Changes to UC & childcare investment announced

The Chancellor announced improvements in Universal Credit for low earners and extra investment for childcare in today’s Budget and Spending Review to offset, in part, rising inflation, tax increases and the ending of the £20 a week uplift in Universal Credit.

The Chancellor announced changes to the taper for Universal Credit claimants due to come in in a month. Currently that taper rate starts at 63 pence – so for every £1, after tax, a person earns, their Universal Credit [UC] payment is reduced by 63 pence. This will be lowered by 8p from 63p to 55p. The Government will also increase Universal Credit work allowances by £500 per year for households on UC who are in work and either looking after a child or have a household member with limited capability for work.

The changes come after criticism of the Government’s decision not to extend the 20 pound a week uplift in Universal Credit from the end of September amid fast-rising energy and food costs and the new health and social care levy. Inflation currently stands at 3.1%, but is expected to rise over the next months. The Resolution Foundation estimates that around three quarters of people on Universal Credit will be worse off as a result of decisions to take away the £20 per week uplift despite the Chancellor’s new Universal Credit measures in the Budget. Frances O’Grady, general secretary of the TUC, said:  “Working families needed a plan to boost pay across the whole economy. But what they got – after 11 years of Conservative government – was a triple whammy of tax hikes, fast-rising energy and food bills, and a universal credit cut that was tweaked, not reversed.”

The Government also announced £170 million in early years investment for 2024/25 to cover ‘free’ childcare. It confirmed that this would be in addition to annual investments of a similar level which will be made both in 2022/23 and 2023/24. The Early Years Alliance cautiously welcomed the money, but expressed concern that it might not make up for the overall funding shortfall. It also called for emergency funding to tide struggling providers over until next April.

The Chancellor also confirmed the increase in the National Living Wage to £9.50 an hour in April 2022 from £8.91 and the end to the public sector pay freeze and a halving of business rates for those in the hospitality, leisure and retail sectors and announced the roll-out of 75 Family Hubs across 75 Local Authorities across England.

Reaction

Tony Wilson, Director of the Institute for Employment Studies, said the UC changes would particularly benefit low income workers with children, but he added they would not make up for the decision not to extend the 20 pound a week uplift in UC and would not help those not in work.

Wilson also said the Budget and Spending Review were a missed chance to “take steps to address the growing recruitment crisis that is affecting firms across all parts of the economy”.

He stated: “With a million fewer people in the labour market than on pre-crisis trends, we were hoping to see substantial new measures to increase labour market participation and address skills mismatches.  Instead firms will continue to struggle to fill vacancies, while the four million people out of work due to long-term ill health and caring responsibilities will continue to receive virtually no employment support at all.”

Dave Chaplin, CEO and founder of IR35 Shield, commented on plans for a new high skill visa system, also announced by the Chancellor. He  said this was due to the loss of talent in response to IR35 legislation. He said: “IR35 has been a talent killer. The country is still reeling from the impact of a global pandemic along with the impact of Brexit and freelancers and contractors are the very workers who can help businesses to navigate these uncertain times.  These are the group of flexible workers who can provide specialist skills, expertise and knowledge to help UK plc to ‘build back better’.  However, the Government is losing them in their droves and the UK economy and UK plc is suffering.”

Impact on earnings

Meanwhile, a report from the Office for National Statistics earlier this week showed full-time earnings in the UK grew by the most since 2008 in April 2021, up by 4.3% from a year earlier, although this was in part due to people being furloughed last year and on 80% of their wages and due to other pandemic effects.  This meant some parts of the economy were more affected than others. For example, pay for construction workers went up by 16.8% in 2021 compared with a fall of 10.4% a year earlier. Nicola White, head of earnings at the ONS, said increases were most marked for the groups worst affected in 2020, such as younger people, men and those in the lowest-paid jobs.

A report from the Institute for Fiscal Studies show that over the next five years real household disposable income is expected to grow by 0.8% per year, well below the historical average. Since growth had been weak in the decade before Covid, average incomes are now expected to be 28% (£9,000 per capita) below the pre-2008 trend, says the IFS.

Its Budget analysis suggests middle earners “will find their pre-tax pay just about outpaces inflation, but after the extra income tax and NICs due their take-home pay will fall by about 1%, or £180 per year, in real terms”.

While many lower earners will see increases in income, inflation and tax rises will tend to make those increases “much more modest than headlines might suggest”. The IFS estimates that, before tax, about half of the 6.6% increase in the minimum wage will be eaten up by inflation over the next year, meaning a real-terms rise of about 3.2%. It says: “After tax this will become a 1.2% real increase in take-home pay for a full-time minimum wage worker.” For those who are out of work, the situation is more difficult, particularly in the short term before benefits rises kick from next April. The IFS states that the “out-of-work safety net is substantially lower than a few years ago as a result of retrenchment pre-pandemic”.

Meanwhile, the Resolution Foundation says the combined impact of polices announced by the Chancellor – including on Universal Credit, reduced Alcohol and Fuel Duties and higher Council Tax, Income Tax and National Insurance – “will deliver a 2.8 per cent income boost to the poorest fifth of households by the middle of the decade, but an income hit of 2 per cent to middle-income households, and a 3.1 per cent hit to the richest fifth of households”. It calculates that real wages will fall again next year, while the medium-term outlook for steady state real-wage growth by the mid 2020s is just 1.5 per cent (down from 2.5 per cent in 2010).

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