12 November 2015
The rejection of the Chancellor of the Exchequer’s plans to cut expenditure on tax credits by the House of Lords has been portrayed as being a personal political blow to George Osborne. The rejection of Osborne’s proposals in favour of a slower pace of cuts and the development of transitional protection for existing recipients, however, is more than the consequence of political hubris

The argument here is that the current furore over tax credits is due to more fundamental issues related to the way in which they have been understood by Conservative governments as being a tool to help manage worklessness, rather than as being a means of addressing the poverty of people in low paid employment.

The Conservative approach: wage supplements as a work incentive

What is often lost in the debates about and news coverage of tax credits is that Conservative governments were responsible in the post-WWII period for the reintroduction and extension of such wage supplements for people in full time work. The Conservatives introduced Family Income Supplement in 1971 and extended the reach and generosity of wage supplements by replacing it with Family Credit in 1988 (which was later replaced by tax credits). In this context, and even taking into account the historical preference of Conservative governments for economy in social protection programmes, it is somewhat curious that the current government is determined to cut wage supplements.

To understand its determination it needs to be acknowledged that Family Income Supplement and Family Credit were not introduced as a means of addressing the poverty of poorly paid working people. In contrast, they were introduced as a means of incentivising workless people to take low paid work. By the time, for example, Family Income Supplement was introduced concerns with poverty that had been ‘rediscovered’ in Abel-Smith and Townsend’s 1965 publication, The Poor and the Poorest, had been usurped by a concern that some households were earning such low wages that their income was below what they might have received in means-tested benefits had they been workless. The consequential search in the Wilson Labour governments of the 1960s and the early period of the Conservative government elected in 1970 was for a policy that could address this situation and allay government fears that people could be incentivised to give up work in preference for unemployment.

The importance of the incentivising potential of wage supplements was to become even more apparent during the years of mass unemployment in the 1980s. The first Thatcher government was warned by its ‘think tank’ (the Central Policy Review Staff) that unless action was taken unemployment would rise continually for the whole of the 1980s. It was during this period that wage supplements came into their own as a means of providing the Conservatives with a policy tool to encourage people into low paid work in the hope that this would help to reduce unemployment. This was because the Central Policy Review Staff’s analysis contended that it was only through tackling what were perceived as institutional interferences with labour markets (the actions of trade unions, the creation of an inflated ‘wage floor’ through the payment of benefits to workless people and industry-specific regulated wages through wages councils) that unemployment would be stopped from increasing.

In this context, it was argued by the Central Policy Review Staff that many working people would have to accept a future of low paid work. Wage supplements were to be central to this by helping to break in the public’s mind the link between low pay and family poverty. And, it was argued, that wage supplements would actually help to create employment by reducing the ‘wage floor’ – the wages employers felt obliged to pay and unemployed people were willing to work for. Hence, it was suggested by the Central Policy Review Staff that wage supplements could be used to reduce the wages employers expected to pay to below those in the lowest paid jobs. Such ideas were taken forward to the introduction of Family Credit via the Fowler Reviews of social security in the mid-1980s.

It is in this view of wage supplements – as a means of addressing what is known as the ‘unemployment trap’ – that the changes announced by Osborne in the summer budget were located. The changes, however, were to shift the means of delivering the incentive to take to wage work away from tax credits to, first, a concerted effort to reduce the amount in benefits that workless people will receive in the future (e.g. a freeze in the cash level of benefits for four years, a reduction in the ‘benefit cap’ and a restriction of tax credits for both people in and out of work of tax credits to two children only) and, second, an attempt to increase working people’s wage income through primarily an increase in the National Minimum Wage (to what was mislabelled as a ‘National Living Wage’), but also by increasing the personal income tax allowance. This approach can be understood as having historical resonance with the poor law principle of ‘less eligibility’ – the idea that if workless people are to be incentivised to take work at the available rates they must be kept poorer than those people in the lowest paid employment. The consequence of the Osborne approach would be a reduction in the importance of state-sponsored wage supplements in this role of enforcing less eligibility.

Difficulties with the Conservative approach

The difficulty for the government arose because it chose not to acknowledge what the opponents to its plans quickly drew upon – that in incentivising employment, and even if this was not their original intention, wage supplements also have an important role in maintaining the income of the poorest working families. In other words, they are important in relieving the poverty of poorly paid workers. Hence the arguments used so effectively in the House of Lords outlining the potentially devastating impact of the loss of tax credits to working poor households.

There are at least two issues here for the government. First, is the difficulty that it has with the idea of poverty, demonstrated, for example, in its effective repeal of the Child Poverty Act 2010 which was outlined just a week before the cuts to tax credits were announced. For the government, poverty is not so much about income (it, for example, was scathing about the headline measure of poverty of household income below 60% of the median contained in the Child Poverty Act), as it is about the non-financial circumstances in which people live. Hence, the Welfare Reform and Work Bill 2015 proposes the replacement of the income-related measure of poverty with ‘reporting obligations’ on issues including progress towards full employment, the proportion of children living in workless households and the educational achievement of deprived children. Given this reconceptualisation of poverty to focus upon circumstances, rather than income, it becomes easier to understand why the government had few problems with such severe cuts (estimated to be £4.4 billion per annum) to tax credits, the individual economic consequences of which it is hard to believe it did not understand.

Second, is the inadequacy of what – an increase in the National Minimum Wage to 60% of the median hourly wage by 2020 – was portrayed as the main replacement for the loss of tax credits. In the context of weak collective bargaining, legally requiring employers to pay higher wages is to be welcomed, but as the Institute for Fiscal Studies has so clearly shown, increases in minimum regulated wages will not necessarily help the people who would lose income through changes to tax credits. Tax credits, for instance, are concerned with familial need and income, whereas minimum wages are concerned with the hourly wages of poorly paid workers. It is instructive, for example, that the basis of the government’s so-called ‘national living wage’ is a low pay threshold approach to understanding wages, rather than a needs-based approach used, for instance, in the grass root-led demands for a ‘living wage’. The focus of the low pay threshold approach is to reduce the proportion of people who can be considered to be low paid. This is very different to developing a ‘living wage’ that, if it is to provide a replacement for tax credits, must have at least some relationship to the subsistence needs of low paid households.

The fundamental issue in the current furore over tax credits is one of differences in how political parties view the roles of such wage supplements in society. It is the Conservative government’s understanding of tax credits as merely being a mechanism that provides an incentive for workless people to take employment that has led to its problems with them. While opponents to the Conservative’s plans, as the development of tax credits under 1997-2010 Labour governments demonstrates, undoubtedly conceptualise tax credits as a work incentive measure, in addition they see them as having potential in helping to relieve poverty. Conceptualising tax credits in this way makes it easier to avoid the charge that deficit reduction is being done on the backs of those people least able to afford it.

Chris Grover is a Senior Lecturer in Social Policy in the Law School at Lancaster. He researches in the areas of social security policy. He has written widely in this area, with his most recent books focusing upon crime, social security policy and inequality, and the loaning of social security payments.

You can find out more about Chris’ research at: http://www.lancaster.ac.uk/fass/law/profiles/chris-grover