Both the tone and content of Philip Hammond’s first budgetary statement belied the mood music of the past few weeks: that Theresa May’s government will do much more to help just about managing families – dubbed the “JAMs”. It continued in a modest way some policies of its predecessor: freezing fuel duty; promising more social housing and help-to-buy schemes; infrastructure support for the regions; support for innovation to improve long-term productivity. Families struggling to make ends meet right now will find it hard to see how such policies will make their lives significantly better in 2017 than in 2016.
The few announcements with a direct effect on personal incomes will come nowhere near undoing recent cuts in state support for families on low incomes, including those who benefit from the welcome pay increase represented by the National Living Wage. Immediately after the summer 2015 budget, I explained in The Conversation why this measure would not leave most families off when combined with cuts in tax credits and Universal Credit. Such critiques led to a climbdown by George Osborne on the former but not the latter, and as Universal Credit is phased in, its declining real value will hit the families finding it hard to manage. Philip Hammond announced just one measure to help compensate these losses: a reduction in the very sharp rate at which Universal Credit falls as post-tax earnings rise, from 65p to 63p in the pound. To selected families, this change, in combination with the pay rise and higher tax allowances, will turn a small net loss into a net gain; for most, it will come nowhere near doing so.
Figures 1a and 1b illustrate who the winners and losers will be. On the left of each graph are families who do not work: they have only seen cuts, and will typically be £750 a year worse off once the announced reductions in entitlements feed through. These are families who are quite clearly not managing, and are finding it ever harder to do so. My team’s research at Loughborough University shows that some families on out of work benefits have barely half what they require for an acceptable minimum living standard, compared to nearly two thirds just before the financial crash.
Figure 1 – Swings and roundabouts: Results of main changes announced since 2015 on net family incomes
By working hours, for parents paid the National Living Wage, by working hours
Notes: Effect on incomes of gains from introduction of National Living Wage and reduction in Universal Credit taper; losses from lower UC “Work Allowance”, abolition of first child element of UC (new claimants); freezing of UC and Child Benefit
Moving to the right along the diagrams, families who work a few hours a week have become worse off as a result of the cuts because Universal Credit starts being withdrawn sooner with rising pay: its “work allowances” have been cut, especially sharply for lone parents. On the other hand, the higher wage and Mr Hammond’s cut in the “taper” from 65p to 63p produce offsetting gains, which are larger the more hours you work. For couples where both parents work full time on the National Living Wage, there is a small net gain. For everyone else, and especially lone parents, the changes have made things worse overall.
These changes help those low-paid families who manage to find plenty of regular work – but that is not the experience of most people on low incomes. The overwhelming majority getting help from the state do not have two full-time wages coming into the household.
The new Work and Pensions Secretary, Damian Green, has stated that there will be ‘no new search for cuts in individual welfare benefits’. This is qualified good news to families depending on state help: among the cuts in the pipeline that were not reversed in the Autumn Statement, the freeze in the cash value of benefits is particularly significant. Over the next few years, living standards for the worst off are threatened further not just by renewed inflation, but by the wrong kind of inflation. As shown in Figure 2, recent years have seen a reversal of the situation in the 1990s, when falling world commodity prices made essentials like food and fuel cheaper even when domestic demand put other prices up. These days, the world price of energy and other commodities have become the driver, and I have shown how this creates higher inflation rates for those on lower incomes.
Figure 2 – Inflation rates: annual changes in Consumer Prices Index and the cost of food and home energy, 1997-2015
The recent decoupling of benefit increases from price rises is unprecedented in the postwar period. Steady prices in the past two years have delayed the impact of the current benefits freeze, but the latest forecasts suggest the Consumer Prices Index will rise 10% by the end of this Parliament – and the cost of essentials could increase more quickly than this. For many families who just about manage, and for most of those who do not, this augurs a further fall in living standards.