Welfare Reform Bill

Memorandum submitted by CARE (WR 67)

Introduction

1. CARE is a Christian social policy charity located in Westminster, London. One of our goals is to promote Christian Action, Research and Education to support children, single people, marriage and family life effectively. To this end we specialise in (amongst other areas) the policy issue of family taxation.

2. We have been monitoring the Welfare Reform Bill and have undertaken an analysis regarding how it will affect families in terms of where they fit in the income distribution, and in terms of work incentives for the parent(s) of these families.

Executive Summary

3. We comment particularly on the Universal Credit, which will be implemented under the Bill. We mention two aspects of this new benefit:

(i) how it will combine a number of existing benefits and credits into one single payment, and how this will positively (in terms of income) affect two parent families, reducing both child poverty and the couple penalty, and

(ii) how the implementation of the new credit will affect the Marginal Deduction Rates (MDRs) of parents within a number of different family structures. We note that under the latest Universal Credit proposals, two parent, one earner families with children will face MDRs of 76.2%, much higher than the OECD average, negatively affecting their incentives to work.

Impact on two parent families

4. First then, CARE welcomes the fact that, according to our own analysis (available in our annual publication, ‘the taxation of families 2009/10’), the Universal Credit will reduce the complexity experienced in the present system, mainly due to many of the benefits and tax credits present under the current system being merged into one credit. Furthermore, CARE welcomes the fact that the Universal Credit will take into account the financial needs of both parents [1] in a two parent household, as opposed to the needs of just one, as is the case in the current tax credit system. Taking into account the needs of both parents in the new Universal Credit arrangements will mean that both child poverty and the couple penalty will be reduced markedly, something which CARE warmly welcomes and something which we have been campaigning on for 10 years.

5. The couple penalty, that is to say the cost in lost benefits for two individuals of living together rather than separately, is not only a burden on couples, but also affects lone parents. This is because it acts as a disincentive on them to partner or, as the case may be, repartner. We should not for one moment suggest that the only consideration which people have in mind when deciding whether or not to live together is financial, but under the present system the cost of so doing may be so significant that it would be otiose to suggest that it is of no account. Hence any reduction in the couple penalty has to be welcomed.

6. We are however concerned about the proposals within the Universal Credit relating to self employed people and to those with a moderate level of savings. We believe that both of these need further consideration. We also need to take account of the Government’s intentions in relation to child care.

Marginal Deduction Rates

7. Despite the positive effects anticipated above, CARE is concerned that under the arrangements laid out in the Bill, 1.8 million families will see their Marginal Deduction Rates (MDRs) increased while 1.7 million will see them decreased. The former group is comprised mainly of one earner, two parent families with children. It will be these families who will see their MDRs increase to 76.2% [2] , and it will therefore be these families who will face the greatest increase in the disincentive to take paid work which often entails extra costs, such as travel and childcare. Moreover, these figures take no account of passported benefits, in particular, free school meals, whose loss can bring about a very damaging cliff edge. We find the impact on this type of family particularly odd, given the current Government’s repeated comments on the paramount importance of two parent families in fixing the ‘broken society.’ [3]

8. CARE would also refer to recent analysis made by the Institute for Fiscal Studies (IFS) which stated that these high MDRs would exist for one earner families with the most modest incomes (at or below £24,000). It should also be noted that, according to data from the OECD which CARE has drawn upon in its latest ‘taxation of families’ publication, this rate is far higher in the UK than it is in other OECD nations [4] .

Summary

9. In summary, CARE is both encouraged and concerned by the provisions made for families under the Welfare Reform Bill. On the one hand, we are pleased that, through the implementation of the Universal Credit, appropriate account will be taken of both parents in a two parent household. We are confident that this will result in reduced child poverty and a diminished couple penalty.

10. Yet on the other hand we are concerned about the high MDRs which one earner parents with children on the most modest incomes will face and the negative impact which this will have on the incentives among these parents to work. CARE believes that this problem needs to be addressed, not least if the Government wishes to see the number of children living with incomes below 60% of the median UK household income reduced in line with their commitment to abolish child poverty by 2020, as stated in the Coalition agreement [5] .

May 2011