Gary Vaux explores thinking that crosses party lines on how the overall cost of benefits might be cut and people encouraged to take up work
One of the best ways to get people off benefits and into work is to make part-time work more worthwhile. But people who are on income support or jobseeker’s allowance can only earn pathetically small amounts from part-time work before they lose benefits penny for penny – this can be as low as £5 for people who are unemployed, and it is still only £20 for many lone parents.
So it is a long overdue shift in policy that will soon enable some lone parents to earn £50 a week before they begin to lose their income support. This is only a pilot scheme in certain parts of the country, but I can’t see how it will fail to be attractive.
It will give lone parents more incentive to work before making the much bigger switch of coming-off income support altogether and moving on to working tax credit when they work more than 16 hours a week.
Interestingly, this is an idea that is attracting support from across the political spectrum. Centre-right think tank Policy Exchange has recently produced a report that takes a similar view – although it sees it as part of a bigger plan to reduce benefit expenditure.
Policy Exchange proposes an even more generous “disregard” of £92.80 a week, applying to all means-tested benefits. It estimates that this would cost £5.1bn – and say it could be paid for by saving £6.5bn by taking child benefit and child tax credit away from better off families.
What is especially noteworthy is that Policy Exchange has calculated what are called the participation and marginal tax rates – the percentage of income a person will lose when they first take a job and when the combined effects of increased income tax and lost benefit income are taken into account as wages rise.
Currently, when the additional costs of work are taken into account (fares etc), a person over 25 on jobseeker’s allowance faces a participation tax rate that is above 100% for most of the first 20 hours of work, and then just under 100% after that – leaving only a £29.06 gain after 40 hours in employment.
Lone mothers receive a slightly better deal, but their participation tax rates are still mostly 75% until they have worked for 16 hours, and their marginal tax rates are just under 100% as they consider earning a bit more money each week.
So increasing the current disregard to £50 a week, as being tried out in the pilot areas, or £92.80 as suggested by Policy Exchange, has to be taken seriously as a genuine and realistic measure to get people into employment.
It would also create a virtual amnesty for those benefit claimants who are currently doing little bits of undeclared work and who are dreading the DWP’s fraud team knocking on their door.
However, neither proposal does anything for people who get carer’s allowance, where the disregard is £100 a week but operates on a “cliff-edge” principle –any earnings over that figure meaning that the whole allowance is lost.
It has been repeatedly pointed out to the Department for Work and Pensions that this disregard can be increased to £150 at no additional cost.
At present, carers have no incentive to earn between £100 and £150 (because if they do, they lose £53.90 carers allowance). So an increase would simply mean that carers who currently earn just below £100 would be able to increase their earnings to £150 if they wished, lifting them further out of poverty.
The bill for the carer’s allowance they would continue to receive would be the same. This logic has escaped the DWP however.
Gary Vaux is head of money advice at Hertfordshire Council. Please send any questions for him to email@example.com