Work incentives for single parents will worsen – thanks to child poverty targets

The welfare section of the Comprehensive Spending Review (CSR) contains many elements which are “pragmatic” rather than strategic. This includes the temporary freezing of the Savings Credit, and of some elements of the Working Tax Credit (WTC). Combined, these measures will save almost £1bn. But cost pressures will, of course, resume as soon as the freezes expire.

The cap on the maximum sum that can be received in benefits is an even starker example. In the present system, it can occasionally occur that households receive benefit payments exceeding the median disposable income. In the future, these households will find their benefits capped at the level of the median. But the government should have been asking a fundamental question: what has gone wrong with the welfare system if such a situation is possible?

In the midst of proposals such as these, the CSR contains one which represents a more strategic choice: the minimum number of working hours required to qualify for WTC will be increased from 16 to 24 per week. This suggests that the coalition is rethinking, more broadly, what the proper role of in-work support should be: should the state attempt to permanently replace the pay of several workdays? Or should in-work support have a more subsidiary role, i.e. should it be a wage supplement instead of a wage substitute? (Or am I reading too much into the CSR?)

However, the coalition is not prepared to take this rethink beyond an embryonic stage: single parents are exempted, even though they are the most relevant group in this context. There are about 739,000 households in receipt of WTC who work between 16 and 24 hours a week, and 500,000 of them are single parent households. Consequently, the fiscal savings are limited to less than £0.4bn per annum.

No explicit reason for the exemption of single parents is provided, but it is not far-fetched to suspect the government’s commitment to ill-defined child poverty targets is behind it: the CSR emphasises that “the Budget will have no measurable impact on child poverty in the next two years”. For the same reason, Child Tax Credit (CTC) will also rise.

This is a missed opportunity in several respects. Increasing the working hours requirement for single parents would not necessarily have decreased their income. It would merely have incentivised them to contribute a greater share of it themselves. Raising the number of working hours required could even have released the funds necessary to lower the taper rate of WTC, thus lowering a barrier for single parents (and others) who want to progress in the labour market. Requiring a greater contribution from tax credit recipients, including single parents, would not just realise fiscal savings, but also improve work incentives.

The combination announced in the CSR will achieve the precise opposite. Some perfectly feasible fiscal savings will be foregone, while work incentives for single parents will worsen. This latter point is easy to demonstrate: work-related transfer payments (the basic element and the 30+ hours element of the WTC) will be frozen, while transfer payments unrelated to work (the Child Tax Credit) will rise notably. If benefits are to be raised at all, it should have been the other way round. 

The UK already has by far the lowest employment rate among single parents anywhere in Europe. By further decreasing the relative pay-off from work, the plans outlined in the CSR will make sure it stays that way.

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  1. Posted 11/11/2010 at 15:45 | Permalink

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