Centre for Research in Social Policy

School of Social, Political and Geographical Sciences

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Incomes improve against MIS: a welcome but brief respite

Zero inflation is great news these days for low income families.  This is because more and more government policies affecting income are being set without regard to the inflation rate.  If you work on the minimum wage, you can expect your pay to rise 23 per cent and tax allowance 18 per cent by 2020 to meet Conservative election pledges.  If you’re a pensioner, the Triple Lock will increase your state pension by at least 13 per cent in that period.  Whether this makes you much better off will depend on how much prices rise.  Conversely, the pledge of a freeze in working age benefits and tax credits will cause those elements of income to fall, in real terms, by the inflation rate.

The experience of 2015, looked at in isolation, demonstrates this point.  The budgets published in today’s update of the Minimum Income Standard as what households need for an acceptable standard of living have barely changed.  So in the last year in which working-age benefits rise by 1% – seen as a mean measure when it replaced index-linking in 2013 – this is making recipients very slightly better off relative to their needs.  It certainly makes a change from the steady deterioration of the past few years.  If you’re an out of work lone parent your income is 43 per cent short of the minimum budget today, compared to 32 per cent in 2008.  The same lone parent working full time on the minimum wage and paying for childcare was only 2 per cent short in 2008, but this has grown to 14 per cent.

Even the return of modest inflation will extend this deterioration for such families, as a result of the benefits freeze.  True, higher minimum wages and tax allowances will help those in work, but much of this will be clawed back for those on Universal Credit, which will be reduced by 65 per cent of any increase in post-tax pay.

In next week’s Budget, we’ll learn whether rumours of serious cuts to the Child Tax Credit are true; if they are, the incomes of the worst-off families will take a further dive.  If they do, the only solace for such families is that more generous treatment of childcare is round the corner.  I suspect that many of them have stopped even hoping for greater largesse from the state.  But as they struggle to pay for the essentials of life, they should certainly be hoping for low inflation.

 

 

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