Low paid workers should keep more of their earnings to fight cost of living, says top think tank

Friday, 26 August 2022 14:25

Scattergun handouts or “quasi-nationalisation” will waste money and not do enough for the most in need, finds new report responding to soaring Ofgem price cap Emergency ‘tax cuts’ for the poorest workers and a targeted welfare boost are needed to help the most vulnerable households survive the autumn surge in the cost of living, according to a new report from top think tank the Centre for Social Justice (CSJ). ...Request free trial

Scattergun handouts or “quasi-nationalisation” will waste money and not do enough for the most in need, finds new report responding to soaring Ofgem price cap

Emergency ‘tax cuts’ for the poorest workers and a targeted welfare boost are needed to help the most vulnerable households survive the autumn surge in the cost of living, according to a new report from top think tank the Centre for Social Justice (CSJ).

New CSJ analysis finds that the package of support announced by the former Chancellor in May, which gave households on benefits an additional £1,200 and all households £400 to help cope with spiking energy bills, now falls “worryingly short” of protecting the most vulnerable from worsening inflation over the months leading into winter.

Ofgem announced today that October’s energy price cap will soar to £3,549, compared to £2,800 as expected when the former Chancellor’s package was put together, and is predicted to exceed £5,300 by January.

This spells “financial ruin, family breakdown and severe indebtedness” if urgent action is not taken, argues the CSJ in a new report entitled On Target: Protecting vulnerable households from the inflation crisis to be published this weekend.

With privileged access to real-time data on 114,000 low-income households, CSJ research found that even when taking into account the former Chancellor’s May support package, the worst-off families with children are likely to see their real terms incomes fall by a staggering £490 between October and January alone. This compares to £285 for lone parents, £129 for single households and an average loss this autumn of £209 across all the low-income households included in the analysis.¹

In response the CSJ is now calling for a combined package of a targeted welfare boost and effective ‘tax cuts’. This includes uprating Universal Credit by 13.3 per cent in October 2022, which would give more help to larger households facing higher bills (such as families with children) than earlier packages. This would see 8.5 million households receive an additional £219 on average over a three-month period (including those on legacy benefits and pension credit), rising to £243 for lone parents and £413 for families with children.

The CSJ’s proposals also include an effective ‘tax cut’ for the poorest workers worth £842 million by restoring Work Allowances in Universal Credit to their 2015 levels.² This would see around 1.87 million hard-up working households keep more of their own money before seeing their Universal Credit tapered off, boosting incomes annually by an average of £449. This, the CSJ argue, would help struggling workers take advantage of the booming jobs market to better defend themselves against the harms of inflation.

The combined package, which also incorporates a suspension of controversial ‘Green Levies’ on energy bills, would see low-income households receive an additional £257 in the three months from October (rising to £281 for lone parents and £451 for families with children) – enough to neutralise the larger fall in incomes now expected due to worsening inflation.³

The proposals come off the back of criticism that the ‘scattergun approach’ of handouts, which are administered as flat-rate payments, does not sufficiently target help to households with the highest energy bills, including families with children. Moreover, around £2.3 billion of £400 energy bill rebates already announced will go to the richest fifth of households as of October, the CSJ estimate, while the Labour Party’s proposed energy bills freeze is criticised for treating the wealthiest households who can afford higher prices the same as poorer households who are set to face “extremely tough choices this winter”.

Instead, the CSJ is calling for a renewed focus on those likely to struggle the most – and for a ‘special fiscal event’ addressing the cost of living to be held in September, if necessary before wider economy and fiscal policy is prepared for the Autumn Budget.

The highly targeted package, the CSJ argue, gives the next PM the best chance of maximising the fiscal headroom to provide more help for Middle Britain – either in the form of additional direct payments or tax cuts. In total the autumn intervention would cost £3.82 billion, paid for by the higher than expected revenue taken in by HM Treasury through frozen tax thresholds.

Under the plans, ministers would ditch ‘annual uprating’ in favour of a more dynamic approach responding to the fast-moving inflationary picture. A separate intervention would take place in January, informed by the latest inflationary data including the announcement of the next energy price cap. CSJ calculations using existing forecasts suggest that a further uprating of 8.5 per cent could be needed to maintain real incomes among low-income households between October 2022 and April 2023, costing an additional £1.38 billion. This could bring the total effective tax cut, welfare boost and Green Levies suspension to £8.2 billion over the six-month period.

Joe Shalam, Policy Director at the CSJ said: “Poorer families, especially those with children, spend a much higher proportion of their income on energy bills than others. They are highly exposed to the unprecedented spike in the cost of living made worse by today’s price cap announcement. By targeting additional support to those who need it, and letting the poorest workers keep more of the money they earn, this package is specifically designed to protect those at the very sharpest edge of the cost of living crisis”.

