06 October 2006
Chancellor Gordon Brown's attempts to boost low earners' incomes through benefits have been stymied because means testing has discouraged some people from staying in work, a study has claimed.
Research by the independent Institute for Fiscal Studies think-tank concludes that despite Labour's 'make work pay' campaign – which ushered in benefit reforms aimed at helping those in low-income employment – 'the extension of means testing has weakened incentives for many people to stay in work and increase their earnings.'
Research author Mike Brewer, a programme director at the IFS, told Public Finance that as a consequence of the current means testing regime, two million low-paid workers 'keep less than half of any increase in earnings because they face the withdrawal of benefits or tax credits'.
'That is bound to have an effect on peoples' incentive to remain in work or progress their income,' Brewer said. Brewer's report claims that the disincentives thrown up by the means testing regime 'are much greater than those imposed on high-income people through higher rates of income tax.'
Among the many benefits subject to means testing are Labour's flagship tax credits. The system has been effective in lifting around 700,000 children directly out of poverty. But the IFS study states that 'its indirect effect might be to increase poverty through weakening incentives for parents to work.' Treasury officials have long recognised the trade-off between redistributing income and work incentives.
A Treasury spokesman this week told PF that Gordon Brown's 'deliberate focus' has been to get people into work, rather than concentrate new policies too heavily on mitigating the impact of marginal tax rates. UK employment has increased by 2.4 million since 1997.
David Laws, Liberal Democrat work and pensions spokesman, said the high marginal tax rates exposed by the report were 'insane'. He blamed any disincentives to work on 'Labour's obsession with means testing' and 'an increasingly complex benefits system.' Laws called for a simplified tax and benefits system.
However, the IFS study, undertaken on behalf of the Joseph Rowntree Foundation welfare charity, is not entirely critical. It praises the Treasury's record on encouraging lone parents into work and says that reforms have 'strengthened incentives to earn more for some groups– especially the lowest earners.
PFoct2006
