Gordon Brown’s Budget speech was received with less universal acclaim than in previous years. With right-of-centre newspapers furiously denouncing the first explicit tax rise since 1997, little attention was paid to the Chancellor’s measures that should drive down poverty during the rest of this Parliament.
This is a bit rich after the drubbing the Government took just days earlier when it was revealed that child poverty had not been reduced by 1.2 million - as pledged during the 2001 general election - but by a more modest 500,000. Labour’s goal is to halve child poverty before the end of this decade and to have eliminated it completely within 20 years. So, some cheap shots were fired.
Sadly, politics is a game that prohibits much rational debate and the Government’s explanation looked like a bout of super-spin. Academics had modelled the forecasted increase in child poverty that would have resulted if the previous Conservative Government’s policies had remained unchanged. Instead, the Government introduced the minimum wage, increased benefit payments and launched a tax credit regime that boosted the net income of families that otherwise would still have been stuck in poverty.
The Government’s economic policy contributed to an unusually rapid increase in earnings combined with low inflation. This did not just raise the incomes of poorer families it also raised average earnings. So, although poor households became better off, they still remained below the poverty threshold because that threshold itself got higher. Amidst the political knockabout, these sorts of explanations get lost.
The Government’s critics were drawn from two camps. From the left of the political spectrum were a few nay-sayers looking for evidence of Government betrayal. Incredibly, the vast bulk of the Government’s attackers were people from the political right who do not believe in poverty reduction measures at all. Most of the anti-poverty lobby conspicuously did not reinforce the criticism. Why? Because half million fewer children in poverty is a commendable achievement in itself.
So the Budget’s announcement of tax credit levels due in 2003 was a welcome reminder of the Government’s commitment to raise the incomes of low paid workers and to create powerful financial incentives to enter work and to stay in work. The Treasury’s forecasts now predict that by 2003-04, the effect of all Labour’s tax and benefit changes will lift 1½m children from poverty - a reduction of one third of the 4.4 million who were living in poor families in 1996-7.
By April 2003, the combined effect of the Statutory Minimum Wage, the Working Tax Credit and Child Tax Credit guarantees a weekly income of at least £237 for a family with one child and one person working 35 hours per week. A couple in these circumstances will be £42 per week better off working than when relying on benefits. For single people, the gains from working are even greater with a guaranteed minimum income of £154 per week if working 35 hours. This represents a 50% improvement compared with out-of-work benefits.
More importantly, the prospect for raising employment levels through the new tax credits regime depends on several additional factors. Firstly, a more determined effort may be required to boost jobs in areas where employment growth has been very weak. Unless there is a stronger supply of work in low employment communities, financial incentives may have only a limited impact. Pilots for the job guarantee programme ‘StepUP’ are a welcome development. They should be expanded as quickly as evidence emerges of their effectiveness in tackling persistent long term unemployment in areas with acute labour market weakness.
The success of tax credits also requires a speedy resolution to the complex interplay between the credits and housing benefit to ensure a higher take-up. There are currently 1.3 million receiving Working Families Tax Credit - some 450,000 more than claimed Family Credit at its peak. But the take-up rate has been estimated at less than three quarters of those eligible for it. Take-up will be influenced by minimising the complexity and bureaucracy of claiming - and particularly the process of adjusting the tax credit in response to rises or falls in income during a tax year.
Lastly, the Government should re-think the underlying assumptions that exclude all those aged under 25 from receiving the Employment Tax Credit.
Getting these measures right is important because healthy jobs growth is likely to arrive next year. The Chancellor’s budget statement quietly emphasises that previous Treasury forecasts for the economy proved to be more accurate than its more pessimistic critics thought. It now predicts that economic growth will rise to over 3% a year, heralding a return to buoyant jobs growth in many regions, industry sectors and occupations. The Chancellor’s aim to reduce poverty critically rely on these measures being correctly tuned to the economic circumstances expected next year.