LONDON: A leading thinktank has warned the government it risks worsening inequality during workers’ lifetimes by cutting tax credits and reducing income tax rates for the richest.
The Institute for Fiscal Studies said the long-term positives of higher in-work benefit payments were clear, citing a study of workers’ finances over the past 70 years. In the absence of higher income tax rates, top-up payments from tax credits and other in-work benefits were the main reason the income gap closed over a worker’s lifetime.
The study will add to the pressure on George Osborne to explain how the mix of tax and benefit changes in recent budgets will avoid widening the income gap between rich and poor.
The chancellor was criticised after the July budget when he said that a higher minimum wage – which he called the “national living wage” – would offset the effect of widespread tax credit cuts. At the time, the IFS warned that the £4bn extra income resulting from the rise in the minimum wage would fail to balance £12bn in welfare cuts.
In its latest report, the tax and spending thinktank said policymakers needed to be aware that the impact of the cuts would be felt over a worker’s lifetime, entrenching the wedge between the rich and lower-income workers.
It said that perceptions of an underclass of families out of work for most of their lives was misplaced and that almost all workers were in employment for a majority of their working lives.
This finding meant that tax credits for people in work had the biggest effect on closing income inequality. The report said tax credits also avoided creating a bigger poverty trap, which deters jobseekers from finding work when their out-of-work benefit incomes rose above wage levels.