Thursday 17 February 2011

"David Cameron sets out Welfare Reform Bill plans"

Further to Scott Wright's post of earlier, this BBC article is a fair summary, I suppose, but it repeats the same deliberate untruths:

In future, the government is guaranteeing that for every £1 extra people earn, they will be at least 35p better off as a result of being in work.

Nope. The correct figure is probably more like 19p 'better off'.

Even by the DWP's own admission:

... under the current system people who work longer than 16 hours would be taxed at around 96 per cent – under Universal Credit around 900,000 people who already work 16 hours a week would be taxed at around 76 per cent.

That in turn is an unfair comparison:

a) The 96% rate is because Tax Credits Withdrawal is currently 39% of gross wages (41% from 6 April 2011); basic rate tax + Employee's NIC is 31% of gross wages (32% from 6 April), leaving you with 30p for every £1 you earn. After that, Housing Benefit and Council Tax benefit are withdrawn at 65% + 20% of your income (after tax and tax credits withdrawal), leaving you with the princely sum of 4.5p for every £1 you earn.

b) The 76% rate is because the Universal Credit is withdrawn at 65% of the net amount, i.e. you earn £1 gross, lose 32% in PAYE, and of the 68p left, they claw back [65% x 68p] = 44.2p so you keep 23.8p for every £1 you earn.

c) But what even the DWP gloss over is that it is only Housing Benefit which will be rolled into the Universal Credit (and not Council Tax Benefit). If we rework the 96% rate from (a) for somebody who isn't claiming Council Tax Benefit, the effective tax rate is in fact 'only' 89.5% (i.e. for every £1 gross wages, knock off 39p WTC withdrawal, 31p PAYE and of the remaining 30p, claw back 65% or 10.5p of Council Tax Benefit, leaving you with 10.5p!

d) It is not clear what will happen to Council Tax Benefit under the new rules, but assuming it is clawed back at 20% of net income, that takes another 4.8p of the 23.8p you were left with from (b) and leaves you with 19p for every £1 you earn, which I submit is considerably less than 35p.

4 comments:

James Higham said...

Nope. The correct figure is probably more like 19p 'better off'.

And at what cost, as you point out.

Mark Wadsworth said...

JH, to the outside world, the UC/SUT is a fairy step in the right direction, but the bureaucrats have ensured it will cost more in 'implementation' than any possible savings, and there is the insane idea doing the rounds that employers will report people earnings 'in real time' so that the DWP can update claimants' entitlement every week.

I can't see that going horribly wrong or anything.

AntiCitizenOne said...

The cost of working for a mainstream presenteeism employer is quite high I'd say 30%+ of salary (opportunity costs, travel, Clothes, extra food).

It probably needs to be a lot higher that 35p to attract any out of the unemployment hammock.

Mark Wadsworth said...

AC!, there's that as well, although I don't think it's a percentage of salary.

I'd suggest that the fixed costs of working are (say) at least £50 for loss of leisure time + travel + more expensive food + clothing etc, so people would have to earn a bare minimum of £100 a week (after tax, means testing etc) to make it worth bothering (ignoring 'starter' jobs where there's a career progression, I started training for less than £100 a week, for example).