A policy conflict with no easy answers

The government wants to cap benefit rises at 1% a year for the next three years. It's beings strongly criticised as being unfair.

The arguments are actually about two issues. Long term supply-side incentives and income distribution. The first is much more straightforward to explain than the second.

One of the biggest problems faced by those out of work is the difference between in-work and out-of-work income. When the difference between the two is small the incentive to take a job is less and may prompt some people to remain on benefits rather than take a job. This is known as the unemployment trap.

During the period since 2008 the incomes of those in work have risen only slowly and at less than inflation, and for some nominal wages fallen. But benefits have gone up in line with inflation, which in some years has been well above target. So the difference between in and out-of-work income has narrowed. The government argue that the cap on benefits will restore the balance and raise incentives to work.

The case on income distribution can be argued both ways. Those on benefits are the least well off in the UK and it has been long established that they will be guaranteed an income that allows them to at least take a part in the normal activities of society. Therefore raising benefits by less than inflation represents a real cut in their incomes and breaks this social contract.

However against this the case can be made that the faster rise in benefits than in wages has led to an unintended change in the UK's distribution of income. While those on benefits will be worse off through this measure they will simply join the rest of society in the experience of recession. The distribution of income will be restored to the one that existed before.

There is no doubt that the distribution of income is the macroeconomic target which gets the lowest priority. The question really is do we want to prioritise long-run efficiency or compassion. No easy choice.

The BBC explains the measure and the arguments here

Means test benefits or not?

The government proposes that child benefit will be means tested. This means any family that earns more than a certain amount (£45,000) will not be paid the benefit at all.

This is an unusual form of means testing as normally benefits fall as income rises. The proposal is for an 'on-off' switch at 45k. However the aim is to reduce public expenditure by removing this flat rate benefit from the better off.

So that seems fair? After all the rich don't need it do they? Some will, however, argue that the Child Benefit is an 'indicator targeted' benefit, it is given to a group that are known to have a high proportion of need - those with children have to spend more and the aim is to ensure children are well provided for. Another example is old age pensioners, they receive a flat rate benefit regardless of income, because many old people have low incomes. By offering this unconditional benefit nobody needs to ask for it, nor do they need to disclose any personal details.

One aim of government is a more equal distribution of income. Does this move improve it? Could it be that for some it will increase poverty?

The BBC provide the details of the latest discussion here

Is 15p enough (a tough balancing act)?

The National Minimum Wage (NMW) has risen by 15 pence per hour to give a pay rise for Britain's lowest paid workers.

With RPI inflation running at 5.2 per cent (CPI at 4.5%) the real income of these workers will fall. Inflation is high due to this year's VAT increase, increasing fuel prices and any number of other significant price pressures.  This years increase in the NMW won't allow Britain's lowest paid workers to maintain their standard of living.

However, before rushing to any judgement on this apparently about the small increase, consider that the Low Pay Commission (LPC) (which oversees increases in the minimum wage) had a truly tricky job on its hands. Given the poor GDP growth forecasts and rising unemployment, they couldn't risk making a tough labour market worse.

Therefore the key conflicting issues the LPC need to consider are:
What increase do we require to maintain the lowest income earners' standard of living?
and
What level would an increase in pay cost jobs in this economic climate?

Retailers take the view the NMW will cost jobs here

Reduced child-care support hurts the poor

Cuts to the working tax credit have hit poorer families. Four in 10 of those affected have considered giving up work because they will no longer earn enough to cover their childcare bills. The cut has added £500 extra on average to the childcare bill of low-income families.

Around 80 per cent of parents in low-income families who are in employment agreed with the statement: "Once I have paid for childcare, I am in a similar position to as if I was not working."

Parents spend almost a third of their incomes on childcare - more than anywhere else in the world, according to research by charities Save the Children and Daycare Trust.

The situation is even worse for families already living in poverty, where nearly half have had to cut back on food to afford childcare.

Please watch the Channel 4 video here

What impact is this having on society and how does it impact on social mobility?