In 2012, the British government, which had for the first two years of its last term, realised that it was going to drive the economy back into deep recession if it maintained its fiscal austerity plans. It had spent the previous two years telling everyone how it had to cut into the fiscal deficit to save Britain but by 2012 the data was telling the government that their view of the world did not accord with reality. As a consequence they curtailed the austerity onslaught and allowed the deficit to grow and support growth. The result was that Britain avoided a triple-dip recession and the nation demonstrated to its EU partners across the Channel how stupid and reckless the Eurozone’s fiscal austerity was. But ideology often comes back to the fore when the emergency is over. Now with continued, albeit weak growth and a renewed electoral mandate, courtesy of the pitiful British Labour Party, the Tories are once again talking tough and in the Spring 2015 ‘Budget’, the austerity returned with vengeance. The focal point at present of that austerity is the impending parliamentary vote on cutting the benefits to low income families in Britain via the Tax Credits system. The attempt to force harsh austerity onto the poor in Britain is vile in its conception. But the Tax Credits system in the first place is the result of weak-kneed decisions by New Labour to avoid forcing British employers to pay a decent minimum wage which would have eliminated ‘working poverty’. Now the chickens are coming hometo roost. And as usual, when austerity is introduced it is the poor that suffer. A disgrace all around really.
There is often an over-reach among the right-wing governments that feel entrenched in power. In Australia, for example, the previous Liberal government under John Howard has been in power for 8 years and finally seized control of the Senate (Upper House), which meant he could introduce any legislation he liked in the lower house and know that it would get through both houses.
He took this as a sign that he was invincible and immediately wheeled out the pernicious Workplace Relations Act which hacked into worker entitlements and protections and dramatically shifted the balance in favour of employers.
It was one shift to the right too many for the population and was the principal reason the conservatives lost office in 2007 after 11 years in office.
The British government seems likely to be engaging in the same sort of hubris with the Spring ‘Budget’ announcement that it would reduce the tax credits offered to workers on low pay.
The proposal is now broadly reviled in Britain and many commentators are claiming it may be Osborne’s ‘plank’ (as in ‘walk the plank’ into shark-infested waters).
The House of Lords is poised to defeat the legislation when it goes to vote in London today.
What is the tax credits system?
The previous Labour governemnt introduced the system to assist low-paid workers and their families because they did not have the foresight (they were New Labour after all) to reform the mininum wage system to ensure that no one was in poverty who had employment.
They created a two tier system of benefits paid to British families who have low incomes:
1. Working Tax Credit (WTC) – so an income threshold was established at £6,420 below which maximum tax credits were provided by the Government. The upper ceiling after which no benefit was paid is £13,253. A minimum number of hours worked per week is also enforced (at least 16).
Under the current proposal, this threshold will be cut to £3,850 a year from April. So benefits will start to taper sooner and the taper rate has been increased, which means that from April 2016, for every £1 earned above the threshold a loss in 48 pence will occur instead of the current loss of 41 pence.
It is estimated that millions of poor working families in Britain will lose on average £1,000 per year as a result.
2. Child Tax Credit (CTC) for those with at least one child. The income threshold in this category is £16,105 and will be cut to £12,125 under George Osborne’s proposal.
The Government claims that these negative impacts will not occur because it has announced the introduction of a National Living Wage from April 2016 to offset the loss of benefits under the Tax Credits system.
On October 7, 2015, the British Resolution Foundation analysis – Summer Budget changes will push up to 200,000 working households into poverty – took into account the changes to the minimum wage system and rejected the Government’s claim that cutting the Tax Credits would not increase poverty.
They found that by 2020, a single parent in a low pay position (earning £9.35 per hour for 20 hours per week) will be £1000 worse off per annum while a couple working a combined total of 53.5 hours per week on the same hourly rate will be £850 worse off per annum.
They found that “the number of poor working households will rise by up to an additional 200,000 over the course of the parliament as a result of policies announced in the Summer Budget”.
100,000 of these increased poor will be directly the “result of cuts to tax credits and other benefits announced in the Summer Budget”.
It found that “Many of those looking forward to a pay rise this April will soon learn that those gains will be dwarfed by reductions to tax credits.”
