Need for clarity on the living wage and family benefits

Note:  This article gives the views of the author, and not the position of the Social Policy Research Unit, nor of the University of York.

Jonathan Bradshaw writes:

When Eleanor Rathbone[1]campaigned for a family endowment in the 1920s her main argument was that a working class wage was not enough to keep a man and his wife and children above the poverty level. They needed a family allowance to close the gap. The Beveridge[2]report accepted this argument and family allowances were introduced into UK social security by the Tory government in 1945 - according the Macnicol[3]in order to hold down wage demands in the post-war era. Family allowances, after a long and torrid history, have now become child benefit and child tax credit. Every rich country has a similar package of cash transfers that seek to recognise the extra costs of children[4].

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The child transfers in the UK were never adequate to meet the needs of low paid families with children. When budget standards began to be produced in the late 1980s[5]it became clear that the biggest shortfall between net income and a minimum budget standard was for families with children. The minimum wage from 1998 closed some of the gap. Then the increases in child benefits and the introduction of child tax credits closed more. Child poverty began to fall. But there was still a shortfall. The latest poverty statistics show that two-thirds of children in poverty are living in low paid working households.

The London Living Wage was founded on the basis of this budget standards work. After the first Minimum Income Standard (MIS)[6]was produced in 2008 it was taken up by campaigners as the basis of the first UK-wide Living Wage.  Initially, in 2009, a figure of £7.14 an hour was set to cover fully the needs of most household types, including the following with very similar wage requirements:

Single person: £7.09

Couple with two children both working: £7.14

Lone parent with one child: £6.79

The key feature of the living wage is that the level was based on the net earnings and child cash benefits that would meet the MIS. In 2009 the child transfer system was doing a good job in creating a similar living wage for different family types.

This is no longer the case. The latest MIS for 2015 requires: 

Single person: £8.75,

Couple with two children: £10.24,

Lone parent with two children:  £13.67

if a family is to meet the MIS standard. These different levels are the result of changes in commodity prices, family cash benefits, direct taxes and the specifications of what is required as a minimum since 2008. The most important cause of the divergence, even before the recent Budget, has been cuts in in-work benefits.

The Living Wage is to be revised in November 2015 based on these latest MIS estimates. It is currently £7.85 outside London.

Now in the Summer Budget the Chancellor has announced that he will raise the minimum wage for over 25s to £7.20 per hour in April 2016 and to the equivalent of 60% of median earnings or currently £9 per hour in 2020.  In some ways this is a fantastic achievement for the Living Wage Foundation and the research on budget standards showing that the present minimum wage is not enough. It is a big increase on the minimum wage which will be £6.70 per hour from October 2015. No campaigner on low wages would have predicted that a Conservative Chancellor would do this.

But of course that is not the end of the story. Badged as a national living wage it is undermined by the associated cuts in child tax credits. The so called national living wage will give single people a lot of help towards reaching a decent living standard, which the national minimum wage fails to achieve. However, most low paid families with children will be much worse off. Most of their national living wage increase will be clawed back in higher tax and national insurance liabilities, a tapering in tax credit support, cuts in the rates and thresholds of child tax credits and frozen child benefit. Child poverty rates will increase for low paid families.

What is needed here is greater clarity. First, clarity that the national living wage is not a living wage, but an enhanced minimum wage. Greater clarity about how the living wage is calculated would also help. Perhaps it is time for the living wage campaign to fix the living wage on the basis of the MIS for a single person and return to the idea of the family endowment on top of that. The living wage should be the responsibility of employers and the family endowment, the investment in children, a responsibility of all taxpayers through state transfers.

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[1] Rathbone, E. (1924) The disinherited family, Arnold: London

[2] Beveridge Report (1942) Social insurance and allied services, Cmd 6404, HMSO: London

[3] Macnicol, J. (1980) The movement for family allowances 1918-1945, Heinemann: London

[4] Van Mechelen, N. and Bradshaw, J. (2013) Child benefit packages for working families, 1992-2009 Marx I. & K. Nelson (eds.) Minimum Income Protection in Flux. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan 81-107

[5] Bradshaw, J. (ed) (1993) Budget Standards for the United Kingdom, Studies in Cash & Care, Avebury: Aldershot

[6] Bradshaw, J., Middleton, S., Davis, A., Oldfield, N., Smith, N., Cusworth, L., and Williams, J. (2008) A minimum income standard for Britain: What people think, York:  Joseph Rowntree Foundation

Report highlights 'bleak' poverty levels in the UK

The Poverty and Social Exclusion (PSE) Project published its first report today. 'The Impoverishment of the UK' reveals significant levels of poverty and deprivation.

Funded by the Economic and Social Research Council, it is a major collaboration between a group of UK universities including York and is the largest and most authoritative study of poverty and deprivation ever conducted in the UK.

