LPU Budget Briefing 2002

A fair budget for the low paid

The Low Pay Unit demands a budget that addresses the causes of in-work poverty – low wages – as well as its symptoms. Our five priorities are:

Minimum wage: the Chancellor should confirm the rise in the minimum wage to £4.20 from October, which was previously said to be dependent on economic circumstances. More importantly, the government should build on our minimum, minimum wage by committing to an objective of raising the wages of the lowest paid to the Council of Europe’s decency threshold (currently £7.61) within 10 years. Without an aspiration to raise wages at the bottom the UK will remain a low wage sweatshop.

Tax credits: In the Budget the Chancellor will give details of the shape of the Employment Tax Credit and Child Tax Credit which will replace working Families Tax Credit next year. The Low Pay Unit is looking for adequacy and sustainability in the design of the new credits:

• Adequacy: Currently, a household with two children is guaranteed an income of only £204.50 a week if one person in the household is working 16 hours per week. The IFS has estimated that 1 million children would be lifted out of poverty if an additional £10 was added to credits paid for children (in addition to appropriate adjustments made for tax credits paid to households not in work).
• Sustainability: We are concerned that a strategy based on topping up low wages rather than increasing wages at the bottom will entrench low pay still further, and in the future require ever larger top up payments. Not only is this inefficient, but it also works against the aspirations of those in low paid employment. The Low Pay Unit wants to see a structure that facilitates wage growth by allowing households to hold on to as much of their income gains as possible during each year of claim.

Direct taxation: Changes to direct taxation will be more important to low paid workers this year than ever. Previously, low paid workers had their incomes for tax credits purposes assessed on a net basis. This meant that as income taxes fell through the reduction in the basic rate and the introduction of the 10 pence band, tax credit recipients saw their net incomes rise, but their tax credit payments fall. From next year income for tax credit purposes will be assessed on gross income, just as the trend towards lower income tax rates appears likely to end. It would be ironic if low paid workers who failed to gain the benefit from lower income tax rates take a second hit as tax rates rise. All of which emphasises the importance to low paid workers of a tax system that is genuinely progressive.

Progressive taxation: The Chancellor should extend the 10 pence tax band to cover all earnings up to £8 923 to cover all the earnings of a full time worker on the minimum wage. To target this measure more effectively, eligibility could be restricted to those paying 10 pence and basic rate tax only. He should also end the anomaly where those with incomes between £29 957 and £33 935 pay lower marginal tax rates than a full time worker on the minimum wage. This is because they have reached the ceiling for National Insurance Contributions but do not yet pay higher rate tax.

National Insurance Contributions: NICs are only paid on income up to £29 957 per year. Because of this they are regressive as workers on lower incomes pay a greater proportion of their income in NICs than those on higher incomes. If the Chancellor wishes to raise more money from NICs he should increase the range of income over which they are paid, but not the 10% rate at which they are collected. In our view, the ceiling on NICs should be removed to make the payment system fairer.

Low Pay Unit, March 2002