Tax credits calamity hammers 200,000 families and harms the economy

May 8, 2012

New figures today, published by HMRC, show that over 200,000 families will be losing their entire working tax credit support, worth £3,870, from 6 April 2012. The Chief Executive of Child Poverty Action Group, Alison Garnham, said:

“This is an absolute calamity that plunges nearly half a million children deep below the poverty line. Many of these parents will now have less money in work than if they just claimed benefits. It runs directly against the consensus on the importance of making work pay and the government’s duties on child poverty.

“The Chancellor should have announced at the Budget he would keep these working families afloat and in work, but they were cut loose whilst taxes for corporations and the super-rich were cut instead.

“The policy was designed in 2010 when the economy was predicted to be in strong growth by now. But with an economy returning to recession, Ministers should have taken responsible action and put the policy on hold until employers could provide the additional hours of work these families need.

“There will be appalling economic consequences too, with the retail and service sectors taking a big hit from the loss of £500 million pounds of spending by the families affected. This could put further jobs and businesses at risk.

“The economy is not where we had hoped it would be and that requires Minsters to make hard decisions on today’s realities. Even now, this change could be postponed and David Cameron’s government should act swiftly and decisively before the damage is done to families and the economy.” 

ENDS

Notes to editors:

  • Constituency level data for the number of families and children affected has been released by HMRC and can be downloaded from the right hand menue.
  • An open letter was sent to the Prime Minster on 5 March 2012 by a group of organisations including children’s charities, Citizens Advice and Usdaw calling on him to postpone the change. A reply has not yet been received.
  • Figures release by HMRC, based on the latest quarterly statistics, show that 203,000 families (with 449,000 children) will be lose their working tax credits due to one of the Coalition’s cuts, which changes the hours rule.
  • On 6 April 2012, the rules for Working Tax Credit for couples with children changed. Currently, couples have to work at least 16 hours a week between both parents. From April they will have to increase their working hours to at least 24 hours, or they will lose their whole entitlement to Working Tax Credit, worth £3,870 a year. Although a minority of these families may be able to find extra hours in the coming weeks and months, for now their working tax credit claim has been terminated and all entitlement lost.
  • Key problems with the change:
    • Over 800,000 people are affected by major falls in household income to well under the poverty line. Official figures placed in the House of Commons Library earlier this year showed that up to 212,000 couples (424,000 adults) could be affected. These households include 470,000 children (an average of around 1,375 people in each parliamentary constituency). The new figures show that almost none of the families have so far been able to obtain additional hours to increase their hours of work to 24 or more.
    • Child poverty will surge. The families affected by this change are likely to already be close to the poverty threshold – most likely slightly below the line. The loss of Working Tax Credit of £3,870 (even with some counteracting increase in housing benefit as a consequence) will mean most of these couples and their children will be plunged deeply below the poverty line. This may have some impact on the headline measure of child poverty, but is more likely to show a larger impact on the government’s new ‘severe poverty’ indicator.
    • Families will be better off out of work. The current margin between those out of work on benefits, and those in work between 16 and 24 hours, will be erased by this change. A parliamentary answer to Ann Coffey MP has confirmed that the change will make households worse off in work than on benefits (see ‘Social Security Benefits’, column 395w).
    • Universal Credit will abolish the criteria for working hours in 2014. One of the key points about Universal Credit is that it will reward people for however many hours work they can do. The criteria for set hours of work will be abolished and families will receive support that is tapered at a set rate depending on their earnings rather than their hours of work. This change will therefore create untold misery for hundreds of thousands of working families and their children for a small and temporary gain to the Treasury.
    • The strong economic situation needed to support this change has not been reached. The government first announced this change in November 2010 in the Spending Review. At the time the Office for Budgetary Responsibility (OBR) was predicting that the economy would be back in strong growth now of 2.1% in 2011 and 2.6% in 2012. But the economy grew at just 0.9% in 2011 and we have just had a contraction of 0.5% for the last 6 months, meaning the economy is back in recession. The OBR have also significantly revised upward the job losses they expect in the public sector, many of which will be implemented in the form of reduced hours. The argument by government that the change would incentivise increases in working hours no longer makes in sense in the current economic context.
  • Poverty the Facts For up-to-date background facts and stats on UK poverty, visit: www.cpag.org.uk/povertyfacts/
  • 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.