Britain’s dreadful new benefits trap demands a response

When children face the question “what do you want to be when you want to grow up?”, a common response is astronaut, or maybe doctor?

I’d be willing to bet my house that no child has ever answered: “researcher for the Institute for Fiscal Studies (IFS)”.

However, the work the staff at that august organisation produce is often of extraordinarily high value. Take the report that the IFS Deaton Review of Inequalities has published in conjunction with the Nuffield Foundation. It takes a medical scalpel and uses it to cut to the heart of the problem with welfare reform.

It finds that successive changes to the benefits system have indeed led to higher employment and strengthened the financial incentives to move into work. A good thing in principle, for sure. Being in work is clearly better – and more financially rewarding – than being out of work.

And the numbers appear impressive: 100,000 more single parents in jobs with evidence (albeit limited) that universal credit (UC) has sped up claimants’ return to the labour market.

As to those financial rewards: back in 1997 to 1998, low earners with children on average lost 50p in lower benefits or higher taxes for every £1 earned through moving into part-time work. Today the figure is 38p. The national living wage is £9.50 per hour. The difference between the net hourly wage (after taxes paid and benefits withdrawn) is now around £5.90 rather than £4.70.

Iain Duncan Smith, the architect of UC, must be cock-a -hoop. He’s had an opportunity to shoot at a goal and scored! He stands with arms aloft as the Tory team gathers for a group hug. But wait. The IFS is now in charge of the VAR and the goal has been disallowed. Why? It is because of the jobs these people are pushed into. They’re not very good.

The whole idea of getting people into work is supposed to be that they can then get on. Climb the career ladder. Better themselves. It’s a trope subscribed to by both the main parties, although the idea has deeper roots in Tory mythology. But this research shows they are not getting on. Instead, they are getting stuck in low-paid, part-time roles. There are far too many of those in the British labour market.

This line from the research is particularly damning: “A large majority of the new jobs were part-time, and on average paid just £8,000 per year [2021 prices]. Virtually none were paid over £20,000 per year – meaning that essentially all the new workers were in the bottom 40 per cent of the overall earnings distribution.”

This is, then, the rot at the core of the system. It undermines the claims made for benefits reform because it has simply served to swap one social problem (joblessness) for another (low-wage work that is impossible to escape).

The benefits trap thus remains a trap. The UK spends more than £100bn on benefits, about half of which now goes to families in work, while another aim of welfare reform – to get people off those benefits entirely and hopefully cut the bill – is also not being realised.

This is an issue that needs to be addressed. And you can do that by reforming the taper, which progressively cuts benefit payments as workers earn more, by cutting the speed at which benefits are withdrawn would be one. It would encourage full-time work or at least more hours.

Addressing the cost and the difficulties people – women in particular – face in securing childcare would be another.

Doing the first of those (and maybe even the second) might make the chancellor baulk. But as the report’s authors argue this could “reduce the long-term cost” of such a policy “since higher wages bring more tax revenue and reduced entitlement to in-work benefits”.

The benefits would not just be financial. There is a social cost to this latest benefits trap, which is as morally repugnant as the old one.

The IFS research is obviously invaluable to those of us who have sought to point out the flaws in welfare reform by providing a piece of rigorously researched evidence to buttress our arguments. But its worth goes beyond that. It identifies a problem and suggests workable solutions, at least for a government with an interest in long-term policymaking aimed at improving the life chances of low-wage Britons.

Unfortunately, we’ve seen scant sign of that.