What happens when the tax credits go?

UK citizens are among the the least likely in the EU to be trapped in poverty according to ONS statistics released yesterday. Around 6.5 percent of the UK population is in persistent poverty, compared to an EU average of 10.4 percent.

The report uses the EU’s definition of poverty as an equivalised disposable income of less than 60 percent of the national median. Persistent poverty is where people fall below that measure in the current year and at least 2 of the preceding 3 years.

The figures show that, while the percentage of people in overall poverty in the UK broadly tracks that of the rest of the EU, the persistent poverty rate is lower and has been falling since the recession.

Persistent and overall poverty rates, UK and EU average, 2008 to 2014, percentage total population


The reason for this is that, while the UK has relatively high rate of entry into poverty, it also has a relatively high rate of exit. The chances of falling into poverty are relatively high but so are the chances of getting out of it.


Of course, the flip side of this is that, while people are less likely to be trapped in poverty, quite a lot of people have recent experience of it. The UK’s poverty rate stayed around the EU average during the 4 years between 2011 and 2014 but, during the same period, almost a third of the population had, at some point, been earning below 60 percent of the median income.

Years in poverty in the UK in a 4 year period, 2005/08 – 2011/14, percentage population


What we have in the UK, then, is a higher level of poverty churn that most other EU countries. Or, to put it another way, we do a better job of distributing our poverty.

Much of this is due to what the Joseph Rowntree Foundation called the The low-pay, no-pay cycle, where people move between a series of low-paid jobs and worklessness.

A report by the European Foundation for the Improvement of Living and Working Conditions (Eurofound) last year showed the effect this had on the UK’s levels of income inequality relative to other EU countries, based on different measures.

This is a horrid chart* but worth persevering with because the information on it is fascinating.

Screen Shot 2015-05-26 at 15.46.51

The dark blue lines, showing full-time equivalent pay, show that the UK has the most unequal hourly pay rates in Europe.

But not everyone works full-time or has regular hours. As you would expect, monthly earnings (the mid-blue line) show greater income inequality in all countries because this measure builds in the effect of the uneven distribution of working hours. Because the UK has relatively high employment rates, the likelihood of people getting at least some work during a week is reasonably high so our relative position doesn’t look as bad.

Yearly earnings (the light blue line) include those unemployed for some or all of the year. This increases the level of inequality again but this time some countries overtake the UK. Again, Britain’s relatively low unemployment means that, although its pay levels might be polarised, the amount of work is more evenly distributed than in many other EU countries.

Finally, household disposable income, the white line, allows for the distribution of work within families and includes the effects of taxes and benefits. Once this is taken into account, a number of countries (Greece, Spain, Portugal Latvia and Lithuania) are more unequal than the UK.

Taxes and benefits are, in part, what enables the cycling in and out of low-paid work. Low paid jobs are underpinned by tax credits, enabling people to work in jobs that don’t pay enough to support their families. A report by the ONS last month found that the UK had one of the highest levels of pre-tax income inequality in the EU but that, after taxes and benefits, the UK was about average.

As the report comments:

However, the UK’s tax and benefits system appears to be more redistributive than that of many other countries with relatively high inequality of original income, bringing the UK close to the overall EU average for disposable income inequality.

Gini coefficients of equivalised original and disposable income, 2013


In other words, then, both the UK’s relatively low levels of income inequality and persistent poverty are partly the result of our benefits system. It mitigates the worst of both, facilitating a distribution of low-paid work that means few people experience poverty  for long but quite a lot of people have a frequent taste of it.

So what is likely to happen when those benefits are taken away? As Ben Chu says, things are going to get a lot worse for those of working age and particularly for children.

Forecasts by the Institute for Fiscal Studies suggest that the Conservatives’ tax credit cuts are going to push overall poverty rates much higher over the rest of the Parliament. The IFS sees the overall rate rising by around 2 percentage points by 2020-21. Moreover, the child poverty rate is set to explode.

Screen Shot 2016-05-16 at 17.30.45

A report by the Institute for Social & Economic Research for the Child Poverty Action Group in 2014 found that the UK’s taxes and benefits brought one of the highest rates of child poverty in the EU down to well below the average. Take those benefits away and up the league we go.

Screen Shot 2015-05-29 at 11.12.13

There is, then, some good news on poverty and inequality in the UK. When compared to other EU countries it doesn’t look too bad. But a lot of this is due to this country’s system of in-work benefits. Poverty in the UK has shifted from being a problem of worklessness to one of low pay. In-work benefits rather than unemployment pay is what keeps our poorer families afloat. Increasing the minimum wage will not come anywhere near to compensating for the loss of these benefits. The frequent reports and charts that show the UK’s comparatively benign position on poverty will last only as long as the tax credits and benefits continue to support the low paid. Once they are taken away, the full extent of the UK’s precarious and low-wage economy will be revealed.

* I hope that this fad for using corporate colour palettes on graphs will soon pass. It’s a really silly idea. The OBR has abandoned it and everyone else should too.

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3 Responses to What happens when the tax credits go?

  1. Pingback: Brexit? No thanks! Better the Devil you know – Negative Capability

  2. gunnerbear says:

    So in essence, it’s going to be a bit of a b*****d for those at the pile when taxpayers stop subsidising the profits of firms and mass immigration continues meaning the UK will be flooded with foreigners who will be happy to work for f**k all….because f**k all in the UK is still better than the wages on offer in whatever third world or Eastern European s**t-tip they are coming from.

  3. gunnerbear says:

    “Once they are taken away, the full extent of the UK’s precarious and low-wage economy will be revealed.”

    Then the low wagers might just elect a version of HMG that looks after them….not red or blue….

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