CARE’s response to Family and Parenting Institute (FPI) and Institute for Fiscal Studies (IFS) report on ‘The Impact of Austerity Measures on Households with Children’

The aforementioned report makes for bleak reading, particularly for families with children. CARE has been interested for a while about the effects of the Coalition’s changes to tax credits and benefits on families (the introduction of the Universal Credit, for example).

Some intriguing findings from the report include[1]:

a) Between 2010-11 and 2015-16, 500,000 more children will fall into absolute poverty as defined by the Child Poverty Act (2010), where the poverty line is fixed at 60% of the median income in 2010–11. 300,000 of these children come from households where the youngest child is under five. The median household with a child under five faces a drop in income of 4.9 per cent by 2015-16.

b) The UK’s poorest families with children lose the largest proportion of their income from tax and benefit changes. Before taking Universal Credit into account, families in the poorest income decile will be 10% worse off in 2014–15 than they would have been had no changes been made to the tax and benefit system. Even after the introduction of Universal Credit, this group loses more than average, at just over six per cent. In particular, lone parents not in employment lose more than 12% of their income on average as a result of tax and benefit changes to be introduced between 2010–11 and 2014–15, or £2,000 per year.

c) The government’s plan to introduce Universal Credit will soften the blow for certain family types but will not be introduced fully in place for existing claimants until 2018. The report offers evidence that although Universal Credit strengthens work incentives for most individuals, it weakens the incentive for a second earner in a couple, typically the mother in a couple household, to take up employment.

This rather unpromising picture is reinforced by CARE’s own research. Indeed, CARE’s most recent report on families suggests that both lone parents with two children and married couples with two children on 75% of the average wage face Marginal Effective Tax Rates of 70%[2]. To put this into some perspective, for every extra £1 earned through work, the parent would only receive 30 pence of that due to losses in benefits and tax credits and tax increases.

This feeds into a wider point about a fundamental flaw in the UK income tax system, this being that it does not take proper notice of family responsibilities. That is, our income system is far too individualistic and does not take account of the number of dependents in a household when calculating how much an individual should pay in Income Tax. The graph below[3], illustrates this point by revealing where certain households sit in the Income Distribution. To go into a bit more detail, it would seem to make sense that when you have different households who enjoy the same income, they should sit in a similar place in the income distribution. Yet this is not the case. When we look at poorer households for instance, we see that while lone parents with two children and single people with no children are better off than about 40% of the population, one earner couples with two children are better off than just over 20%. This hardly seems fair. This of course is not to say we should penalise lone parent families in order to bring them in line with one earner couples with children. No, far from this scenario it would surely be much better to look at ways in which the situation of one earner families on lower incomes can be improved.

All in all, the FPI and IFS report should be commended for the attention it brings to the difficulties families are facing both now and in the future. But taking both this research and CARE’s work into consideration, what can be done? One idea, which would especially help one earner couples with children, particularly those who are poorer, would be the implementation of a transferable allowance. As the graph below illustrates[4]this is progressive and would begin to redress the balance in relation to the difficulties these families are currently facing and will continue to face in the future.

1. http://www.familyandparenting.org/news/Press-releases/2012+Press+Release...

2. Draper et al, The taxation of families 2010-2011, CARE, forthcoming 2012.

3. Draper et al, The taxation of families 2010-2011, CARE, forthcoming 2012. Data derived from the IFS ‘where do you fit in’ software.

4. Figure 4.4, Adam et al, Taxes and Benefits: The Parties plans, 2010 election briefing note no.13, IFS, 2010.