IFS - Planned benefit cuts will leave low-income households more exposed to the next recession

8 Nov 2017 07:50 PM

New IFS research published yesterday, funded by the Nuffield Foundation, looks at recessions, inequality, and the role of the tax and benefit system. It finds that planned benefit cuts will leave low-income households more exposed to the impact of future recessions.

If the falls in the earnings of workers seen between 2007–08 and 2011–12 happened again now, the poorest 30% of working-age households would see their after-tax incomes fall by an average of only 39p for every £1 fall in pre-tax earnings. This is because of the offsetting impact of lower direct taxes and higher benefits. But when benefit cuts currently being rolled out are fully in place, that figure rises to 53p for every £1. Some working households currently receiving in-work benefits will no longer be entitled, and so won’t see their benefits rise as soon as their earnings fall. Some of those who are still entitled will see benefits rise less when earnings fall.

This matters. The Office for Budget Responsibility puts the chances of a recession in any five-year period at 50:50. Economic uncertainty is currently high. When the next recession does hit, the tax and benefit system will offer less support to low-income households.

The government is in the process of implementing a number of significant cuts to means-tested working-age benefits. The biggest are a cash freeze in most working-age benefits, cuts to child tax credit, and the introduction of the less generous universal credit. These cuts make low-income households worse off, while reducing benefit spending and, potentially, strengthening work incentives. But another part of this story is that these benefit cuts mean the government will, by default, provide less insurance to households in the event that their earnings fall.

Other key findings include:

Andrew Hood, a Senior Research Economist at IFS and an author of the report, said,

“When governments change the tax and benefit system they should consider the impact on the support the system will provide to households when the next recession hits. Planned cuts to working-age benefits will leave low-income households with children in particular more exposed to any future downturn in the labour market, by reducing the extent to which earnings losses would be offset by increased entitlement to benefits. This is particularly important since many in this group have little or no savings which they can draw on during a period of temporary difficulty.”

Notes to editors

Recessions, income inequality and the role of the tax and benefit system’ by Jonathan Cribb, Andrew Hood and Robert Joyce was published here as an IFS Report at 00.01 on Wednesday 8th November 2017.

This research has been funded by the Nuffield Foundation. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at ifs.org.uk