Tax Cuts For The Rich, Benefit Cuts For The Poor?

Tax Cuts For The Rich, Benefit Cuts For The Poor?

Following news that benefits may rise with earnings, not inflation, Sian Norris and the Byline Intelligence Team asks: who will be hardest hit? And is this an inequality economy?

The Government has mooted real-term cuts to welfare benefits to help meet the ongoing economic crisis that was exacerbated by the mini-budget announced a week ago. 

The Times’ front page on Friday 30 September led with the story that the Government was discussing raising benefits in-line with earnings, leading to a real-terms cut that would mean households already struggling to make ends meet risk falling deeper into poverty. A rise in-line with earnings would be 5%, while inflation hovers around 10%.

The Byline Intelligence Team has analysed who would be impacted by any decision to introduce a real-terms cut to the incomes of families currently claiming welfare. 

We found that low-income women and people in their 30s, living in traditionally “red wall” seats, would be hit hardest by a decision to increase Universal Credit against earnings, not inflation. 

Our analysis comes as the Government delivers big tax cuts to the rich, while potentially cutting benefits for the poorest families, as well as threatening more cuts to public services.

This represents a move by Liz Truss’ Government towards an inequality economy. 

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What Is The Plan?

Universal Credit is the welfare system pioneered by former Department for Work and Pensions Secretary Sir Iain Duncan-Smith. In 2018 it was criticised by the National Audit Office which concluded it could end up costing more than the benefit system it had replaced, could not prove it helped more claimants into work, and was unlikely to ever deliver value for money.

Benefits usually increase in April each year, based on the consumer price inflation of the previous September. This meant that in spring this year, benefits rose by 3.1% – in line with inflation six months earlier. However, by April 2022, inflation had already risen to 9%, before hitting 10.1% in July. It is currently at 9.9%. 

Johnson’s Government had promised to correct this imbalance before he was forced to resign over the summer. However, the new Government has made it clear that benefit freezes are on the table, although formal discussions are due to begin only once September’s inflation figures are received next month.

According to the Resolution Foundation, increasing benefits in-line with earnings instead of inflation would leave a low-income family with two children £1,000 per year off. This would follow the decision by former Chancellor Rishi Sunak in October last year to cut the Universal Credit £20 uplift, which cost 5.5 million households an average of £1,200. 

It also risks cancelling out the changes to the taper rate announced last year, which gave an additional £1,000 more per year to two million working families on Universal Credit.  

Iain Porter, Senior Policy Adviser at the Joseph Rowntree Foundation, said: “It is shocking to hear the Government suggesting that they may not do what Rishi Sunak promised and uprate benefits by inflation next April as usual. This will mean yet another devastating blow to the finances of people on the lowest incomes and will cause fear for millions who have spent the past months struggling to feed their families, cook hot food and heat their homes”.

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Where The Cuts May Fall

More than 5.8 million people in England, Wales and Scotland claim Universal Credit, and just under half (40%) have jobs. The amount a household receives varies depending on income and whether the claimants have children. 

Of that 5.8 million, 46.7% are single people with no children, and 13.5% are a couple with children. Single parents make up 36.3% of claimants. Half of single parent households are in relative poverty, and 90% of those families are headed by single mothers. 

London has the highest number of individual Universal Credit claimants, at 771,665, and in April 2022, 16.5% of people on the benefit lived in the capital. Just over 12% of people on Universal Credit live in the North West, or 618,572 individuals. 

Proportionally the region with the most people on benefits is the North East, at 8.76%. This is based on the number of claimants (236,709) as a percentage of the regional population as estimated by Varbes (2,702,539).

The North West had the second highest percentage of claimants per population, at 8.39%. London is at 8.08% and the West Midlands at 7.9%. In Wales, 7.2% of the population claims Universal Credit, while in Scotland it is 7.1%. 

On an individual city or county council level, Birmingham City Council has the highest number of claimants, at 160,164, while Rutland has the lowest: 1,793.

This regional breakdown demonstrates that many of those who will be hardest hit by a decision to raise benefits in-line with earnings and not inflation are in former Red Wall seats – traditionally held by Labour but which voted Conservative for the first time in 2019 on a promise of getting Brexit done and “levelling up”. 

Women will also be disproportionately impacted by a real-term cut to benefits levels – they make up 55% of Universal Credit claimants. The majority of claimants are in their 30s.

Should the Chancellor Kwasi Kwarteng pursue a plan to increase benefits in-line with earnings in order to balance the books, at a time when offering tax cuts and unlimited bankers’ bonuses to the richest in society, he will be sending a clear message that austerity is back, and risks increasing regional, gender and generational inequality.

“Many people across the UK will agree it is morally indefensible that the Prime Minister would choose to give tax cuts to the richest funded on the backs of the poorest in our society,” said Porter. “Those who will lose out if the Government continues down this track include people with low earnings, families with children, carers and people who are sick or disabled”.