Abolition of the 10p tax band: How much more can Britain’s low paid workers take?

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In the 2007 Budget Gordon Brown, then Chancellor of the Exchequer, announced that the 22p tax band would be reduced to 20p in the pound as of April 2008. In addition, the 10p tax band was to be abolished. The aim was to create a simplified and fairer tax system and raise some much needed revenue for the government – they expect to make £3.7bn from the changes. A year has passed since then and the planned tax system changes have been implemented but only now are we beginning to understand the implications of these changes. As the tax band changes have the effect of ‘making poor people poorer’ (to quote Labour MP David Anderson) Brown is facing a substantial backlash from backbench Labour MPs, other political parties and the general public.

In essence, what the tax band changes amount to is a reduction in the tax paid by higher earners and an increase in the tax paid by those on the lowest incomes. Let me repeat that. A Labour government, which is intent on tackling poverty, has implemented a change to the tax system which sees the better off in society gain money and the poor lose money. As The Times put it, it amounts to a robbing Peter to pay Paul type of situation but in this case Peter was notably poorer than Paul in the first place. It has been estimated by the Institute of Fiscal Studies (IFS) that 5.3 million households will be negatively affected by these changes with poor households losing out by up to £232 per year. This is shameful enough but when this is juxtaposed against the fact that the tax changes mean that everyone earning above £41,435 will have an extra £297 a year in their pockets there is little wonder there has been a substantial and sustained backlash.

The Government’s position on the emerging tax rebellion has changed several times in the last few weeks from outright denial that the changes will negatively affect anybody to some form of commitment to do something about it somehow in the future. For now, Gordon Brown and the current Chancellor of the Exchequer, Alistair Darling, are attempting to stave off criticism by pointing to the role of the tax credits system in making up any short fall in household income. Admittedly this would be an effective mechanism if the tax credit system was infallible and was available to all workers and if homo-sapiens became homo economicus – the optimum economic being – but this is not the case. Current estimates suggest that around only half of those eligible for Working Tax Credit actually claim it. In my work with working poor households in Manchester I found that many households did not claim tax credits because of (i) a perceived stigma around being seen to claim benefits despite the fact that they were a form of in-work support and (ii) because of the complex nature of the system. In addition, the recent problem of tax credit overpayment had dented the confidence of many low income households in the system and has put many off from claiming. In the last three years nearly £6 billion has been overpaid to hundreds of thousands of households. The government’s attempts to claim this back from low income households has exacerbated the experience of poverty for many recipients. Some claimants have even been forced to sell or re-mortgage their homes to afford the repayments. As such, the tax credits system is no longer seen by many as an effective poverty alleviating tool let alone a makeshift tax compensation tool. Indeed, Frank Field, the former welfare minister and MP for Birkenhead, noted recently that ‘tax credits are clearly the bluntest of anti-poverty weapons and are the equivalent of attempting delicate key hole surgery with a hacksaw’. Then there is the problem that Working Tax Credits are not available to all workers – anyone working under 16 hours a week and all childless people under 25 or not working 30 hours a week are ineligible. As such, these workers are some of the hardest hit by the tax band changes because they do not have access to tax credits to plug the shortfall in their income. Other groups that have been hit hard include those in childless households because they are unable to access child tax credits to make up the shortfall. So maybe the tax credits system is not best placed to make up the shortfall for those households who lose out as Brown and Darling suggest.

At a broader level the tax band changes also go against the Labour Governments making work pay strategy – promoting work through National Minimum Wage legislation and the tax credits system. New Labour has put paid work at the top of the political agenda since 1997 due to a belief that it was central to combating the Conservative legacy of rising poverty, social exclusion and social inequalities since the early 1980s. The  making work pay strategy was implemented to ensure that those moving into work (and those already in work) were financially better off vis-à-vis being on benefits. However, the 10p cut makes a mockery of Labour’s strategy of making work pay as the tax changes hit the take home pay of the low paid. Frank Field has argued that ‘this is a group we should be saluting, who do some of the best jobs in our society for the least money’. Indeed, the majority of workers I spoke to in Manchester were employed in local hospitals as cleaners, porters, security and health assistants on wages just a few pence more than the minimum. The majority of these workers will open their pay packets and find they have a little less money this month for food, rent, fuel, clothing and leisure. These workers should be applauded for their valuable work and not punished by a regressive tax system which further undervalues their work meaning that for some work becomes a less viable option.