The modelling by the Resolution Foundation found that the minimum wage would have to rise to around £12 per hour (£22,700 a year) to offset the loss of tax credits.
In Britain, the so-called ‘living wage’ is currently £7.85 an hour or £9.15 in London. The legal minimum wage is only £6.50 per hour.
The ‘living wage’ is how much a family has to receive to enjoy an acceptable standard of living.
The Government’s justification is clothed in the sophistry of moving Britain from a “low wage, high tax, high welfare society to a high wage, low tax, low welfare” but, in reality, this is just an ideological move to attack the defenceless as a way of attempting to reduce the fiscal deficit.
On October 5, 2015, the British Resolution Foundation published its – Low Pay Britain 2015 Report – which is the fifth in an annual series and shows the “the prevalence of low pay in Britain”.
The five annual publications have established a pattern where:
Even before the financial crisis hit, too many employees in Britain were low paid by the standards of the day and relative to other countries. The downturn has done little to alter that, and pay has fallen behind the cost of living
The 2015 Low Pay Report found that:
1. “21 per cent … were low paid in Great Britain”. This proportion has shown “little change … over the last 20 years”.
2. “2 per cent of employees” were affected by “‘Extreme’ low pay”.
3. “22 per cent … were paid less than the voluntary Living Wage” and that proportion has risen since 2013.
4. “5 per cent … were on the minimum wage. This proportion has been increasing steadily since the early 2000s”.
The question then is what is the relation to low pay and the poverty line? The proposition is that if low pay is insufficient to ward of poverty so that employment is not a sufficient path to a poverty free inclusive life then the problem is the wage floor established by the minimum wage is too low.
In its – Monitoring poverty and social exclusion report 2014 – released on November 20, 2014 in liason with the New Policy Institute, a person is considered to be in ‘relative poverty’ if their “income is below 60 per cent of the median”
To overcome the problem that a declining median income level over the last decade presents this sort of classification, the Report uses a “fixed level of income as the threshold”.
The difference between the two measures amounts to “a difference of two percentage points when estimating the number of people in poverty”.
We learn that:
Household incomes fell in real terms for the third year in a row. Median income in 2012/13 was 9 per cent below where it was in 2007/08 and 4 per cent lower than a decade ago. Incomes of the bottom tenth have fallen further and for longer and are now 8 per cent below their level in 2002/03.
The following graph (reproduced from Indicator: 1A in the Report) shows that the low income trend turned well before the GFC although the GFC has exacerbated the disadvantage.
Over the same period, (2003-2013), “the consumer prices index rose by 30 per cent” and for “all family types, the cost of attaining a minimum standard of living has risen more quickly than average consumer prices”.
The Report found that the “poorest households spent over a quarter of their income on housing” compared to the richest 20 per cent who spent less than 10 per cent of their income on housing.
The poor are also heavily indebted with “One in five adults in poverty are behind with at least one bill, compared with one in twenty of adults not in poverty”. More households in the UK now have negative equity.
In the period since 2011/12, the proportion of people in material deprivation has risen in Britain.
How does this all impact on poverty measures?
The 60 per cent of median income’ rule shows that 21 per cent of people in Britain (13.3 million) were in living below the poverty line. Using the 2010/11 fixed threshold measure, reveals that 23 per cent (14.6 million) were below the poverty line.
But the falling median income over the last decade blurs the extent to which poverty has risen in Britain. Using a pre-GFC income fixed income threshold measure (2007-08) and indexing it to inflation shows that there were 16.6 million people living below the poverty line.
More people below the age of 30 are in poverty whereas pensioners (above 65 years) have enjoyed lower poverty rates. There was an interesting UK Guardian article over the weekend (October 24, 2015) – Pensioners prosper, the young suffer. Britain’s social contract is breaking – discussing the age profile of poverty.
What about the working poor?
1. “half of all poverty is found in working families”.
2. “Around two-fifths of working-age adults in poverty are themselves in work”.
3. Poverty in working families is rising in the UK as is the number of families on low pay.
While the British government claims that the expanding employment in the UK is a sign of its policy success, the reality is quite different when we consider the quality of the work being created.
1. Underemployment remains at high levels.
2. “two thirds of those in work now but unemployed a year ago are in low-paid work” which means they are classified as being working for less than the ‘living wage’.
