1. Austerity, tax and benefit changes and minimum wage policies
Jonathan Cribb and Robert Joyce
Presentation to Low Pay Commission
5th October 2017
Slide Title 1
Presentation template 2

2. Budget 2017 forecast: deficit
Source: Office for Budget Responsibility.
Where next for tax & spend?

3. Budget 2017 forecast: deficit
2% of GDP limit
on structural deficit
Source: Office for Budget Responsibility.
Where next for tax & spend?

4. Long run impact of tax and benefit reforms May 2015 – April 2020 (including universal credit)
Note: Assumes full take-up of means-tested benefits and tax credits and all changes fully in place

5. Benefit changes coming up
Almost nothing entirely “new”, but...
...freeze on most working-age benefits continues in April 2018 and 2019
Impact set to increase due to higher inflation
Under current OBR forecasts, real value of these benefits to fall by 5% between now and 2020; reducing annual spending by £3bn per year
...and big cuts continue to be phased in
Child tax credits
Employment and Support Allowance
Introduction of universal credit
© Institute for Fiscal Studies

6. Changes being phased in (starting last April)
Extra tax credits for third and subsequent children abolished for new claimants and new births
Currently around 900k families get average of £3,670 per year of support for 3rd and subsequent children; about 550k are in work
Only about half of long run impact by 2020
Family element of child tax credit removed for new claimants
£545 p/y less for all new CTC claims
About 4m families affected in long run
CTC is means-tested so both cuts tend to strengthen work incentives for low-earning parents
Employment and Support Allowance
New claimants in WRAG group (those assessed as less ill) to get same rate as JSA claimants – cut of £30 per week
Currently about 500k such people (20% of ESA claimants)
Weakens incentive to get into WRAG group (rather than JSA); strengthens incentive to get into support group
© Institute for Fiscal Studies

7. Changes and delays to Universal Credit
Rollout now not planned to be complete until March 2022
(and OBR assumes October 2022)
It is due to accelerate quite significantly
Twice as many claimants planned on average in as in
But we’ve been in that situation before
© Institute for Fiscal Studies

8. Changing assumptions about UC roll-out
Notes and sources: see Chart 4.7 of November 2016 EFO
© Institute for Fiscal Studies

9. Changes and delays to Universal Credit
Rollout now not planned to be complete until March 2022
(and OBR assumes October 2022)
It is due to accelerate quite significantly
Twice as many claimants planned on average in as in
But we’ve been in that situation before
The big picture in the long run:
UC now clearly a net reduction in entitlements compared to legacy system
Mainly due to cuts to ‘work allowances’
Impacts on work incentives very mixed, though does get rid of weakest incentives
Take-up is a key uncertainty and has the potential to make UC less of a takeaway in receipts terms than entitlements terms
© Institute for Fiscal Studies

10. Manifesto commitment: personal allowance to rise to £12,500 by 2020–21
This commitment is in nominal terms and inflation is likely to make it almost irrelevant
Under current inflation forecasts, by default the personal allowance would rise to £12,310 by 2020
...so meeting manifesto commitment would be worth £38 per year to basic rate taxpayers
minimum wage workers on housing benefit or council tax support (or universal credit) will typically keep only a minority of that anyway
NB: currently, if on NLW you have to average 30 hours per week throughout year to pay income tax (but about 21 to pay ee NICs!)
© Institute for Fiscal Studies

11. Large increase in % paid minimum wage by 2020
Proportion of workers paid minimum wage under different scenarios
Source: Cribb, Joyce and Norris Keiller (2017)
© Institute for Fiscal Studies

12. Higher minimum wages particuarly affect Northern England, part time workers, women, private sector
Proportion of employees aged 25+ paid the minimum wage, by subgroup
Source: Cribb, Joyce and Norris Keiller (2017)
© Institute for Fiscal Studies

13. Total directly increase in employer costs:
Higher minimum wages lead to significantly higher cost of employing affected workers
Increases in employer cost in compared to as a result of higher minimum wages
Government plans in 2020
Average increase in cost to employer, per employee brought on to minimum wage
£480 per year
(4.0%)
Number of employees directly affected by higher minimum wages in 2020–21
2.8 million
Total directly increase in employer costs:
£1.3bn per year
(0.1%)
Note: Costs measured relative to a baseline scenario in which all current (2017–18) minimum wage rates and the NLW are uprated in line with average earnings. Employer cost includes both wages and salaries paid to employees and employer National Insurance contributions. It does not include any mandatory employer pension contributions under automatic enrolment.
Source: Cribb, Joyce and Norris Keiller (2017)
© Institute for Fiscal Studies

14. Total directly increase in employer costs:
Higher minimum wages lead to significantly higher cost of employing affected workers
Increases in employer cost in compared to as a result of higher minimum wages
Government plans in 2020
Labour plans in 2020
Average increase in cost to employer, per employee brought on to minimum wage
£480 per year
(4.0%)
£2,000 per year
(14.7%)
Number of employees directly affected by higher minimum wages in 2020–21
2.8 million
7.1 million
Total directly increase in employer costs:
£1.3bn per year
(0.1%)
£14.1bn per year
(1.5%)
Note: Costs measured relative to a baseline scenario in which all current (2017–18) minimum wage rates and the NLW are uprated in line with average earnings. Employer cost includes both wages and salaries paid to employees and employer National Insurance contributions. It does not include any mandatory employer pension contributions under automatic enrolment.
Source: Cribb, Joyce and Norris Keiller (2017)
© Institute for Fiscal Studies

15. Incentives to employ younger workers and, particularly, apprentices
Employer cost of employing example individuals at the applicable
national minimum/living wage for 35 hours a week, excluding training costs, in 2017–18
Note: Employer cost includes earnings, employer NICs, minimum employer contribution to workplace pensions (at long-run minimum of 3% of qualifying earnings) and the apprenticeship levy. Source: Amin Smith, Cribb and Sibieta (2017)
© Institute for Fiscal Studies

16. Summary
Currently a bit of headroom against target for budget deficit
But lots of uncertainty around path of economy and public finances
Commitment to eliminate deficit by mid 2020s would require more tightening at some point, even under current forecasts
Benefit cuts are reducing incomes of working age households in the bottom half of the income distribution; growing as inflation bites
But will also strengthen work incentives
Increased NLW particularly affects part-time employees, women, Northern England and significantly increases employer costs
Density of wage distribution means going beyond current plan could have much bigger impacts
Now significant differences in cost of employing workers of different ages, plus much lower cost of employing apprentices
© Institute for Fiscal Studies