1

Understanding changes to Tax Credits:

historical and policy dimensions of wage supplements in Britain

Chris Grover

Senior Lecturer in Social Policy

Law School

Lancaster University

September 2015

The research for this paper was supported by a British Academy/Leverhulme small grant (award number SG132025) and by a small grant from Lancaster University’s Research Committee. The views contained in the paper are solely those of the author.

Contents

Page

Abbreviations3

Summary4

Introduction: wage supplementsand the 2015 summer budget7

Research method10

Findings11

Wage supplements before 1834 – discouraging paid work?11

Wage supplements as an incentive to take paid work13

Creating paid work? Wage supplements as wage suppressants16

Tackling poverty through wage supplements?20

Women and wage supplements27

Conclusion33

Bibliography36

Abbreviations

CPAGChild Poverty Action Group

CPRSCentral Policy Review Staff

CTCChild Tax Credit

CYPRChildren and Young Person Review

DfEDepartment for Employment

DWPDepartment for Work and Pensions

FCFamily Credit

FISFamily Income Supplement

IFSInstitute for Fiscal Studies

LROLancashire Records Office

NANational Archives

NAIRUNon-Accelerating Inflation Rate of Unemployment

‘NLW’‘National Living Wage’

NMWNational Minimum Wage

NRONorfolk Records Office

PACPublic Assistance Committee

WFTCWorking Families Tax Credit

WTCWorking Tax Credit

Summary

  • The summer budget of 2015 announced increases in the National Minimum Wage (NMW) so that by 2020 it will be what is described as a ‘National Living Wage’ (‘NLW’). It also announced significant cuts to wage supplements (Tax Credits and Universal Credit) so that in the future they will be residualised for the very poorest working families and offer significantly less financial support to them.
  • These developments provide an opportune moment to consider wage supplements, in particular whether there is anything that can be gleaned from debates about, and the practice of, supplementing wages in the past that can help inform understandings of wage supplements into the future.
  • Debates about wage supplements have existed for at least two hundred years. During that time wage supplements have been conceptualised as being both deeply problematic and as providing a solution to a range of economic and social problems.
  • The problems that have been associated with wage supplements include:
  • encouraging employers to adopt ‘flexible’ employment practices, for example, employing people on less than full time hours and reducing their wages in the knowledge that the state will top them up;
  • demoralising working people by discouraging them from working long hours and/or working harder to increase their income;
  • the pauperising of working people as a consequence of these two issues.
  • The advantages which have been associated with wage supplements include the opposite:
  • remoralising working people by providing them with an incentive to take paid work;
  • a means of suppressing wage demands and compressing wages, the latter in the hope of increasing the number of jobs;
  • a means of helping to tackle in-work poverty, particularly among families with dependent children.
  • The policy position on wage supplements has shifted over the past two hundred years. However, the problem – that for many families wages are not adequate to provide even a subsistence income – will continue into the future as the ‘NLW’is not related to household need and wage supplements are to be reduced in value.
  • Women, or more specifically relationships between men and women in couple households, have been central to debates about wage supplements. The principle that wage supplements should be paid to women was established with the introduction of Family Allowance in the 1940s.
  • The principle that wage supplements should be paid to women has been challenged at various points since the 1940s mainly because it was seen as a means of weakening the incentive for men to do paid work. Payment of wage supplements to men through the wage packet was contrasted as a means of increasing the incentive for men to do paid work.
  • The principle that wage supplements should be paid to women has been supported at various times as a means:
  • of ensuring that support for children is spent on the;
  • of encouraging women in couple households not to do paid work.
  • The justification for the contemporary cutting back of wage supplements – that Tax Credits which are deemed too generous encourage ‘welfare dependency’ and subsidise the operations of the ‘worse employers’ – have historical precedence.
  • Despite these criticisms wages supplements have not been prohibited (as they were in the Poor Law Amendment Act 1834) because they are still deemed necessary as a work incentive measure for the poorest paid workers and, as such, they are still deemed to have an important role facilitating labour market participation and the macro-economic consequences of it.
  • Previous experiences of wage supplements suggests that this position will change in the future as economic, political and social concerns change.
  • The focus upon ‘predistributive’ rather than redistributive policies in the 2015 summer budget announcements of an increasing minimum wage and cut backs to means-tested wage supplements is likely to lead to a worsening of the financial situation of women in couple households as the emphasis is upon increasing income via the wage packet and reducing income via the purse.

