Understanding tax credits in debates about wage supplements from the past

by Dr Chris Grover

14 Mar 2016

There can be little doubt that the Conservative government got into policy and political difficulties over announcements in the 2015 summer budget that it intended to reduce the cost of wage supplements by cutting tax credits for people in low paid work. While the idea was to partly offset the cuts to tax credits by increasing the national minimum wage to what is described as a ‘national living wage’, resistance from a range of sources meant the proposed changes to tax credits were dropped in the Autumn Statement, although the cuts will be secured as universal credit replaces tax credits.

These contemporary concerns with tax credits can be understood as the latest episode in long-standing debates about whether the state should be involved in supplementing wages. Such debates have been had for at least two centuries and during this time similar arguments have been used to both support and criticise wage supplements. Perhaps the best known, and most (unfairly) maligned example is the Speenhamland Scale that was introduced in 1795. It noted that when a gallon loaf of bread cost one shilling:

every Poor and Industrious Man should have for his own Support 3s weekly, either produced by his or his Family’s Labour, or an Allowance from the Poor rates, and for the support of wife and every other of his Family, 1s 6d. … When the Gallon loaf shall cost 1s 4d then every Poor and Industrious Man shall have 4s Weekly for his own, and 1s and 10d for the Support of every other his Family. And so on in proportion as the price of bread rises or falls.

It was, however, critiques of such approaches to poor relief in the 1834 Royal Commission on the Poor Laws’ report that in the long-term were to shape financial support for low paid workers. The report informed the 1834 Poor Law Amendment Act that prohibited the payment of poor relief to people in full time work. The main criticisms were that the payment of wage supplements (allowances in aid of wages as they were described) had the effect of both discouraging people from working hard and encouraging employers to pay low wages. Later studies suggested it was low wages that led to the adoption of poor relief to supplement wages, rather than it causing low wages, and histories of poor relief also point to the continuation of the payment of such allowances for range of administrative, economic and social reasons. However, the criticisms cast a shadow over poor relief and social security policy making for nearly a century and a half.

Despite pressure being placed on central governments in the 1920s and the 1930s by poor relief authorities in Norfolk and public assistance authorities in Lancashire respectively, governments resisted paying means-tested support to people in full time work until the 1970s. By this time, the potential of wage supplements had been redefined. Rather than being problematic, they were now thought to have the potential to incentivise workless people to take low paid jobs. When, for example, Family Income Supplement was introduced in 1971 concerns with poverty that had been ‘rediscovered’ in Abel-Smith and Townsend’s 1965 publication, The Poor and the Poorest had been usurped by a concern that some households were earning such low wages that their income was below what they might have received in means-tested benefits had they been out of work. The search, therefore, was on for a policy that could address this situation, thereby allaying government fears that people were being incentivised to give up work in preference for unemployment.

The potential of wage supplements to encourage people into low paid work was to become even more apparent during the mass unemployment of the 1980s. The first Thatcher government was warned by its ‘think tank’ (the Central Policy Review Staff – CPRS) that unless action was taken unemployment would rise continually for the whole of the 1980s. It was during this period that wage supplements came into their own as a policy to encourage people into low paid work in the hope of reducing unemployment. This was because the CPRS’s analysis contended that it was only through tackling what were perceived as institutional interferences with labour markets (the actions of trade unions, the creation of an inflated ‘wage floor’ through the payment of benefits to workless people and industry-specific regulated wages through wages councils) that unemployment would be stopped from increasing.

In this context, it was argued by the CPRS that many working people would have to accept a future of low paid work. Wage supplements were to be central to this by helping to break in the public’s mind the link between low pay and family poverty. And, it was argued, that wage supplements would actually help to create employment by reducing the ‘wage floor’ – the wages employers felt obliged to pay and unemployed people were willing to work for. Hence, it was suggested by the CPRS that wage supplements could be used to reduce the wages employers expected to pay to below those in the lowest paid jobs. Such ideas were taken forward in the introduction of Family Credit via the Fowler Reviews of social security in the mid-1980s.

It is in this view of wage supplements – as a means of addressing what is known as the ‘unemployment trap’ – that the changes announced in the summer budget were located. The changes were to shift the means of delivering the incentive to take to work away from tax credits to, first, a concerted effort to reduce the amount in benefits that workless people will receive in the future (e.g. freezing the cash value of benefits for four years, reducing the ‘benefit cap’ and restricting tax credits for both people in and out of work to two children only) and, second, an attempt to increase working people’s wage income through primarily an increase in the national minimum wage, which led at least in part to the reversal of the proposal to cut tax credits.

What was not acknowledged in this approach, however, was that in incentivising employment, and even if this was not their intention in recent years, wage supplements have an important role in maintaining the income of the poorest working families. In other words, they are important in relieving the poverty of poorly paid workers. Hence the arguments used so effectively in the House of Lords outlining the potentially devastating impact of the loss of tax credits to working poor households.

Chris Grover is a Senior Lecturer in Social Policy in the Law School and Sociology Department at Lancaster University. Chris Grover received a Small Research Grant from the British Academy for a research project called ‘Social security and wage poverty’.

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