What's the point of working tax credits? David Cameron has called their use into question by highlighting the role they play in enabling big businesses to get away with paying poverty wages. But this overlooks the important role that working tax credits play in enabling parents to enter or stay in the labour market working less than full-time.
For many, work can only provide a route out of poverty if pay levels, hours worked and in-work benefits come together to provide an adequate income.
Being a parent is a big job. Many find that working part-time is the best way for them to manage both their paid job and the unpaid job of parenting. Our recent research found that whilst the public holds a vast range of opinions on the number of hours parents should reasonably be expected to work, parents believe that those on low pay should be able to make similar choices about work-family balance as the better-off. Parents in the research felt that decisions about the 'right' number of hours for a parent to work are deeply personal and driven by parents' unique knowledge of what works for their family.
So it makes sense to create a system that allows parents to work the number of hours that works for their family. For all but the highest earning lone parents, wages from part-time work will never be enough to cover the costs of raising a family. These parents need social security to help meet family costs, and working tax credit in particular rewards parents moving into the labour market. Without the vital contribution that tax credits make in underpinning part-time work, we risk moving to a situation where some lone parents can no longer afford to have a job. And in this respect Universal Credit (UC) is no different from (and indeed uses the same rates as) tax credits: without being set at an adequate level, Universal Credit will be unable to encourage behaviour change and reward parents moving into work. Torpedoing tax credits damages UC too.
This is in no way a defence of low pay. Of course employers should pay wages that employees can live on. But we need to be honest about what this means for low income families. A lone parent working 16 hours a week will see very little difference in their income whether they are paid a minimum wage, living wage or higher as they will simply receive less in tax credits. The real benefit of higher hourly earnings is in the savings to the Treasury which will be paying less in-work benefits and gaining more from tax receipts. And this is where the potential actually lies: government could reinvest these savings in measures that would help to bring down child poverty. For example, by restoring the value of children’s benefits through a triple-lock of the kind that pensions enjoy.
There is also the need for some honesty about how working tax credits have (or haven’t) affected pay levels. Evidence shows that benefits designed to top up earnings do not depress wages as many fear. There are far more effective ways to raise wages than by impoverishing workers by cutting tax credits in the hope that employers will pick up the tab.
Cutting tax credits has the potential to be a real shot in the foot for a government looking to reduce the deficit. Lone parent employment rates have been steadily rising over the last decade, many moving into part-time work. If this trend is reversed, we will see a rise in benefit payments and a reduction in tax receipts from this group. Even if working patterns do not change, reductions in working tax credit entitlement could mean parents are entitled to higher levels of housing benefit, simply increasing pressure at a different point in the system.
As final decisions are being made ahead of the budget, let’s make sure that mums aren’t frozen out of working.