The "just managing" need deeds, not words

Theresa May has identified the fortunes of “just about managing” working families as her priority in post-Brexit Britain. A new government’s rhetoric precedes real outcomes against which it can be judged. But from one point of view, May’s talk about the low-paid looks well timed. Employment remains on an upward march, and after the longest squeeze in living memory, just before the referendum pay was finally growing strongly in real terms. Low inflation helped and, crucially, so too did the introduction of the National Living Wage—a new higher minimum wage for those aged 25 and over. This bold step meant that the smallest pay packets grew more than twice as quickly as those of typical earners at the start of this year, a pattern we might expect to continue as the National Living Wage is set to rise rapidly in the coming years too. All this sounds like music to the ears of the “just managing.”

A broader view, however, suggests that the current parliament will not be at all kind to this group: 2016 represents a blip, not a trend. This is because of two headwinds inherited by May. The first is the economic outlook, which forecasters suggest has worsened since the Brexit vote. A rise in inflation looks like a certainty following sterling’s fall. Other outcomes are less certain, but the consensus view has been to pencil unemployment up, and wage growth down, as a result of the referendum. This sounds like a mix that might just push the “just managing” over the edge.

The second headwind is £12bn of welfare cuts, introduced after last year’s election, but still to truly bite. These cuts are heavily concentrated on working households in the poorer half of society. They more than offset the welcome National Living Wage, which helps individual low-earners living in richer as well as poor households, and income tax cuts, which largely benefit the better-off.

Together these two headwinds—one economically-determined, one policy-induced—imply living standards will fall for the bottom two-fifths of households over this parliament. There is, surely, no way that could be stomached by a government claiming to champion their cause. So what to do?

In time, the economic backdrop—the first headwind—may respond to the Brexit deal, and any meat put on the bones of other aspects of economic policy, such as the declared return to an active industrial strategy. But if the “just managing” focus isn’t to ring hollow, more immediate action is also needed—action to reverse the second headwind, those £12bn of cuts. These reductions were originally planned to achieve a fiscal surplus. If that were still the aim, abandoning them would be nigh-on impossible. But helpfully, Philip Hammond, the new Chancellor, has created a window of opportunity for his Autumn Statement, by indicating a fiscal “reset” and ditching his predecessor’s targets. One option for a less stringent target could—at the price of higher debt­—create £17bn of headroom. Pressing pause on cuts to income and corporation taxes which largely benefit richer households would add another £4bn of breathing space on top. So Hammond has options, which could—potentially—include wiping out the full £12bn of cuts. In practice, there will be many other things on his to-do list in his first big set-piece event, and he will feel the need to prioritise. So what changes would the “just-managing” put top of the list?

He can target support at this group with pinpoint accuracy, by reversing a planned cut in “work allowances” in Universal Credit. These allowances define how much families can bring home in earnings before their credits start to be withdrawn. At a cost of around £3bn, this change would—on its own—boost incomes right across the bottom half of households by nearly 1 per cent, and for working single parents by as much as £2,800 annually. Crucially, this approach also helps to make work pay, encouraging people to earn more too. David Cameron’s government already conceded in principle that these cuts went too far, when it reversed them in the old tax credit system. The May government must now follow the same logic to its conclusion, and reverse them for the reformed Universal Credit, too.

The next priority should be thawing the freezes applied to working age benefits, which will bite harder as inflation rises. A full reversal would cost £4.6bn, but at a minimum he ought to prioritise spending around £1bn to protect households against the sterling-induced inflation spike.

Fiscal realities may limit how far the Chancellor can go this autumn, and looking further ahead, all sorts of things from the Brexit deal to the housing market and action to tackle the UK’s woeful productivity performance will determine how the “just-managing” fare. But new governments aren’t judged by rhetoric alone for long: with chill winds blowing, it soon wears thin. It is thus vital that in the Autumn Statement—its first concrete statement of policy—all the fine words about the “just managing” are turned into deeds.