Families on low incomes are once again bearing the brunt of a tough economic environment. Over the past decade, rising costs of items such as food, energy and childcare, combined with stagnating wages and cuts in benefits, have repeatedly put a squeeze on family budgets. Between 2014 and 2016, some of these pressures eased, as inflation sank to zero and pay started to grow again. But now that inflation has returned, for the first time in post-war history the increasing cost of a child is being combined with a freeze in all financial support for children. The failure to uprate either benefits, tax credits or the wage levels at which tax credits are withdrawn means that inflation is bound to erode modest family incomes both in and out of work.
The gradual fall in living standards that this produces will be worsened by other benefit cuts that come in over the next few years, for different families at different times. For a start, the phasing out of the ‘family element’ of Child Tax Credit (and its equivalent in Universal Credit) will eventually result in all low income families getting over £500 a year less from the state than at present. Since this only applies to families whose oldest child was born in April 2017 or later, it hits families with the youngest children first, with the effect spreading gradually through the population. The restriction of tax credit entitlements to a maximum of two children is also being phased in, affecting only third children born from this year on, but will clobber families much more severely, with a loss of nearly £2,800 a year per child. Some existing larger families who escape this cut have nevertheless had their income severely reduced this year (by anything up to £6,000) by the severe reduction in the benefit cap.
My latest report on the cost of a child takes stock of these trends, and the effects they will have on parents’ ability to provide for their children effectively. For some families in work, improved support for childcare and a higher minimum wage partially offsets the losses incurred as a result of the above cuts. But for those relying on benefits as a ‘safety net’ when they are not working, the level of this net is being progressively lowered over time. On present policies, the support that it provides will sink below half of what families need as a minimum sometime early in the 2020s – having in contrast provided about two thirds of their requirements at the start of the present decade. There comes a point when a ‘safety net’ stops being worthy of its name because it is no longer enough to provide even the bare essentials of modern life. The evidence shows that when income sinks this low, most families can only escape severe material hardship either by going into debt or by getting help from extended family members.
We are about to enter a new parliamentary season, led by a government that survived by the skin of its teeth after a disgruntled electorate failed to give it the clear majority that it sought. Raising family living standards has been at the heart of the political promise to improve people’s lives. The benefits freeze alone seems to contradict this promise by creating a downward escalator for the half of families relying on some kind of means-tested benefit or tax credit, in combination with Child Benefit. For those who are ‘just about managing’, and particularly for others who are not managing at all, the clearest signal that Philip Hammond could give in his Autumn Budget that he is starting to reverse the direction of that escalator would be to restore a system of benefit upratings. This would at least allow incomes to keep up with living costs, stopping things from getting systematically worse, and giving a stable foundation on which measures to improve living standards could build.