Tax Credits: Is the government subsiding the profits of low-wage employers?

kamsandhu —  May 10, 2013 — 1 Comment

As the coalition government overhauls the benefits system in a way that chancellor George Osbourne says will ‘make work pay’, is it time to put pressure on large employers to provide wages without the need for government subsidy?

Last year, £14bn was paid out in Working Tax Credits (WTC) to those in work, to top up their low pay. WTC will continue in a similar manner underneath the new Universal Credit system that is being piloted this month. However, with the recent focus on the spending of the Department of Work and Pensions, some commentators believe that WTC can act as leverage to subsidise the profits of low-wage employers. While WTC is seen as a positive incentive to get people into work and help push some out of poverty, without more responsibility put into the hands of employers to pay correctly, some will never afford to live without state support. Ian Birrell, former deputy editor of the Independent and ex-speechwriter for PM David Cameron said, in his article in the Independent on April 16, 2013:

“While it is delusional to think that inequality can be eliminated, there is something very wrong when a heavily indebted nation takes taxes from hard-pressed families to effectively subsidise firms that underpay their workforces. But this is precisely what is happening with the complex, bureaucratic and backfiring means-tested tax credits system used to top up the pay of poorer people.”

Despite pressure to freeze the minimum wage this year, the coalition increased it by 12p to the current £6.31 an hour.

The ‘Living Wage’ is calculated in line with the cost of living in the UK, and stands at £7.45 outside of London and £8.55 in London. While this has received cross party support, the choice for companies to take part is voluntary. Strong campaigning from anti-poverty charities over the last six months has seen a number of large businesses, including Barclays and cosmetic store Lush, adopt the wage. But many have not, and this still means that the minimum wage has remained below the rate of inflation for three years running, making it even more difficult for those struggling on these salaries, and more likely that they will need government help.

Increasing the minimum wage to the ‘Living Wage’ comes with its own range of benefits for both employer, employee and the welfare system, including:

  • Better staff morale
  • Lower staff turnover and greater retention of staff, increasing quality and staff knowledge
  • Consumer awareness of businesses as ethical employers
  • Decrease in numbers of those dependent on state help
  • Savings in government spending

A lot of benefit payments go to people who are in-work. There are currently some 900,000 people in the UK with jobs who need Tax Credits to afford to live. Breaking the ‘trap’ of benefit dependency should be at the heart of new changes to the system, and striving for large companies and firms that can reasonably afford to pay the ‘living wage’ to do so, will be the real way to ‘make work pay’ for people, businesses and welfare.



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