Radical tax and benefit changes ‘needed to protect living standards’

31 Oct 12
New top council tax bands are among a series of changes needed to halt declining living standards, a major inquiry warned today.
By Vivienne Russell | 31 October 2012

New top council tax bands are among a series of changes needed to halt declining living standards, a major inquiry warned today.

The final report of the Resolution Foundation’s Commission on Living Standards says that without action on a number of fronts, low and middle income families face stagnant living standards over the next few years.

Council tax ‘stands out as a regressive tax in need of reform’, the report says, taking up 5% of the disposable income of low-to-middle income households. Gaining from growth says the ideal reform would be a single proportional tax rate linked to property values, following a full revaluation of house prices throughout the UK. Acknowledging there are ‘significant political obstacles’ to such a move, the commission suggests ‘a more modest and achievable’ change would be to add several new bands to the top of the scale to enable a cut in lower value properties.

Employment changes also threaten living standards, it says. There are already insufficient incentives for women and older people to join or stay in the workforce and there will be further polarisation in the labour market in the future. The report predicts that mid-level manufacturing and administrative jobs will largely be replaced by senior, professional jobs and low-paid service posts.

At the same time, the commission adds that fiscal tightening means tax credits cannot continue to be used to top up the income of low and middle-income families and employers will need to fill the gap and increase wages.

Among the commission’s other recommendations are an expansion in the provision of affordable childcare, tax breaks for low-paid older workers and more robust powers to counter low pay. In addition, the English education system should be recalibrated to focus on qualifications at 18, rather than earlier, with a standard school-leaving exam at that age.

These changes would be paid for by limiting the generous tax relief enjoyed by the most affluent and capping private pension pots at £1m. Means-testing some currently universal benefits for pensioners such as the Winter Fuel Payment and free television licences would raise £1.4bn and extending National Insurance Contributions to those working beyond the state retirement age would raise another £800m.

Members of the commission included Paul Johnson, director of the Institute for Fiscal Studies, Frances O’Grady, general secretary-designate of the Trades Union Congress and Sir Win Bischoff, chair of Lloyds Bank.

Johnson said: ‘In the current fiscal climate, further growth in living standards will need to come from employment income rather than direct state support. The tax and spending switches we set out in this report show that, even within existing fiscal constraints, steps can be taken that will help support living standards. We must ensure that out tax and benefit system does more to boost employment.’

O’Grady added that the country had found itself ‘locked in a destructive cycle of low pay and underinvestment in skills’. She said companies needed to pay their workers more when they could afford to do so.

Bischoff said that the government’s priority should be to secure a return to growth. But he added: ‘For long-term sustainability, we must also ensure that growth is built on the solid foundations of rising real wages through productivity increases and higher employment across the working population, rather than rising debt and state support.

‘That will require widespread improvements in skills, stronger work incentives and an efficient tax and benefits system.’


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