Andy Cook, Chief Executive of the Centre for Social Justice said: “We are all going to have to tighten our belts this winter, but our highly focused approach on the most vulnerable in society is the best way to protect those most at risk, and leave headroom for the new PM to reduce the pressure on middle Britain.”

The CSJ spotlight stories told across the think tank’s UK network of community-based charities, which relay the devastating impact of the cost of living crisis on the most vulnerable:

“We are finding that many more people are now coming to us in crisis and finding that crisis point is coming much quicker than it previously did. We have come straight out of a pandemic and hit people with a cost of living crisis. When the headlines in the papers say 'heat or eat' this is not an exaggeration, this is happening.”
CSJ Alliance charity, Bridlington, Yorkshire

“The current cost of living has had a significant impact on the families we support. It has had both a negative impact on pupil's education but also their mental health as they see parents struggling with costs. One pupil was missing a Thursday and Friday of school; we found out later it was because their mum had only enough money for fuel to fill the car up Monday-Wednesday.”
CSJ Alliance charity, Craigavon, Northern Ireland

“An elderly lady recently came to us asking if she could come here every day to get warm as she simply couldn't afford to keep the heating on during the day.”
CSJ Alliance charity, Gorton, East Manchester

“The more families are under pressure, the more children will suffer and not only in terms of their emotional and cognitive development but also nutrition and health. The rising stresses in life will take over”
CSJ Alliance charity, Wallasey, Merseyside

Joe Shalam, Policy Director at the CSJ, is available for interview and comment.

ENDS

NOTES TO EDITORS

1.     The CSJ commissioned Policy in Practice to produce an illustrative analysis of the expected fall in real incomes affecting low-income households with a sample of 114,000 low-income households on HB and/or Council Tax Support in six local authorities across different regions of the UK in July 2022. The ‘administrative data’ used in the analysis provides detailed information on low-income household demographics covering a large population size. In order to calculate the average fall in real incomes across different household types, analysts used data from the ONS Family Spending Workbook to uprate low-income household expenditure (equivalised based on household size and characteristics) in line with October and January inflationary forecasts from the Bank of England, Ofgem’s October price cap (as announced on 26 August) and upcoming energy price cap rises projected by Cornwall Insights – factoring in the £400 energy rebate.
2.     Work Allowances are the amount of money Universal Credit claimants keep before their benefits are tapered away. Work Allowances were cut as part of former Chancellor George Osborne’s cuts to welfare in the 2015 Budget. Restoring Work Allowances represents an effective ‘tax cut’ as it helps to reduce the large effective marginal tax rates (EMTRs) experienced by benefit claimants, which reduce the incentives to increase working hours and earnings.
3.     The impact of the combined welfare and effective ‘tax cut’ package for low-income households proposed by the CSJ is set out the chart below.

4.     The full list of recommendations proposed in Alleviating the Crisis are as follows:
Recommendation: The Government should take the earliest opportunity to hold another special fiscal event, laying the appropriate legislation required to direct additional financial assistance to individuals and families who are facing higher inflationary pressures than previously forecast.
Recommendation: The Government should introduce a ‘proactive uprating’ of benefits in October 2022 to reflect inflation of 13.3 per cent for a three-month period. This would see the average household on Universal Credit receive an additional £219 over the emergency period rising to £413 for families with children.
Recommendation: The Government should commit now to holding another special fiscal event in January, in order to provide additional support to maintain real income levels among the most vulnerable households, informed by up-to-date analysis of the changing inflationary picture.
Recommendation: Work allowances should be restored to their pre-2016 level. This would represent an effective ‘tax cut’ for 1.87 million of the poorest working households worth £842 million and additional £449 on average.
Recommendation: The Government should mirror the ‘proactive uprating’ with a payment for people on mean-tested benefits including legacy benefits and pension credit. This would total £219 and could be distributed via local authorities using local administrative data in order to target support proportionally by household type.
Recommendation: environmental and renewables levies should, where legally possible, be paused for the duration of the current energy crisis, boosting household incomes by £153 annually and bringing the package of autumn support for households on low incomes up to around £257 (excluding the additional income working households would receive from the restoration of Work Allowances).
Recommendation: Debt repayment to government bodies within UC should be suspended for 6 months, as it was at the beginning of the Covid pandemic, to allow households to adjust to turbulent energy prices.
Recommendation: Tax credit debt resulting from HMRC overpayments that is older than three years should be remitted.
Recommendation: The maximum level at which debts and benefit overpayments can be recovered through UC should be reduced to 10 per cent of the standard allowance.
Recommendation: The Illegal Money Lending Team should be allocated additional funding to scale up its operation in light of the cost-of-living crisis.
Recommendation: The Government should overhaul the Credit Union Act 1979 to address the key challenges preventing credit union growth.
Recommendation: The Government should initiate the rollout of Universal Support, jointly administered by the Department for Work & Pensions and Department for Levelling Up, Housing & Communities, to help those furthest from the labour market take advantage of rising job vacancies.