Last week, David Cameron's speech about a 'higher wage, lower tax, lower welfare society' was seen as a signal that the £30billion spent on tax credits will be cut in the forthcoming Budget. New analysis for JRF shows the extent to which low paid families rely on tax credits to top-up their incomes. While higher take home pay and a lower benefits bill are undoubtedly the right goals, the transition will not be quick given the scale of the challenge.
Consider a couple with two young children living in social housing, where both parents work full time, earning the minimum wage. In addition to their earnings, they are eligible to receive Child Tax Credit, some help with childcare costs through Working Tax Credit and Child Benefit. Yet our latest research shows even with this extra income they fall £74 per week short of what the public thinks everyone should be able to afford for a decent standard of living.
Tax Credit payments of £182 per week make up 27 per cent of their after-tax income. Without this additional income, a decent standard of living would be even further from reach.
The picture is even starker for a lone parent with a young child in social housing. Here, someone working full time on the minimum wage is eligible for Child Tax Credit, Working Tax Credit, help with the cost of childcare, Housing Benefit and Child Benefit. But, even after all these top-ups, their income still falls £38 per week short of what the public thinks they need.
Tax credits payments of £227 per week constitute 45% of the lone parent's total after-tax income. Take away the in-work benefits and childcare support and their income not only plummets, it would no longer be worth their while to work at all. Indeed, tax credits played a big part in the increased employment rate among lone parents.
Tax cuts alone cannot take the place of tax credits. Even if minimum wage workers paid no income tax or national insurance whatsoever they would only be £20 per week better off.
And while shifting responsibility for the incomes of low earning families from the state to employers is an appealing idea, there are two challenges to bear in mind. The first is that tax credits don't simply top-up low pay: they were also designed to assist low income families with the additional costs of bringing up children. As we can't expect employers to pay parents more than non-parents, this must be a shared responsibility between employers and the state.
The second is that there is no quick fix here. Pushing up the National Minimum Wage and more employers paying the Living Wage where they can are steps in the right direction. But what the figures above demonstrate is quite how heavily low earning families rely on tax credits. To really begin to shift this load will require a clear strategy to increase productivity - especially in low paying sectors. This is the path to higher pay, more security and opportunities for progression.
Increasing take home pay enables state support to fall back, making it the key to reducing the cost of in-work support to low earning families (whether through tax credits or under Universal Credit). But reducing in-work support without increasing take home pay first will simply result in low earning working families falling even further short of a decent living standard.