George Osborne’s so-called ‘National Living Wage’ (NLW) will do little to compensate low-income working families affected by cuts to tax credits and benefits, says the Institute for Fiscal Studies (IFS).
In a briefing note sent to the House of Commons Treasury Select Committee, the IFS says the Government’s “deficit reduction programme” will “significantly” reduce household income, with the poorest working families hurt the most.
Around 8.4 million households, with at least one person in work, are set to lose an average £750 a year from cuts to tax credits and in-work benefits.
For this same group of people, an increase in the minimum wage to £9.70 per hour by 2020 – described as a ‘National Living Wage’ by Chancellor George Osborne – will deliver an estimated average gain of just £200 for each household, leaving a £550 black hole in family finances.
According to the IFS, this suggests that working families will be compensated by an average 26% for their losses from changes to taxes, tax credits and benefits through the NMW.
For households in income deciles 2, 3 and 4 the average losses from tax and benefits changes (on a “better” case scenario) are £1,340, £980 and £690 per year respectively.
However, these same groups are estimated to gain only £90, £120 and £160 a year from the new NLW.
The IFS says a “better” case estimate of the compensation these groups will receive from the NLW is just 7%, 13% and 24% respectively.
The briefing note concludes: the NLW “should not be considered a direct substitute for benefits and tax credits aimed at lower income households”.
William Elming, a research economist at the IFS, said: “The new ‘National Living Wage’ will only offer partial compensation to working age households who will see their incomes fall as a result of tax and benefit changes announced for the current parliament.
“There may be strong arguments for introducing the new NLW, such as increasing earnings and the incentives to work for the low paid. However, the new NLW cannot be considered a direct substitute for benefits and tax credits aimed at lower income households.
He added: “The wage increases are not as large as the benefit cuts. And, it is not targeted at the same group who lose from the cuts.”
Stephen Timms MP, Labour’s Acting Shadow Work and Pensions Secretary, said: “This latest analysis from the IFS exposes the reality of David Cameron and George Osborne’s raid on the income of working families.
“Low-and-middle-income-families will bear the brunt of the Tories’ work penalty in the tax credit system announced in July’s Budget. And as these new IFS figures show, working families receiving tax credits will be more than £500 a year worse off.
“With MPs set to vote next week on the tax-credit cuts it’s time for the Tories to come clean about how much working families will be worse off under their plans.”