3. Only 20 per cent of low-paid workers have been able to gain better pay over the last decade. In other words, low pay is a trap.
4. “Changes to the way the welfare system operates have worsened the experience of poverty for many of those affected”.
So it is not hard to understand why the detailed analysis of the 2015 Summer ‘Budget’ by the Joseph Rowntree Foundation – Will the 2015 Summer Budget improve living standards in 2020? – found that:
Fiscal austerity is likely to worsen the ability of many low-income households to make ends meet in the next few years,
While the so-called progressive side of politics is attacking the Tax Credit cuts vehemently and are now pressuring the House of Lords to reject the three-times voted proposals (in the lower house) the real issue is the fact that the legally enforceable minimum wage is too low and should be increased substantially.
And that should be done before the workers’ benefits are cut.
The progressive argument should have nothing to do with ‘fiscal savings’ – they are irrelevant even though the Tax Credits system has moved from a system that paid out £1 billion in benefits per year when first introduced to around £30 billion a year now.
The increased fiscal outlays are just a testament to the increased proportions of working poor on low pay. The problem is low pay not the size of the fiscal outlays.
But then you only would be able to conclude that if you were a ‘deficit denier’ (like me), a position which the current British Labour leadership have firmly denounced to their discredit.
I also note that the Tax Credit issue is driving a wedge between reality and tradition in British politics with the House of Lords now being forced to play a non traditional role and make determinations on fiscal matters as a result of the Government’s “plans to front-load its welfare savings and pile the burden on the working poor” (Source).
I will leave that one for the political scientists to work out.
I have made this point before – but you know about repetition … if you say it enough!
The minimum wage (with appropriate social wage support via policies that provide adequate child care, cheap public transport options, housing help and similar) is, in my view, a statement of how sophisticated a nation wants to be or aspire to be. Minimum wages define the lowest real material standard of wage income that a citizenry wants to tolerate.
It should be a wage that allows a person (and family) to participate in society in a meaningful way and not suffer social exclusion or alienation through lack of income.
It is a statement of national aspiration.
There should be no such thing as the ‘working poor’.
In any country it should be the lowest wage that society considers acceptable for business to operate at. Capacity to pay considerations then have to be conditioned by these social objectives.
If small businesses or any businesses for that matter consider they do not have the ‘capacity to pay’ that wage, then a sophisticated society will say that these businesses are not suitable to operate in their economy.
Such firms would have to restructure by investment to raise their productivity levels sufficient to have the capacity to pay or disappear.
This approach establishes a dynamic efficiency whereby the economy is continually pushing productivity growth forward and allowing material standards of living to rise.
I consider that no worker should be paid below what is considered the lowest tolerable material standard of living just because some low wage-low productivity operator wants to produce in a country and make ‘cheap’ profits.
I don’t consider that the private ‘market’ is an arbiter of the values that a society should aspire to or maintain. That is where I differ significantly from my profession.
The employers always want the wages system to be totally deregulated so that the ‘market can work’ without fetters. This will apparently tell us what workers are ‘worth’.
The problem is that the so-called ‘market” in its pure conceptual form is an amoral, ahistorical construct and cannot project the societal values that bind communities and peoples to higher order considerations.
The minimum wage is a values-based concept and should not be determined by a market.
All of that is in addition to the usual disclaimers that the pure ‘competitive market, cannot exist for labour given the imbalances between workers and employers and the fact that the use value of the labour power is derived within the transaction (that is, the worker has to be forced to work).
This is unlike other exchanges where the parties make the deal and go their separate ways to enjoy the fruits of their trade.
Which is why the decision by New Labour to introduce the Tax Credits system in the first place was a sign that they were not prepared to take the ‘market’ on and get rid of low wage-low productivity employers who are content to offer jobs that guarantee their workers remain below the poverty line.
New Labour were content to race-to-the-bottom and the low productivity that cripples the growth of material living standards in Britain today are a direct result of their lack of foresight in pushing up the wage floor and driving out low-wage (poverty wage) employers.
I don’t support the current British government’s plans to impose harsh austerity on the poor in Britain. But the fact they are admininstering a Tax Credits system in the first place is a sign of the failure of New Labour when they were in power.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.