Autumn Statement: New cuts hit children in working and out of work families

December 5, 2012

Commenting in response to the Chancellor’s Autumn Statement, Alison Garnham, Chief Executive of Child Poverty action Group, said:

“Despite all the talk, working families are once again at the front of the queue for spending cuts. With 6 in 10 poor children living with a working parent, real terms cuts to tax credits, housing and child benefits are grim news.

“Today’s measures give a net income boost to 3 out of 5 people in the wealthiest half of the population, whilst everyone in the poorest half will see their income cut. If we are all in it together, some of us – the poorest – are in it deeper than the rest.

“To date, we estimate more than 60% of the cuts to benefits and tax credits have fallen on working claimants, but the increased tax allowances don’t fully benefit them – they get only 15p in the pound, while it is the better off again who get most gain from this tax cut.

“While we’re relieved an outright cash terms freeze was avoided, there is no getting around the fact that benefits have been cut in real terms. The bottom line is that the decisions taken by the Chancellor today will plunge tens of thousand more children into poverty whether their parents are working, unemployed, sick or disabled

“According to the Institute of Fiscal Studies, the single biggest driver of child poverty in the next few years will be the changes already made to how benefits are uprated. Today’s cuts will make this bad situation even worse and will create a child poverty time bomb that will harm children and their life chances and rack up massive spending bills in future years. “

Prior to the Statement CPAG’s key messages to the Chancellor were:

  • Any uprating of benefits by less than inflation will make an already awful situation worse still for both working and out of work families. Benefits and tax credits should be uprated at the very least in line with CPI (already a massively poverty increasing cut from previous uprating in line with RPI)
  • Further cuts to social security create great economic as well as social dangers. In line with IMF warnings the Chancellor must protect economic stabilisers such as social security payments, tax credits and housing benefits to protect demand in our struggling economy. Benefits caps and the housing benefit ‘bedroom tax’ cut should be suspended, and the 16 hour threshold reinstated for couples claiming working tax credit.
  • Earnings disregards should be increased in housing benefit (HB) and council tax benefit (CTB) to ensure low earners benefit from rising income tax thresholds. Currently low earners receiving HB and CTB stand to gain only £106 while middle income earners gain £705 a year.
  • Support for childcare costs for working families should be returned to 80% in working tax credit and the new universal credit.
  • The child tax on child benefit should be dropped and a fairer way found to ensure all high earners, not just those with children, make their fair contribution to deficit reduction.

ENDS

Notes to Editors

  • Over 50 charities, NGOs, unions and academic have written an open letter, warning the Chancellor that further cuts to welfare would be “a tragedy for millions” and would harm economic growth. The full text of the letter and full list of signatories is linked to here.
  • When he was Shadow Secretary of State for Social Security in 1998, Iain Duncan Smith said in a parliamentary debate on uprating of benefits

“As the Minister of State said, the annual uprating order is an opportunity to talk about the detail of this matter. Clearly, it is a straightforward and traditional uplift in line with two measures of inflation, and it would therefore be wrong for anybody in the House to try to block it. It deals with those in need, and it is only fair that those payments should be made at the earliest opportunity. I therefore welcome the order and make no bones about it.”

http://hansard.millbanksystems.com/commons/1998/feb/18/social-security#S6CV0306P0_19980218_HOC_271

  • Unemployment benefits have been on a steady decline in value relative to earnings for several decades, as shown in the chart below.

Benefit uprating history chart

  • Progressive or Regressive? Note that 3 out of 5 people in the richest half of the population will see their net income increase, whilst everyone in the poorest half will see their net income decrease in a fully regressive pattern across deciles 1 to 8. The following chart comes from the Treasury’s own analysis of the distributional impact for the Autumn Statement 2012, which can be seen in full here: http://www.hm-treasury.gov.uk/d/as2012_distributional_analysis_impact_on_households%281%29.pdf

Income distribution Autumn Statement 2012

  • The Office for National Statistics has this week published research showing that richest 10% in Britain have a total combined wealth of £4.5 trillion, whilst the poorest 50% only have a total of combined wealth of £1 trillion. This suggests that options could be considered for greater contributions from the wealthiest as an alternative to cutting essential services and social security for the poorest. The ONS research is here: http://www.ons.gov.uk/ons/dcp171776_289407.pdf
  • The IMF gave a clear warning to the Chancellor in their World Economic Outlook report in October that cuts to social security are destabilising our fragile economy:

“Automatic stabilisers should be allowed to play freely”.

(p.xviii, World Economic Outlook October 2012: Coping with High Debt and Sluggish Growth, IMF)

‘Economic stabilisers’ are social security payments, and wage and housing subsidies (tax credits and housing benefit) that rise when labour markets are weak and wages stagnate during  economic crises. They help protect a struggling economy from a collapse in demand that would cause a domino effect of further job losses and reduction in output. So the stabilisers help keep businesses afloat, keep people in work, and provide social protection preventing longer term costs to government – e.g. increased demand on NHS from ill health associated with destitution.

  • The IMF has also in the World Economic Outlook report warned that the UK and other countries have dangerously underestimated the fiscal hindrance that cuts are having – the extent to which cuts can cause reduction in economic output. The UK had been using a multiplier of 0.6 to estimate the extent to which welfare cuts would decrease economic activity – i.e. if £10 billion is cut from social security, benefits and tax credits then GDP will decrease by £6 billion. However, new analysis by the IMF of the cuts made so far has led them to discover that the multiplier is between 0.9 and 1.7. This implies that a total of £30 billion of benefit cuts will shrink the economy by at least £27 billion and perhaps as much as £50 billion (or 3.6% of GDP).
  • CPAG is the leading charity campaigning for the abolition of child poverty in the UK and for a better deal for low-income families and children.
  • CPAG is the host organisation for the Campaign to End Child Poverty, which has over 150 member organisations and is campaigning for public and political commitment to ensure the goal of ending child poverty by 2020 is met.

For further information please contact:

Tim Nichols

CPAG Press Officer

Tel. 020 7812 5216 or 07816 909302 

tnichols@cpag.org.uk

www.cpag.org.uk