Making Work Pay: From Crafting Tools to Downing Tools

By Daniel Clegg

In recent times the need to ‘make work pay’ has become increasingly central to the Conservative Party’s rhetoric on welfare reform, as it seeks to stake out a new political centre and define itself as the ‘true party of working people’. The speeches of the Prime Minister are frequently punctuated with examples of families who under current tax and benefit rules find themselves scarcely better off in work than they would be by remaining on out-of-work benefits. The political aim of highlighting these supposed anomalies is to portray Labour as a party whose thoughtless expansion of anti-poverty measures when in office has undercut the incentive to work and trapped many families on welfare.

Politics is an unfair business, of course. But even by usual standards these accusations are particularly unjust. For between the late 1990s and its eviction from office in 2010 Labour governments presided over a massive, and internationally quite unprecedented, expansion of cash transfers targeted on working households, the very aim of which was to make work pay. This was an anti-poverty policy for sure, but one pursued in large part by making it more financially attractive to enter paid work. And it is credibly argued to have played a crucial role in the UK’s impressive performance in the reduction of out-of-work benefit receipt over the last two decades.

The key instrument of this policy was the system of working tax credits (Working Families Tax Credit and its successor Working Tax Credit), which provide income supplements – and where relevant additional support for childcare costs – to households meeting certain minimum requirements for participation in work (until recently 16 hours per week for parents and 30 for the childless). As originally designed working tax credits were paid at a full rate up to a threshold, and then quite gradually reduced (‘tapered’) with rising incomes. The fixing of the taper tried to strike a difficult balance between keeping the system affordable and preserving incentives for those already on in-work support to increase their earnings.

What then of the perverse incentives highlighted by Conservative speechwriters? While extremely low financial incentives for people on benefits to enter work – or high participation tax rates (PTRs), in the technical jargon – do exist under the tax credit system, they mainly concern people seeking to enter very marginal employment, below the minimum hours thresholds for tax credit entitlement. People working less than 16 hours are in fact not administratively considered to be in so-called remunerative employment in the UK social security system, and can continue to claim out-of-work benefits like Jobseekers Allowance. Above a tiny disregard income from work however reduces out-of-work benefit entitlement pound for pound. The ‘anomaly’ of the very high PTRs at this level of work intensity is in fact not an anomaly at all. Rather, it reflects a quite deliberate policy choice to avoid encouraging employment so marginal that it is scarcely distinguishable from unemployment.

The removal of the hours thresholds for entitlement is one of the biggest changes that will come with the eventual replacement of tax credits by the Conservative’s flagship welfare policy, Universal Credit (UC), currently being gradually rolled out. UC is a combined out-of-work and in-work means tested benefit, withdrawn after disregards (so-called ‘work allowances’) at a stable rate of 65% with increasing income, irrespective of hours of work. Compared to the existing system, this will indeed considerably enhance the financial incentive to enter marginal employment from out-of-work benefit receipt. But many of those working 16 hours or more will keep rather less of their income from increased earnings than they currently do under tax credit rules. UC will try to counteract perverse effects this may have by actively supervising working claimants (and their partners) to ensure that they are making appropriate efforts to increase their hours to full-time or to get an additional or alternative job – a type of administrative control of working families that the liberal tax credit system expressly eschewed.

Whatever one may think of UCs financial inducement to marginal employment, its somewhat Orwellian vision of public officials dictating peoples’ hours of work and earnings, or indeed of the apparent tension between these two aspects of the policy, at least these and other differences between UC and the tax credits system seem to reflect genuine attempts to grapple with some complex challenges of policy design in this area. Crafting policies to make work pay is a tricky business, and there is space for reasonable debate as to how the balance should be struck, within given expenditure parameters, between a range of equally desirable but not always fully compatible objectives: encouraging both participation and progression in work; reconciling administrative simplicity with responsiveness to individuals’ different and changing circumstances and behaviours; and so on.

But other changes to in-work support since the Conservatives have been in office – first in coalition and now as a majority government – make their claim to want to make work pay ring somewhat hollow, to say the least. Since 2011 a series of deep cuts have been made to the value of tax credits and the future UC, culminating in the massive restrictions in the value of in-work support announced by George Osborne in his summer budget earlier this year. As the UK’s very extensive system of in-work support is necessarily also very expensive, it has become an irresistible target for a party so strongly committed to deficit reduction.

Directly contrary to the language with which they have been justified, these changes tend to lessen the returns to work relative to out-of-work-benefits. The axe has fallen particularly brutally on UC, which only a few months ago was presented as the Conservatives own answer to the problem of making work pay. In probably the biggest change, the projected UC work allowances have been slashed, and for some claimants abolished altogether. This vastly reduces the amount people will be able to earn before their support under UC starts being withdrawn, with – as work by the Resolution Foundation has shown – very damaging effects on financial incentives to enter work.

The government, meanwhile, puts the emphasis on other policies it is adopting to supposedly make work pay – an increase in the thresholds for the payment of income tax and, especially, a boost to the value of the minimum wage for over-25s, branded as the introduction of a ‘national living wage’. But taking more people out of tax doesn’t help those who already don’t pay it, while minimum wage policies are – whatever their other virtues – poorly targeted anti-poverty policies and blunt instruments for improving household work incentives. Efforts to make work pay are a much longer-standing feature of UK social policy than the rhetoric of the current government would suggest. And this rhetoric notwithstanding it is on the current government’s watch that the policy tools are now being downed.

Daniel Clegg is Senior Lecturer in Social Policy at the University of Edinburgh. His paper on the demise of tax credits will appear in the forthcoming edition of Political Quarterly.

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