Matthew Oakley is a senior researcher at the Social Market Foundation.
When George Osborne stands to present the combined Spending Review and Autumn Statement to the House next week, he should stand strong on tax credits. This will not be a popular view. All the analysis shows that the proposed reforms will mean that, even when combined with increased tax allowances and the National Living Wage, many families could face significant drops in their incomes.
That is, obviously, a bad thing. But, equally, continuing to apply the sticking plaster tax credits system to a labour market with much deeper problems would be the wrong answer. It’s also clear from the ongoing debate and analysis that any form of mitigation will be a combination of complex, ineffective and costly.
Thankfully, the Chancellor has an alternative. It would involve strengthening the Government’s ambitions on increasing family earnings and committing to carrying through his proposed tax credit changes once these ambitions can be achieved. Ultimately, families would rather have earnings in their pockets than have to rely on state support.
And a new report from the Social Market Foundation and Joseph Rowntree Foundation shows the sheer scale of potential rewards. By helping in-work tax credits claimants work just an hour a day more, even earning the Minimum Wage, the savings to the Exchequer would come to a staggering £4.1 billion. At the new National Living Wage or, better still, even higher wages, the fiscal impact would be considerably higher. Other research from the SMF shows that doing so would also leave many families considerably better off than under the old tax credits system.
To achieve this, the Government needs to take urgent action to improve productivity, boost skills and help families get better, longer-term jobs with a prospect of progression and a career. The problem at the moment is that the support offered by Jobcentre Plus and contracted support like the Work programme is just not up to the job.
Our report, Employment support for a high wage economy, outlines the steps that need to be taken. When the system is re-contracted over the next 18 months, the whole system should be turned on its head to focus on earnings, not simply movements off benefit; support should be better targeted at those with the greatest problems in finding work that pays enough to live on; city regions, combined authorities and expert providers in the third sector need to be much more closely involved in commissioning and delivery; and the Government must stop favouring public sector provision of Jobcentre services that might be delivered more effectively and efficiently by other sectors.
Reforms on this scale will not be straightforward. They would represent the major reform programme in this Parliament. And helping families increase their hours and earnings will not always be easy. However, continuing with a tax credit system that ignores the underlying problem will ultimately only prolong the pain and leave families worse off in the long run. The Government was right to take action, but so far is has taken only tentative steps towards a better approach. Now it must be bolder and develop a more ambitious and positive reform agenda to improve the UK labour market and family incomes. The Spending Review presents the perfect opportunity: deliver significant reform of employment support for 2017, and implement tax credits cuts when this is in place.