Tax credits may not be the best way to help those on low pay
By Lucy Powell
—Under this government we are seeing a growing number of circumstances, especially for those with children, where the costs of working or, more often, increasing one’s hours of work are not financially ‘worth it’. These disincentives to work are set to get worse with the introduction of the government’s universal credit in April.
What is more, for some employers, especially those in retail and services where having large numbers of staff on short hours suits their business, there is little incentive to offer more hours.
Their employees see too little benefit to those increased hours so do not demand them.
It was certainly never the intention of the tax credits system to create this situation. So is it time that we looked at ways to reform system, by using some of the £29.8bn currently spent on tax credits (soon to come under universal credit) to incentivise better pay and more hours instead of simply supporting those on low pay and short hours?
Under current arrangements there are a number of circumstances where families would see very little return for taking on more work or returning to work after having children. The Resolution Foundation’s recent report Counting the Costs of Childcare found that for lower-to-middle-income families, the extra income generated by a second earner is almost entirely lost on childcare costs, leaving the household no better off in work than out of work. This just cannot be right.
And with the introduction of universal credit, Barnardo’s has calculated that a lone-parent family with two preschool children working 16 hours a week would be zero – yes, zero – pounds better off if the parent increased their hours to full time. This is a perverse situation.
The Children’s Society’s recent report, The Parent Trap, found that those on the lowest pay, who have already seen their tax credits cut, will have to pay up to seven and a half times as much towards their childcare costs under universal credit, leaving many unable to continue working.
For sure, some of these issues relate to the growing crisis in childcare, which needs urgent attention, and IPPR’s report, Making the Case for Universal Childcare, is an excellent start. But we also need to look at how we can make it in employers’ and employees’ interests to deliver and demand higher pay and more hours.
One way to explore this would be to discuss with employers creating financial incentives for higher pay, such as the living wage, which in turn may almost pay for itself as the need for tax credits reduces. We could also look at incentivising workplace crèches and childcare support, as the problem for many in retail and the service sector is the irregular and antisocial hours they work. Again, these sorts of measures could pay for themselves over time.
What is clear, though, is that the government’s approach to tackling this problem is, in many cases, making it worse, and the blunt instruments it is using, such as increasing the number of hours required to work to qualify for credits, is leaving too many to fall through the net.
The reform that is needed will require dialogue with employers and employees and should be seen as a long-term plan so that we do not leave some of the lowest-paid and most-struggling families even worse off. But if we do it right it could be a way of raising living standards at the same time as cutting the welfare bill.
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Lucy Powell is MP for Manchester Central and a vice-chair of Progress
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It’s true we need a living wage and higher pay. However what we do not need is babies and young children spending longer hours than they already spend in childcare This is not in line with children’s developmental needs and neither does it tally with most families’ call for more ‘family time’. Parents of teenagers will say it doesn’t get better when they’re older – they need you before and after school even more in some ways.
It is highly misleading to call for more childcare as if this can be conjured up by magic somehow. Most childcare providers and childminders are mothers themselves on low wages trying to make ends meet and raise their own children – if you increase their pay to a living wage (as you say is needed) then this would make childcare more costly not cheaper – but at least it would reflect the cost of doing the job. Many childminders offer atypical hours but they found there was very little demand for it – probably because atypical hours means the children are either in bed in the morning or at night – yes they need their sleep! And when they’ve been to school all week they don’t want even longer in a ‘setting’ at the weekend! MOst adults would not be expected to work the week AND the weekend too.
Calling for more childcare is highly misleading. What we need is a more family friendly taxation system so parents get to keep more of their earned income compared to another couple in the same street with no children – at present it’s perfectly likely that the couple WITH children pays most tax – how can this be? This is because the dual earner childless couples have two personal allowances. We need transferable tax allowances or income splitting.
If people want cheaper cihldcare then it cannot come at the expense of providers (usually other parents, mostly women) and their unbelievably low wages- so the only alternative is for taxation rates to go up – but I don’t think we’d tolerate that either would we?
Incentivising workplace creches sounds good – but in practise it amounts to a bias towards non parental care – and to be a fair system then the money needs to follow the child even when cared for by a mother. Mothers at home have costs too – and this is equal to the salary forfeited, meaning household income is usually halved. So why should one mum benefit from having childcare costs paid for /subsidised by taxapyers – and not the other?? It would make no sense. IMagine your stay at home for a couple of years for whatever reason (because your child is unbelievably shy, or because you feel it’s the right thing to do or because you have a large family or because your husband travels away with work …) . You get no help or recognition at all…but you are expected to make ends meet. BUT your sister round the corner gets most of her childcare subsidised (even if her household income is slightly higher than yours!). HOw can this be? And now they talk about making childcare tax deductible!! Well that’s fine as long as the working partner in a single earner family can claim against the care provided by his/her partner.
Is this another case of divide and rule? It’s not a good idea to set one set of parents against another set of parents, instead of encouraging them to demand a better deal for all!
I was about to write something very similar, Thanks for beating me to it!