The Welfare State We're In, The website of the book by James Bartholomew
November 12, 2010
Some bad news about the welfare reform and some good

As so often with government documents, some of the real meat is near the end.

The bad news:

The key bad news is that the much heralded 65% rate of benefit withdrawal is only benefit withdrawal. It does not included the impact of tax or national insurance. So people can still face a combined rate of benefit withdrawal with tax and national insurance of well over 65%.

Page 55. For low-earners but who nonetheless earn enough to pay tax, the incentive to increase their pay has been improved but still not to a really attractive level. Yes, there are 0.1million who will cease to face a tax/national-insurance/benefit-withdrawal rate (known as the Marginal Deduction Rate) on increased earnings of over 90%. Thank goodness for that. There will also be 0.4million people who won't face a rate of 80-90% which is also good. But the numbers facing a rate of 70-80% will increase from 1.7million to 2.0million. I think that rate is still much too high. I wonder if a big increase in personal allowance - with adjustment to the tax bands and perhaps a higher standard rate - would go some way towards fixing the problem?

The good news:

p54 For really low earners - those whose income is not taxable at all - the tax/national-insurance/benefit-withdrawal rate on increased earnings for 0.1million people has been over 90% and another 0.1million have been facing 80-90%. Now no one will face a rate above 60-70%. Excellent.

p56 Those who are currently unemployed will not longer anything like such penal rates of tax/national-insurance/benefit withdrawal rates (know as the Participation Tax Rate) on taking work for 10 hours a week. At present 0.6million are facing a rate of over 90%. That is a scandal - an appalling failure of past governments. Another 0.6 million face 80-90% which is also far too high. Under the new system, a modest 0.2million will face a rate of 70-80%. Some 1million will have a rate of less than 60-70% and an even bigger number, 3.0 million will face less than 60%. A big improvement.

p57 It will very clearly be worthwhile for a lone parent to work under the new system, partly because of the universal credit and partly because of a 'more generous earnings disregard'.

Measuring incentives to work is a complex business. On some measures things look as though they will improve a lot. On others, less so. In every case, though, I expect the attraction of working would be a lot greater if the government could put the money into improving the benefits withdrawal rate to 55%.

Posted by James Bartholomew • Indexed in Reform • Welfare benefits

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