Introduction: wage supplements and the 2015 summer budget

The first Conservative government budget in Britain for 18 years was argued to be a means of moving ‘Britain from a low-wage, high-tax, high-welfare society to a higher-wage, lower-tax, lower-welfare economy’ (House of Commons Debates, 2015, col. 332). In order to do this, it was argued that a three-pronged approach was required. Two prongs – a reduction in the amount spent on social security benefits and a reduction in the amount of income tax paid by people in work by increasing further the point at which they would start to pay tax, and increasing the level at which the higher rate of income tax is paid – were related to reducing what was held to be ‘unfairness’ for tax payers within the tax/benefit systems. The third prong, was an increase in the reward from working through incremental rises in the NMW to reach what was described by the Chancellor of the Exchequer as a NLW[1] by 2020 (House of Commons Debates, 2015, col. 337). The budget was recognised as being deeply political, with, for example, the announcement of the ‘NLW’ seen as being designed to wrong-foot the Labour Party[2] by taking its ideas on ‘predistribution’ (the view in this instance that households should receive more of their income from wages, rather than state-sponsored wage supplements) and making them Conservative policy.

For the purposes of this paper, the most important of these developments is the reduction in social security spending. It was clear in the 2015 general election campaign that ifa Conservative government was elected it would seek to find savings in the social security budget of £12 billion per annum by 2020 in its desire to run a budget surplus by then. Exactly where those savings were to come from was made apparent in the 2015 summer budget, which, in fact, outlined ‘welfare’ savings of £13 billion. Nearly a half of those savings (£5,835[3]per annum or 45 percent) were to come from changes to Tax Credits, which are widely seen as wage supplements (although Child Tax Credit is payable to income poor families, whether their adults are in or out of wage work). People in low paid work will be greatly impacted by the changes to Tax Credits announced in the ‘summer budget.’ This is because three changes – reducing the level of earnings (the ‘earnings threshold’) after which Tax Credits are withdrawn by 40 percent (from £6,420 to £3,850) (with equivalent adjustments to Universal Credit), withdrawing Tax Credits at a faster rate by increasing the taper (the rate at which they are withdrawn) by nearly a fifth, from 41 to 48 percent and halving the increase in amount by which income can rise without it having to be declared – was to account for the two thirds (£3.8 billion or 65 percent) of the social security savings to come from Tax Credits.

The summer budgetcontinued a trend established under the 2010-15 Coalition government, which within months of its creation had announced savings to Tax Credits of £3.2 billion per annum by 2014/15. Given the cumulative effect of the savings to Tax Credits under the Coalition and now the Conservative Party government, it is estimated that that by 2020 real spending on Tax Credits will be at a similar level to that of 2007/08 (HM Treasury, 2015, Chart 1.15). The aim of retrenching Tax Credits is to ensure that they are received by fewer households. Treasury simulation models, for instance, suggest that by 2016/17 half of families with children will receive financial support through Tax Credits, compared to 9 out of 10 in 2010 (HM Treasury, 2015, para. 1.149).

There are two conclusions which can be drawn from these developments – that Tax Credits have and are being residualised so that only the income poorest families will receive them and that it is Tax Credits as a wage supplement which willfinancially suffered the most from the summer budget announcements. While the NLW and increases in the income tax personal allowance were, at least in part, portrayed as off-setting the cuts to Tax Credits, such arguments are problematic for several reasons. The Inland Revenue, for instance, argued in the past that income tax thresholds do not serve the same purpose as social security benefits (income tax thresholds, so the argument goes, adjusts income tax to ability to pay, rather than being linked to household need, as, until 2015, social security benefits were). In addition, regulated wages support individual workers with low hourly earnings, rather than supporting their household to reach a politically defined level of income as wage supplements did before the summer budget.

Given these observations, it was widely argued that the summer budgetannouncements would disincentivise people from taking work or increasing their hours of work.[4]While such arguments are a familiar critique of the social security from across the political spectrum and from various policy actors, they also raise issuesabout the role of the supplementing of wages through the social security system. The aim of this paper, drawing upon the research for a forthcoming book by the author (Grover, 2016) is to examine debates about, and the practice of, the state supplementing wages over the past two hundred years to explore the ways such supplements have been conceptualised in the past and what implications that this may have for understanding contemporary developments. Before doing this, however, it is worth noting the research method upon which the study was based.

Research method

The study focused upon support that was given firstby poor law authorities and later central governments as a means of supplementing wages. As a consequence, it included (in date order) a focus upon ‘allowances in aid of wages’ (of which the Speenhamland Scale is the best known, but not the only, example), Family Allowance, Family Income Supplement (FIS), Family Credit (FC), Tax Credits and, the most recent, Universal Credit.