So what has been the government’s response? Brown has attempted to play down the furore behind the abolition of the 10p tax band by pointing to Labour’s longer term record on dealing with poverty. Speaking at the Scottish TUC on Monday (21st April) Brown stated that ‘we have done more as a government in the last fifty years for poverty than any other government’. He is correct and should be rightly applauded but surely this does not justify the ‘pre-meditated tax grab’ (in the words of opposition leader David Cameron) on the working poor. Brown has, throughout his political career, shown his concern for the poor both at home and abroad which makes the tax band fiasco all the more surprising, or does it? Brown has always been concerned with poverty in households with children. Indeed, they have fared well under New Labour with things like the Child Tax Credit and other pro-family labour market legislation. However, poor households without children have fared less well with Mike Brewer from the Institute for Fiscal Studies (IFS) suggesting that this group has only gained a 1% income increase through New Labour’s tax and benefit changes. It seems in Brown’s admirable aim to eradicate child poverty in the UK by 2020 he has ignored the concerns of households without children – the very people who have been hardest hit by the tax band changes. As the Treasury Select Committee have stated these workers are ‘an unreasonable target for raising additional tax revenues to fund the benefits of tax simplification and meeting the needs of children in society’. Child poverty is something which SHOULD be eradicated but not at the expense of other poor people. Surely a more socially just way of tackling all forms of poverty is through progressive redistribution from the super-rich rather than having the poor subsidising the poor.

Others in the Labour Government have been dismissive of the impacts of the tax band change. John Hutton, the Business Secretary, argued that for those who lose out the losses are relatively small. Indeed, the losses wouldn’t buy John or any of his other MP friends much in John Lewis but to low income households a loss of only a couple of pounds a week can be extremely significant. To return to my work in Manchester, I interviewed low paid workers in the city to better understand what life was like on a low income. The findings of this research will soon be available as part of the BWPI working paper series but let me briefly contextualise what a couple of pounds a week meant to them. It was the difference between getting the bus to the shops and having to walk; it was the difference between affording a bit of fresh food in a diet consisting mainly of cheap calories and eating another high fat/low nutrient microwaveable meal; it was the difference between being able to unwind at the end of the working week with friends and staying in unable to socialise; and it was the difference between being able to put a little bit of money aside for future emergencies and being forced into debt. When put in the context of a small, stretched and finely balanced budget of a low income household a couple of pounds makes a lot of difference particularly at a time when food, fuel and council tax costs are rising disproportionately to income and the working poor face ever increasing pressures on their household income.

However, despite these problems Alistair Darling insists that he cannot change the Budget. He says it will be too expensive to reinstate the 10p tax band (although finding £50bn to bail out the banks as part of the credit crisis is no trouble!) and that he will see what he can do in future budgets to help cushion the blow to low income households. The most recent announcement suggests that the next inquiry into child poverty will be broadened out to include those negatively affected by the tax changes. However, Darling has argued that the next opportunity to change the decision will be his pre-Budget report in November/December 2008. What is needed is action which addresses the problems now and that does not rely on some vague promises in the future. The low income households affected by the tax changes cannot afford to wait six months as they are facing very real problems this week and they can’t eat promises. This has caused Frank Field to argue that ‘the idea that somehow we’ll do something undefined in the future to protect the poorest people in work, just is not on for most Labour backbenchers…it’s against everything we stand for’. Hence the recent backlash by backbenchers led by Field himself. They have argued for the need to announce within the next week a compensation scheme which helps all those affected by the tax band changes and to back date the compensation to the beginning of the tax year. This amendment to the finance bill has just passed its second reading in the Commons and a vote is scheduled for next week.

This issue is one which refuses to go away for the increasingly troubled Brown government which, in recent weeks, has been characterised by disagreement and internal conflict. Nick Clegg, the leader of the Liberal Democrats, has argued that the tax band decision is a ‘defining moment’ in British politics and has been likened to the ‘poll tax’ that brought down Thatcher. I am not sure whether these parallels are valid but what is clear is that the tax changes have been very unpopular and could be the final straw for many Labour supporters affected either directly or indirectly by the crisis. It is the local MPs currently canvassing for support in the May 1st local elections that are feeling the wrath of the electorate with low income households unhappy at losing money and higher income voters uncomfortable with the fact that they are gaining whilst millions of poor households have to struggle that little bit more to make ends meet. Hopefully Labour will react swiftly and positively to help all the low income households affected by these changes. The sad fact is that whilst those in power sit around debating the effects of the tax changes and drag their feet on possible solutions as they attempt to get their own house in order the real impact of a few less pounds in the pocket is affecting the budgets of low income households today, tomorrow, this week, this month. With rising costs and declining incomes I am not sure how much more Britain’s low paid workers can take.

Breaking news (added 23/04/08 12:30): ‘Darling u-turn on 10p tax rate’ http://news.bbc.co.uk/1/hi/uk_politics/7362283.stm

In sum, a compensation package for those losing out as a result of the tax changes will be announced in Autumn and will be back-dated to April. The exact nature of the package is unclear but it will involve changes to the winter fuel payment system, tax credits and the minimum wage. Darling also suggested that the Government are willing to look again at the youth minimum wage rate (currently £3.40/hr for 16-17 year olds and £4.60/hr for 18 to 21 year olds whereas the adult minimum wage is £5.52/hr). As a result Labour’s Frank Field said an amendment calling for compensation and backed by 46 Labour MPs would be withdrawn.

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