will have to be spent on housing and travel costs.  That will gradually reduce the dependence on Working Tax Credits which ideally should be abolished because of their pernicious effects.  Higher wages  and reduced housing and travel costs will also mean  less pressure for women to go out to work when they have pre-school age children. That will reduce the need for highly paid childcare.   The long-term aim should be to reach a situation where it is  the norm for  a single wage to be  enough on which to raise a family.

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