For development before the 1990s a total 379 files were examined at the National Archives for material relevant to the study’s focus. This material included memos and letters (between civil servants within and external to the ministries in which they worked, and between officials and ministers and between ministers), working papers, briefing documents and notes, evidence submitted to government reviews, minutes of meetings, position and review papers, and notes for the record. In addition, research was done at two local archives – Norfolk Records Office (NRO) and Lancashire Records Office (LRO). A total of 35 files were examined at NRO, as well as three local newspapers – the Eastern Daily Press, the Eastern Evening News and the Norfolk Chronicle – at the Norfolk Heritage Centre. At the LRO 39 files were examined, supplemented by searches of local newspapers – the Chorley Guardian and Leyland Hundred Advertiser, the Lancashire Daily Post and The Nelson Leader held at various libraries across Lancashire – for reports of the meetings of Lancashire’s Public Assistance Committee (PAC), local relief committees and affiliates to the Amalgamated Weavers’ Association. For more recent policies (post-1990) official documents and parliamentary debates were examined.

Findings

The research suggested that there have been several ways in which wage supplements have in policy terms been conceptualised, as, for example, both a means of discouraging and encouraging paid employment, as a means of suppressing wage demands and compressing wages in the hope of increasing the number of jobs in the British economy and, to a lesser extent, addressing the poverty of low waged households.

Wage supplements before 1834 – discouraging paid work?

One of the main aims of the Poor Law Amendment Act 1834 was to prohibit the ability, with some exceptions linked to sickness and exceptional circumstances, of poor law Board of Guardians to pay poor relief to people for periods for which they could be considered to be in paid employment. The reason for this can be found in the critique in the report of the 1832-4 Royal Commission on Poor Laws, published in 1834 (Checkland and Checkland, 1974). In their 1834 report the poor law commissioners argued that allowances in aid of wages (locally based schemes of poor relief which supplemented the wages of labouring people in full time paid employment) acted to the detriment of both employers and labourers.

In the case of employers, it was argued that:

The employers of paupers are attached to a system which enables them to dismiss and resume their labourers according to their daily or even hourly want of them, to reduce wages to a minimum, or even below a minimum of what will support an unmarried man, and to throw upon others the payment of a part, frequently of the greater part, and sometimes almost the whole of the wages actually received by the labourers (Checkland and Checkland, 1974, p. 135).

In the case of labourers, it was argued that allowances in aid of wages had a detrimental moral effect, for they stood accused of aiming their ‘allurements at all the weakest parts of our nature – which offers marriage to the young, security to the anxious, ease to the lazy, and impunity to the profligate’ (Checkland and Checkland, 1974, p. 135). In this context the Commissioners questioned:

has the man who is to receive 10s every Saturday, not because 10s, is the value of his week’s labour, but because his family consists of five persons, who knows that his income will be increased by nothing but by an increase of his family, that it has no reference to his skill, his honesty, or his diligence – what motive has he to acquire or to preserve any of these merits? (Checkland and Checkland, 1974, p. 145).

In brief, while wage supplements were held to encourage employers into economic practices which were an unwarranted interference with labour markets, they were also held to disincentivise working people from fully committing to paid employment. In both instances, wage supplements were held to erode the ‘naturalness’ of paid employment, by incentivising employers into what would now be understood as ‘flexible’ employment and wage practices, and discouraging labourers from exerting themselves in paid work. Similar criticisms have been made of Tax Credits for justifying their reduction (see the Conclusion).

The Poor Law Amendment Act 1834 prohibited Boards of Guardians from supplementing the wages of people in full time work. At a local level though, Guardians were determined to keep them. There were several moral and economic reasons for this. Rose (1966, p. 612), for example, argues that the ‘professed humanity’ of some Guardians led them to the conclusion that it was cruel to separate husbands from wives and widows from children by relieving their needs in workhouses. In wanting to maintain the distinction between the ‘deserving’ and ‘undeserving’ it was also felt by some Boards of Guardians that it was not right to have the deserving pauper labourer confined to workhouses alongside ‘idle and shiftless characters’ (Rose, 1966, p. 612). The second reason was financial. It was cheaper to give outdoor relief than it was to give indoor relief. Giving a family a few shillings to supplement wages was more economic than taking part or whole families into workhouses.

Whether or not poor relief offered as a wage supplement continued, however, is less important than the effect that the critique of wage supplements had on poor relief and social security policy making for at least the next 140 years and probably beyond. This is what can be described as the ‘Speenhamland effect.’ The Speenhamland Scale[5] was introduced by magistrates in the Berkshire parish of Speenhamland in 1795 and, while it was not the first such wage supplement (they had existed for at least a century) and was not unique in the late 18th century, because of its inclusion in several important analyses of pre-1834 poor relief (Eden, 1797, Webb and Webb, 1929, Polanyi, 1957, originally 1944), it became inherently linked with the problems of the supplementing wages, and over the next century and half it consistently appeared as an issue in debates about the supplementing wages.