When is a cut not a cut? When it is a cut in a projected increase

‘Britain’s poorest families have been abandoned today and left to face the worst’, goes the opening line of the Child Poverty Action Group’s (CPAG) response to the Chancellor’s Autumn Statement. ‘[P]oor children have been mugged’, adds the Guardian, and the Independent reckons that‘[u]p to 100,000 children could be pushed below the poverty line.’ The Telegraph did not sound much different.

If these were responses to a spending cut, it would be too mundane to write about it. As J. R. Shackleton points out in ‘Sharper Axes, Lower Taxes’, There are always shroud-wavers pointing out the dire consequences of removing a benefit or service without which people lived quite happily till a few years back.’ But in this case, we are not even talking about a cut. We are talking about the cancellation of a projected increase. This year, the annual amount of Child Tax Credit (CTC) has been increased by £180 per child above inflation-indexation. A further increase of £110 had been announced for next year, which has now been revoked. So in 2012, the Child Tax Credit (CTC) will only rise in line with inflation, i.e. it will not rise at all in real terms.

Granted, the extra increase in CTC had been interpreted as a measure to offset the impact of welfare spending cuts elsewhere on low-income families, such that the ‘austerity’ measures have no impact on relative child poverty. Hence, the latest announcement is not so much a withholding of a goody, but a withholding of a protective shield.

Still, the decision is not unreasonable when seen in the context of the tax credit changes previously announced in the Budget and the Comprehensive Spending Review. Tax credits are really a hotchpotch of different payments, some of which are work-contingent and some are not. If you freeze the former while increasing the latter, work incentives worsen, and thus far, the coalition has done precisely that. Sure, this looks good in the statistics: it saves money without affecting those on the very lowest incomes, who do not work at all, and therefore do not receive work-contingent benefits. But it also creates adverse dynamic effects by discouraging work. Unfortunately, if you want to freeze work-contingent benefits without making work relatively less attractive, you also need to freeze benefits unrelated to work. The coalition has now done that.

Of course, a much smarter way to cut the tax credit bill without making low-income families worse off would have been to make all payments work-contingent for the majority of recipients. Once people work steadily and for a reasonable number of hours, their market income already takes them most of the way, even if it is at the minimum wage. The role of tax credits could then be reduced to that of an income supplement – an add-on rather than a main income source. That, of course, would infuriate our poverty lobby even more, because it would run contrary to their key tenet that the route out of poverty is benefits, not work.

But we can’t have everything. The objectives of consolidating the public finances and lowering poverty are reconcilable. The objectives of reducing dependency and keeping the poverty lobby happy are not.

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

1 thought on “When is a cut not a cut? When it is a cut in a projected increase”

  1. Posted 01/12/2011 at 11:58 | Permalink

    I imagine such ‘cuts’ as do occur will be the effect of unintended consequences, the supposed benefits to be derived from inflation which operates under the stealth of quantitative easing

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