The report is the subject of a special edition of Tonight titled Breadline Britain which is broadcast on ITV at 7.30pm on 28 March.

The PSE approach – now adopted by the UK Government and by a growing number of rich and developing countries - identifies people falling below a publicly-determined minimum standard of living. This method of measuring poverty was pioneered in 1983 and repeated in studies in 1990, 1999, 2002/03 and 2012. The project thus provides detailed, robust and definitive trends over 30 years.

Gill Main and Professor Jonathan Bradshaw, of the Department of Social Policy and Social Work at York, are members of the Poverty and Social Exclusion research team. They were responsible for developing the scale of child necessities and analysing the child poverty and deprivation results.

Professor Bradshaw says: “The findings of this study are shocking, indicating a level of poverty and deprivation which should be a wake-up call to policymakers and the public at large.”

Professor David Gordon, of the Townsend Centre for International Poverty Research in Bristol and head of the project, says: “The results present a remarkably bleak portrait of life in the UK today and the shrinking opportunities faced by the bottom third of UK society.  About one third of people in the UK suffer significant difficulties and about a quarter have an unacceptably low standard of living. Moreover, this bleak situation will get worse as benefit levels fall in real term, real wages continue to decline and living standards are further squeezed.”

Today 33 per cent of the UK population suffers from multiple deprivation by the standards. set by the public, compared with 14 per cent in 1983.

For a significant and growing proportion of the population, living conditions and opportunities have been going backwards. Housing and heating conditions, in particular, have deteriorated rapidly.

• One in three people could not afford to adequately heat their homes last winter and 29 per cent had to turn the heating down or off or only heat part of their homes. The number of households unable to heat the living areas of their homes is at a record high – now 9 per cent compared to 3 per cent in the 1990s and 5% in 1983.
• Overcrowding is as high as it was in 1983: today 9 per cent of households cannot afford enough bedrooms for every child aged 10 or over of a different sex to have their own bedroom (back up from 3 per cent in 1999).
• The number of households unable to afford damp-free homes has also risen since 1983 – from 6 per cent to10 per cent.
• One in five households can’t keep their home in an adequate state of decoration – up from 15 per cent in the 1990s.
• Overall, across all these aspects of housing, around 13 million people (aged 16 and over) in Britain cannot afford adequate housing conditions, up from 9.5 million in 1999

Increasing numbers of children also lack items considered essential for a stimulating environment and for social participation and development.

•  The proportion of school age children unable to go on school trips at least once a term has risen from 2 per cent in 1999 to 8 per cent today. 

 “Levels of deprivation today are worse in a number of vital areas – from basic housing to key social activities - than at any point in the past thirty years,” says Joanna Mack from The Open University, who, with Stewart Lansley, devised the study method in 1983. ‘These trends are a deeply shocking indictment of 30 years of economic and social policy and reflect a rapid growth in inequality. This has meant that, though the economy has doubled in size during this period, those at the bottom have been increasingly left behind.” 

There is widespread public agreement on what constitutes a minimally acceptable diet. Over 90% agree that, for children, this means: three meals a day; fresh fruit and vegetables; and meat, fish or a vegetarian equivalent at least once a day. 

• Yet well over half a million children live in families who cannot afford to feed them properly.

Our research shows that, in households where children go without one or more of these basic food necessities: 

• In 93 per cent at least one adult skimp on their own food ‘sometimes’ or ‘often’ to ensure others have enough to eat.

“It is not as a result of negligence but due to a lack of money that so many children are going without adequate food,” comments Professor David Gordon.

Significant proportions of the population find it difficult to cope on their current incomes:

• One in four adults have incomes below what they consider is needed to avoid poverty
• More than one in five have had to borrow in the last year to pay for day to day needs
• One in three can’t afford to save
• One in four can’t afford to replace or repair broken electrical goods (12 per cent in 1999).

Overall, people feel poorer:
More than one in three adults today say they genuinely feel poor some or all of the time compared to 27 per cent in 1999

Benefits uprating and living standards

Discussion piece by Professor Jonathan Bradshaw *

The decision of the Coalition Government, announced in the Autumn Statement, to uprate most social security benefits and tax credits by 1% per year for the next three years is unprecedented* . It will save £3.8 billion, which is the same as saying that the poorest families will have that amount taken from their incomes. The impact on their living standards will be much starker.
The Consumer Price Index (CPI) is running at 2.8% for 2012 and the Office of Budget Responsibility*  expect that the level of inflation will be over 2% for at least the next three years. However the movement in average prices is not that relevant to low income households because they tend to spend a larger proportion of their budgets on commodities (food, fuel, water) whose prices have been increasing faster, than general inflation* . Thus the Retail Price Index and the Consumer Price Index both underestimate the inflation experienced by people with low incomes receiving benefits*. The real incomes of the poorest are going to fall as a deliberate act of policy. This has not happened since 1931 when it resulted in the collapse of the first Labour Government.

