Mini-Budget 2022: Tax cuts work for low income families too

In the mini budget on Friday 23 September the new Chancellor of the Exchequer, Kwasi Kwarteng, announced a tax cutting Growth Plan 2022 that aims to boost economic prosperity of the nation. The driving belief behind the measures is that tax cuts will incentivise work by allowing higher earners to keep more of what they earn.

We argue that the same principles apply for low earners too. The principles can encourage more people into work and boost incomes to help meet essential costs during this cost of living crisis. A restoration of work allowances for households would give 1.6 million low earning families a much needed additional £422 a year.

The Growth Plan gambles on growth

Significant measures in the growth plan for average working households are:

• The welcome removal of the April 2022 National Insurance increase (the Health and Social Care levy) of 1.25% for employees and employers by 6 November. This means that 28 million taxpayers will save an estimated £330 a year
• The 1 percentage point cut to the basic rate of income tax has been brought forward from April 2024 to April 2023 at a cost of over £5 billion a year. This means that workers, savers and pensioners will gain an average of £170 a year

In addition to a number of supply side economic measures for businesses and corporations the measures hope to stimulate the economy.

Reforms to Universal Credit are a lot of stick with few carrots

The Growth Plan 2022 also outlines reforms to strengthen work conditionality of Universal Credit.

The plan announced that, from 26 September 2022, the Earnings Threshold will rise from 9 hours a week to 12 hours a week for individuals, and 19 hours a week for couples. It will rise again in January 2023 to 15 hours a week for individual households, and 24 hours a week for couples.

The government estimates that this policy will impact 120,000 workers, who will be expected to actively search for (more) work. Failure to comply with new rules will mean households could see their benefits reduced.

Sanctions will also be strengthened so that there are clearer work expectations for people who are out of work to apply to jobs. Claimants who do not fulfil their job search requirements will see their benefits reduced.

These changes aim to encourage claimants to increase their earnings but, unlike the new policies for higher earning households, these measures put more emphasis on penalising the poor rather than incentivising work.

Cracking the whip on Universal Credit claimants shows a deep lack of imagination about how to help families with low incomes

Working people need Universal Credit because of rising rents and other living costs. For example, a family with children living in London could be on UC while earning over £40,000 a year because they need help cover essential costs such as rent and childcare.

Households that work fewer than 16 hours a week might love to work more but may face barriers to full time employment. These barriers could include unavailable childcare, high costs of transportation or having a disability that limits the household’s ability to work full time.

Increasing sanctions and work conditionality measures have, at best, a marginal impact on incentivising work. We estimate that around 3% of the 170,000 UC claimants in the work search group are likely to receive a sanction each month, the equivalent of about 5,100 Universal Credit claimants.

The policy is unlikely to generate a significant change for households on Universal Credit at large. Indeed, for the households impacted, the new policies could increase the claimant’s risk of falling into debt, poverty and mental illness.

Previous changes to make the work search more intensive for households on Universal Credit were likely to cost the government more money. We found that it costs taxpayers less to allow someone time to find a median UK wage job rather than forcing them to apply for and accept a minimum wage job or part time job after a month on Universal Credit.

Lower income earners need better incentives and support

The same “important principle of people keeping more of what they earn, incentivising work and enterprise” outlined in the Growth Plan also applies to people earning the lowest incomes too. Leveraging Universal Credit to incentivise work means tax cuts not strengthening sanctions.

Without measures to make work pay for households on Universal Credit, people on the very lowest incomes will not have enough to meet their priority costs. Energy prices and rising inflation will still drive debt and homelessness. The only difference is there will be less money for public services to help.

Tax cuts for low income earners would allow 1.6m families to keep £442 more a year

We called for the restoration of work allowance to 2015 levels in our recent work commissioned by the Centre for Social Justice on the cost of uprating Universal Credit for the cost of living crisis.

We estimate that this would cost £773 million and enable 1.6 million low earning families, or 41% of households on Universal Credit, to keep more of what they earn. This is worth £422 a year to each household. It would incentivise work and enterprise for households on lower incomes, and benefit people both in and out of work.

Tax cuts work for low income families too

The government’s mini budget boldly uses tax cuts as a way to drive growth, giving tax cuts to earners on the highest incomes. Restoring Universal Credit work allowances to 2015 levels is an effective way to give tax cuts to people on the lowest incomes too.

The benefits of the trickle down economics behind the Growth Plan 2022 will take too long to reach families on the lowest incomes. These families, and those who are just about managing, already face a stark winter of rising bills. They need more targeted support now.

Low income families, and the organisations that support them, cannot afford to wait the months and years it will take for the government’s Growth Plan to bear fruit for everyone.