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Saturday, September 12, 2015

The Tories inadequate living wage will not compensate for benefit cuts

The Institute for Fiscal Studies has published a study which shows that less than one-sixth of the losses faced by households from the summer Budget benefit cuts will be recouped by the introduction of the ‘national living wage’.

Public Finance reports that Chancellor George Osborne’s proposals to cut welfare spending, which include reducing the household benefit cap from £26,000 to £20,000 (£23,000 in London) and a four-year working-age benefit freeze, will reduce incomes significantly.

They say (rather obviously) that this is particularly true for households where no one works, which will lose on average £2,069 and cannot gain from the new wage rate:

Overall, the IFS concluded that, on average, only around 13% (£150 per year) of the £1,090 annual losses faced by working age households in receipt of benefits and tax credits would by offset by the NLW.

Among households with someone in paid work, those eligible for benefits and tax credits were estimated to lose an average of £750 per year from tax and benefits changes. On the other hand, the average gain from the new NLW, which will be introduced for those aged 25 and over at £7.20 from next April and reach £9 an hour by 2020, is expected to lead to an increase in wages of £200 per year. This suggests that the new NLW will, on average, compensate for 26% of the losses this group.

The Institute for Fiscal Studies add that largest proportion of households gaining from the higher wage rate are in the middle of the income distribution, while it is households in the lower half of the income distribution who stand to lose the most from the reforms to taxes and benefits.

Essentially, the wage increases are not as large as the benefit cuts. And, the living wage is not targeted at the same group who lose from the cuts.
I think for someone on the minimum wage the increase in the minimum wage for over 25s is worth more than £200 pa. I don't think the IFS do themselves any favours in averaging out over a number of families.

I don't agree with their strategy, but it is best to look at the effects on different households. There is also a question as to the impact of UC which is not yet clear.

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