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Income-Related Benefits in the UK

Income-Related Benefits in the UK. Turin, 2 December 2004 Elisa Baroni – Cathal O’Donoghue UK Dept. for Work and Pensions* National University of Ireland, Galway * Disclaimer: The views expressed in this presentation are the authors’ only. Means Tested Benefits (MTBs) and Tax Credits (TCs).

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Income-Related Benefits in the UK

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  1. Income-Related Benefits in the UK Turin, 2 December 2004 Elisa Baroni – Cathal O’Donoghue UK Dept. for Work and Pensions* National University of Ireland, Galway * Disclaimer: The views expressed in this presentation are the authors’ only

  2. Means Tested Benefits (MTBs) and Tax Credits (TCs) • MTBs target mainly people out of work (<16 hour, irrespective of contributions paid). • TCs target mainly people/families in low paid work (>16 hours a week). Welfare to Work measure.

  3. MTBs and TC target 5 main groups TARGET MTB and TC People on low incomes Income Support, Housing Benefit, Council Tax Benefit, WTC Unemployed Income-based Job Seeker Allowance Families with children Working Tax Credit Child Tax Credit Elderly people Pension Credit Sick and disabled Income Support + Disability Premium

  4. UK Social Expenditures 2002-03 • 4.3 % of GDP spent on MTBs and TCs • 40 % of total social expenditures.

  5. I. Means Testing Rules • For MTBs Benefit = Eligible Amount – Max (0; Net Income ) If Income > Eligible Amount: Benefit=[Eligible Amount –(Taper) * (Net Income –Eligible Amount)] • For TCs: Credit = Eligible Amount – Max (0; (gross income - threshold)*Taper

  6. III. Tapers • If Actual Income > Eligible Amount, tapers: • 100 % withdrawal rateon IS/JSA(IB)/PC(GC) • 65 % withdrawal rateon HB/CTB • 37 % withdrawal rateon WTC • 6.6 % withdrawal rateon CTC Family element • Up to 60% credit rate on PC(SC) for saving • 8 % effectivewithdrawal rate (IS/JSA) and 20% effective withdrawal rate (HB/CTB) due to Capital Limits.

  7. Net Income Composition: MTBs, TCsCouple with 2 Children, below av. wage

  8. MTBs/TCs as % Poverty Line Weekly Income 0.70 1997 0.60 0.50 2003 0.40 Income 0.30 % of Poverty Line 0.20 0.10 0.00 1 2 3 4 5 6 7 8 9 10 Family Type I. MTBs , TCs and Poverty

  9. III. Welfare Reforms and Poverty • Since 1997, the number of children, lone parents and pensioners in low income (below poverty line) has fallen. • Since 1997, the number of working adultswithout children living below the poverty line has risen however. • Are TC policy sufficient to generate the desired work incentives ? • Small labour supply elasticities (Blundell, 2000) explained ?

  10. The Future of Social Assistance • MTBs simplification • Away from means testing: • Asset-based savings policies ? • Tax Credits extended ? • Flat universal rates ? • What impact on labour supply ?

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