Rachel Reeves

Member of Parliament for Leeds West

  • Home /
  • News / My article in the Observer - Giving with one hand, taking away with the other won’t solve issue of low pay

My article in the Observer - Giving with one hand, taking away with the other won’t solve issue of low pay

You can read my article about tax credits in yesterday's Observer here. 

A staggering one in four workers in the UK are paid less than the living wage, up from one in five two years ago. The problem of low pay in our country persists, and changes to tax credits are about to make things much worse.

With six million people not earning enough to cover the basic cost of living, tackling in-work poverty is crucial, and I welcome an increase in the minimum wage.

Yet in the same month that the minimum wage goes up, David Cameron and George Osborne will implement cuts to tax credits that will more than undo the good work of the pay rises. About 3.3 million families – 2.7 million of them with children – stand to lose on average £1,300 in the first year alone.

The level at which working tax credit starts to be withdrawn will fall from £6,420 a year to £3,850. The level at which child tax credit begins to be taken away will fall from £16,105 to £12,125. And the taper rate at which tax credits are withdrawn will rise from 41% to 48%. On top of this, the child element of tax credits will be limited to two children, and tax credits will be frozen for the duration of the parliament. Labour MPs will vote against all these cuts to tax credits.

The Institute for Fiscal Studies says that it would be “arithmetically impossible” for the increases in the minimum wage to outweigh the cuts in tax credits. Never before has there been such a clear case of giving with one hand and taking away much, much more with the other.

New figures that I commissioned from the House of Commons library show by exactly how much families on the minimum wage will lose out. A family with two children and two parents, each earning the minimum wage, will see their income fall by £1,847 in 2016-17. By the end of this parliament, this family will have lost a devastating £7,700. A family with one earner on the minimum wage will be £1,525 worse off in 2016-17, and almost £7,000 worse off in total over the course of the parliament.

But even at this late stage, the government must ensure that the national living wage can deliver an increase in people’s take-home pay. If Osborne were to delay his cuts to tax credits by just two years, it would enable two years of wage growth from the national living wage, raising the incomes of families who will then be better placed, and better prepared, to withstand these cuts. It would also enable a proper distributional impact assessment to be carried out, and support to be put in place to stop the “work penalty”, where people are being unfairly penalised for going out to work.

The figures from the House of Commons library show that, with a two-year delay, the family with one earner and two children would, over the course of this parliament, be about £3,500 worse off, rather than £7,000 as they are currently set to be.

I have campaigned for a higher minimum wage, and more employers should be paying a proper living wage. But to accompany a higher minimum wage with the largest-ever cuts to family incomes is cruel and perverse, and we must oppose them.

We need to bring down the deficit and address the low-paid economy, but we should do this by tackling the root causes of low pay and rising social security spending, not by attacking those who are already struggling to cover the costs of living.

These changes are due to happen in just six months, with parliament voting on the tax credit changes this week. But there is still time for Osborne to help millions of working families, and a two-year delay in the cuts to tax credits is one way to soften the blow.

Rachel Reeves is the Labour MP for Leeds West and a member of the Treasury select committee

The Labour Party will place cookies on your computer to help us make this website better.

Please read this to review the updates about which cookies we use and what information we collect on our site.

To find out more about these cookies, see our privacy notice. Use of this site confirms your acceptance of these cookies.