What safety-net?

Working families on low incomes will be among the biggest losers when the next recession hits after their finances were weakened by welfare spending cuts in the wake of the 2008 financial crash. The IFS said cuts planned over the next few years will deny many families the access to the same level of in-work benefits enjoyed 10 years ago. Instead, they will be more vulnerable to the effects of falling levels of pay and hours.

The Institute for Fiscal Studies said plans for a reduction in tax credits – which boost the incomes of low paid workers – will take a particularly large toll on households where one or more adults face cuts in hours or lower wages. In a recession, tax credits increase to replace a proportion of a family’s lost income and act to keep low-income workers and their children out of poverty. Figures covering the last recession show that inequality in the UK remained stable, despite an average fall in pre-tax earnings of more than 10%.

Andrew Hood, a senior research economist at the watchdog and an author of the report, said protections offered to low-income families in the last recession would be much reduced in the next downturn, which could be five years away. Cuts in payments of universal credit have already forced thousands of families to seek support from food banks and led to an increase in arrears in council tax and rent payments, according to debt charities. The work and pensions secretary, David Gauke, has refused to delay the expansion of the social security scheme, arguing that the system delivers better incentives for people to work.

The study shows that a repeat this year of the falls in the earnings of workers seen between 2007–08 and 2011–12 would hit the poorest 30% of working-age households with only a 39p drop in their after-tax income despite a £1 decline in pre-tax earnings. When benefit cuts currently being rolled out are fully in place, the IFS said that figure rises to 53p for every £1.

“This matters. The Office for Budget Responsibility (OBR) puts the chances of a recession in any five-year period at 50:50. Economic uncertainty is currently high. When the next recession does hit, the tax and benefit system will offer less support to low-income households,” the report said.

Hood said: “When governments change the tax and benefit system they should consider the impact on the support the system will provide to households when the next recession hits. Planned cuts to working-age benefits will leave low-income households with children, in particular, more exposed to any future downturn in the labour market, by reducing the extent to which earnings losses would be offset by increased entitlement to benefits. This is particularly important since many in this group have little or no savings which they can draw on during a period of temporary difficulty.”