Summer Budget: Living Wage fails to compensate for cuts to tax credits

George Osborne today announced £12bn of cuts to welfare.

£5.5bn of these will fall to tax credits and Universal Credit recipients. £3.8bn of these savings will directly affect the work incentives of low earning households.

The Chancellor also announced an increase in the personal allowance, and an increase in the minimum wage for people over 25, from £6.50 today to £9.00 by 2020.

New analysis from Policy in Practice looks at the combined impact of these measures.

Low earning households can expect to be worse off

New analysis from Policy in Practice looks at the combined impact of these measures and finds that many low earning households will be worse off in 2020.

A lone parent with one child working 30 hours a week will be worse off by £2.33 per week in 2020, in nominal terms, and £26.36 per week in real terms, or £1,370 per year.

Budget 2015 impact on households - Tax Credits

Lisa Stidle, who carried out the analysis said:

Our analysis focuses on households that, by the Government’s own terms, are doing the right thing. This Government can’t be the party for working people, while undermining work incentives for those in receipt of tax credits and benefits.

Under Universal Credit, the picture is a little better. But many households unable to work 35 hours will still lose out in real terms.

Budget 2015 impact on households - Universal Credit

This analysis takes into account the following measures:

  • A four year freeze in working age benefits
  • An increase in the withdrawal rate of Tax Credits to 48p in the pound
  • Tax credits withdrawn earlier, at annual earnings of £3,850, and reductions in the UC work allowance
  • An increase in the personal tax allowance to £12,500 per year
  • An increase in wages to a ‘living wage’ of £9.00 an hour

Deven Ghelani, the Director of Policy in Practice said:

“For the lowest earning households, this budget offers a lot of ‘stick’, but leaves the ‘carrot’ dangling some way off into the distance.

“Employers are being asked to pick up the tab, with 48p of each pound paid in higher wages going straight to the government to lower the Tax Credit bill.

“Making Universal Credit look good by cutting tax credits is not the right way to go about things.The government needs to invest in work incentives within the welfare system.

“We know that this is more cost-effective than tax cuts at supporting people into work, and tackling poverty in a sustainable way.

“This budget focuses on how much we spend on welfare, but does little to improve how well we spend it.”

* Post updated 09/07/15 to include additional analysis on Universal Credit.

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