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%.

  1. Some changes to welfare benefits – ones in the news and out of it
  2. Notes ahead of the welfare reform white paper
  3. The Tories get radical on welfare reform. Good.
  4. This is a unique opportunity for welfare reform
  5. Reform’s idea of only giving money to those in need
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