Will working families lose out under 1% benefit uprating? Of course they will.

The story so far:

The government intends to stop uprating most benefits and tax credits with price inflation from next year, meaning that their value will fall in real terms by the difference between inflation and 1%. It is also raising the threshold for income tax from £8,105 to £9,205. This combination of measures will create winners and losers .

The opposition has argued, drawing on analysis by the Resolution Foundation http://www.resolutionfoundation.org/media/media/downloads/AUTUMN_STATEME... that 60% of the impact of the uprating change will fall on those in work.

The latest development:

In a statement on its website http://www.conservatives.com/Get_involved/benefits_haveyoursay the Conservative party has claimed that no working families in receipt of benefits will lose out as any reduction in benefit will be more than offset by the reduction in tax liability.

Fact-check

The statement on the Conservative website seems pretty unambiguous: ‘Anyone in work and receiving benefits will gain more from paying less tax, than what [sic] they lose from benefits not increasing in real terms.’

This is a universal statement, so if even just one working person receiving in-work benefits failed to gain more from the reduction in tax liability than they lost from the real terms benefit cut, it would be false. As many working people have incomes below the threshold for income tax, they will not benefit at all from the change to the threshold. At the same time, many working people who have incomes below the income tax threshold are in receipt of an in-work benefit: working tax credit, child tax credit or housing/council tax benefit. These are among the people we would obviously expect to be net losers under the combined changes.

Customs and Revenues provisional statistics for 2011/12 http://www.hmrc.gov.uk/statistics/prov-main-stats.htm#1 (table 6.1) show there were 682,000 working families receiving child tax credit with annual incomes (before tax and benefits) below £6,420: there’s no reason to expect this figure to have changed dramatically since April. Obviously none of these families will benefit from the increase in the tax threshold as their incomes are already far below the current threshold. At the same time all will be affected by the real terms cut. This is not an estimate of the number of losers, just a lower bound to any possible estimate. There were a further 425,000 working families with incomes between £6,421 and £9,999 some of whom it is to be expected will also be net losers.

The IFS have estimated the impact for different household types: see the last two slides in this presentation http://www.ifs.org.uk/conferences/PTAB_SA.pdf From visual inspection of the last chart, working lone parents lose about £9 a week, single earner couples with children lose about £10 a week, while couples with children and two earners lose about £4 a week. Childless single employed people and dual earner couples without children are more or less unaffected. The losses to working families with children are larger than the losses for comparable non-working families except in the case of dual-earner couples.

So the Conservatives’ statement is wrong. That working families will lose out under the combined effect of the benefits cut and the change to the income tax threshold is an unavoidable truth.

(I’ve reread the Conservatives' statement many times and have failed to come up with a reading which could make it anything other than untrue. But if anyone has an interpretation under which the statement could be true, let me know via Twitter @djmgaffneyW4 and I’ll amend this piece if necessary.)