The post war legislation that implemented the Beveridge plan laid down no provision for uprating benefits. But they were uprated, initially on an ad hoc basis. In 1974 it was decided to link so called ‘long-term benefits’ such as pensions and long-term sick and disabled benefits to the higher of the two annual increases as measured by the Retail Prices Index (RPI) and the Average Earnings Index.  The Thatcher government broke that link in 1979 – by linking long-term benefits to the prices index only. In 1983 they introduced the ROSSI index (RPI (All Items) less housing costs) to uprate income-related benefits. In 1992 the definition of ROSSI changed to New ROSSI.  New ROSSI is calculated as RPI (All Items) less rent, local taxes and mortgage interest payments. Since 1983, benefits have been increased in relation to the RPI, ROSSI or New ROSSI.  The actual increase in particular benefits has depended on the index applied and on policy decisions as to the appropriate rate for the benefit. In the 2010 budget the Chancellor announced that from April 2011 most DWP administered benefits would be uprated in line with the CPI. Also, the Government introduced legislation providing for earnings up-rating of the basic State Pension, and in addition, provided a triple guarantee that the basic State Pension will increase by the highest of the growth in average earnings, price increases or 2.5%

Between 1948 and 1979 the basic retirement pension doubled its value in real terms and maintained its value in comparison with average earnings. Under the Thatcher government the basic state pension declined in value in relation to earnings, until the Labour Government rescued it and linked it to movements in earnings from 2001. Over the whole period since 1948 it more than doubled in real terms. It will go up by 2.5% in April 2013 well ahead of earnings and just about maintain its value with average prices. (See Table 1)

Table 1: Single Basic State Pension at April 2011 prices and as a percentage of average earnings

Source: http://research.dwp.gov.uk/asd/asd1/abstract/abstract2011.pdf

Contrast that with what has happened to the benefit for the unemployed. Between 1948 and 1979 it also doubled in value in real terms. But since 1980 there has been a sustained fall in comparison with earnings and even under the Labour Government the real level of unemployment benefit fell (See Table 2).

Table 2: Single Unemployment Benefit / Jobseeker's Allowance (contributory) at April 2011 prices and as a percentage of Average Earnings

Source: http://research.dwp.gov.uk/asd/asd1/abstract/abstract2011.pdf

The improvements that the Labour Government made to out of work benefits were concentrated on families with children. Table 3 shows what has happened to the incomes of a lone parent with one child on social assistance. The first act of the Labour Government in 1997 was to cut lone parent benefits, but the outcry resulted in a sustained improvement in real terms and as a proportion of average earnings.

Table 3: Income support for a lone parent plus one child at April 2011 prices and as a percentage of average earnings

Source: http://research.dwp.gov.uk/asd/asd1/abstract/abstract2011.pdf

The decision to uprate pensions by 2.5% and working age benefits by 1% for three years is going to further exacerbate the absurd differentials in benefit rates that have developed over time. In 1948 a single pensioner received only 10p more than a single person on national assistance. Now a single person receives £71 per week in Job Seeker’s Allowance until they are eligible for Pension Credit when it jumps to £142.70 per week. A lone mother with one child gets £133.21 per week. These differentials clearly have nothing to do with need.

The decision to uprate benefits by less than inflation is justified by the argument that earnings are falling in real terms. Yes, and this meant that for the first time for decades there was some closing of the gap between the living standards of the unemployed and working households. In 1948 the single rate of social assistance was 18% of average earnings and it reached 20% in the late 1960s. In 2011 it had fallen 11% of average earnings.

Figure 4 compares movements in the CPI, RPI, the Minimum Income Standard price index and the single pension and JSA rates since 2000. The Minimum Income Standard price index, (developed by Donald Hirsch), represents the expenditure patterns of a low income person rather than the average. Between 2000 and 2011 the MIS price index has risen by 47% compared with the CPI by 28% and the RPI by 38%. The incomes of single pensioners have risen by 51% but single people on JSA by only 29%. Next April single people on JSA will get an extra 71 pence and their living standards and those of all other non-pensioners supported by benefits and tax credits including the majority who are in employment will fall further.

Figure 4: Movements in CPI, RPI, MISPI and benefits for single pensioners and single JSA. 2000=100

*

[1] Professor of Social Policy at the University of York

[2] Bradshaw, J. and Lynes, T. (1995) Benefit Uprating Policy and Living Standards, Social Policy Reports Number 1, Social Policy Research Unit, University of York: York

[3] http://budgetresponsibility.independent.gov.uk/economic-and-fiscal-outlook-december-2012/

[4] Levell, P. and Oldfield, Z. (2011),The Spending Patterns and Inflation Experience of Low-Income Households Over the Past Decade, Commentary 119, London: Institute for Fiscal Studies

[5] Hirsch, D. (2012) Benefit uprating: a return to human decency, Poverty 141, 6-9.