IFS: Budget leaves low-income workers 'significantly worse off'

Posted On: 
9th July 2015

Low-income households in receipt of tax credits will be “significantly worse off” as a result of yesterday’s Budget, the Institute for Fiscal Studies has warned. 

George Osborne announced a new ‘National Living Wage’, which will be worth £9 per hour by 2020 and will be compulsory for over-25s, alongside the deep cuts to tax credits and other benefits.

The Chancellor has characterised the reforms as a “new contract” to reduce dependency on the state and said the Government was “rewarding work”.

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But the IFS said increases in the minimum wage would not be “anywhere near” enough to make up for the losses to be incurred by those on tax credits.

“If that’s what they’re arguing, they’re plain wrong because there is simply not enough money going into the new minimum wage to anywhere near compensate in cash terms people on tax credits,” IFS director Paul Johnson told the World at One.

“Very clearly on average people who are currently receiving tax credits will be significantly worse off as a result of this, even when you take into account any increase in the minimum wage.”

“The increase in the minimum wage simply cannot provide full compensation for the majority of losses that will be experienced by tax credit recipients. That is just arithmetically impossible.”

WORK INCENTIVES

Mr Johnson also said those out of work would be less affected than those in employment.

“The cuts will be bigger for people in work than they will be for people out of work and in the new Universal Credit system it will reduce the incentives for people to move into work,” he added.

Labour has criticised the scale of the cuts to tax credits, saying they amount to a “working penalty” that will reduce incentives to get into work.

The IFS said some three million households were in line to lose an average of £1,000 per year as a result of the Chancellor’s Budget yesterday.