Time to 'stick or twist' on wage subsidy | CPAG

Time to 'stick or twist' on wage subsidy

Published on: 
04 May 2016
Written by: 

Alison Garnham

Chief executive

It’s undoubtedly good news that Stephen Crabb, the new Work & Pensions Secretary, insists that Universal Credit will be one of his main priorities. The key question, however, is will it be one of the Chancellor’s priorities?

The Government’s ambivalence to topping up the wages of the low paid so frustrated Iain Duncan Smith that he nearly resigned last year before he actually did so a few weeks ago.

You might think the tax credits U-turn last November demonstrated support for wage subsidy and the important role it plays in targeting support at low-paid workers – particularly those with children. But be cautious in drawing this conclusion. The flagship Universal Credit, the Government’s own version of tax credits, has now been torpedoed so often in successive budgets and spending reviews - particularly last year’s Summer Budget - that government now refuses even to report on its poverty-fighting potential, and its ability to make work pay is looking pretty ropey for many families.

In fact, it is clear that the calculus has changed on Universal Credit; it now represents a Treasury saving, compared to tax credits. The IFS states that Universal Credit now cuts support for working families but does strengthen the gains from work for those facing very high disincentives under tax credits (though at the expense of worse incentives for others). 

No surprise, perhaps, that IDS resigned rather than stay to watch the scheme into which he had invested so much undermined even before it was up and running.

The Chancellor argues that these cuts working benefits are both necessary to meet his fiscal rules and desirable because they bring us closer to being a ‘high wage, low tax, low welfare’ economy. (To this Treasury tricolon, we may now need to add ‘high poverty’ - the IFS projects that tax and benefit changes may lead to child poverty rising by a half by 2020).

But at a strategic level, does this really signal a change of policy direction? Does the government now want wages high enough to avoid wage subsidy? Any serious model of this type would also need to advocate much higher child benefit to meet the extra costs of children (which wages cannot take account of) plus universal childcare and help with housing costs. Otherwise, the consequences for families would be dire.

It is worth remembering modern-day wage subsidies are a Conservative idea. Tax credits were one of Ted Heath’s big ambitions and his proposal, after much debate and opposition (including from CPAG, which opposed the principle of paying it through the wage packet mainly to fathers), were eventually introduced as Family Income Supplement (FIS) by Anthony Barber.

FIS was replaced in 1988 by Norman Fowler’s Family Credit. For Fowler, FIS, among other things, helped create a series of common rules for means-tested benefits in the Social Security Act 1986. Gordon Brown’s version of tax credits from 1999 operationalised an intention to reduce child poverty and make work pay and, it has to be said, made huge progress on both. Universal Credit is now starting to look more like Fowler’s Family Credit, with one key improvement: that there is now more help with childcare costs.

Today, any credible attempt at an alternative to wage subsidy, would arguably also need to take on board the need for a renewed series of social insurance benefits to cover periods of interruption of employment (as Beveridge called them) or even contemplate turning tax allowances into a basic income for adults to avoid rising poverty. Is this really the agenda of the current government? I think not.

But if it continues to raid Universal Credit for Treasury savings, the benefit will certainly never be what it was cracked-up to be. The Government – with the DWP and the Treasury arm-in-arm - should be able once again to speak proudly about a flagship benefit that will reduce poverty and make work pay, or tell us what a ‘high wage, low tax, low welfare – and low poverty’ world looks like.

The Government needs to make up its mind about whether it wants an effective system of wage subsidy or not. It needs to stick or twist – it can’t have it both ways, as Iain Duncan Smith’s resignation made clear.