Levelling up through the social security and taxation systems

  • Levelling up

Professor Karen Rowlingson, University of Birmingham 

In this piece Karen Rowlingson looks at the crucial role that fair taxation and an effective benefits system must play if the UK is going to level up successfully.

The Conservative Party’s 2019 manifesto promised to “level up every part of the UK” and thereby reduce regional economic disparities.  And, indeed, regional disparities relating to GDP, health, educational attainment and social mobility are considerable according to research by the Institute for Fiscal Studies (IFS) in 2020.  This research found that UK regional GDP inequality was the highest compared to 27 other developed countries.

However, the research also found that, after adjusting for housing costs, living standards between UK regions were not particularly unequal.  And a report by the Business, Energy and Industrial Strategy Committee in July 2021 similarly highlighted disparities in income levels within regions as well as between them.  For example, London is one of the wealthiest parts of the UK in many respects but also has the largest percentage of people in relative poverty and only the fourth highest average level of disposable income in 2019 once housing costs were taken into account.

The existence of clear regional inequalities of various kinds most certainly requires policy response but if policy merely levels up average incomes between regions then it will leave millions in poverty throughout the country.  The goal of levelling up should surely be to reduce, if not eradicate, poverty wherever it is found?  And it is not difficult to find, unfortunately.

According to the latest official data, 14.5 million people in the UK were living in poverty in 2018/19, ie before Covid-19, equating to more than one in five people.  This includes 8.4 million working-age adults, 4.2 million children and 1.9 million pensioners. Child poverty and in-work poverty had been on the rise for several years before Covid-19 and many of the groups already struggling most were also the groups most likely to suffer from the health impacts of Covid-19 including: part-time workers, low-paid workers and sectors where there are much higher rates of in-work poverty, such as accommodation and food services; Black, Asian and minority ethnic households; lone parents – mostly women; and renters in the private and social rented sectors.

And, since Covid-19, all our data suggests that poverty and inequality have increased still further.  For example, the Trussell Trust alone gave out 2.5 million emergency food parcels in 2020/2021, an increase from 1.9 million in 2019/20.

In light of these figures, genuine ‘levelling up’ surely needs a nationwide approach to reducing or indeed eradicating poverty wherever it occurs and this is where our social security and taxation systems are crucial, particularly in the short-term.

Reforming income-related benefits: the short-term fix

Our social security ‘safety net’ was failing before Covid-19 and despite some critical temporary measures, such as the £20 uplift to Universal Credit, it needs urgent reform in order to support the levelling up agenda so that people on the lowest incomes (many in paid work) have enough to live on in dignity and without experiencing poverty, wherever they live in the country.

This should be the primary focus of any ‘levelling up’ agenda and requires various changes to the system including reinstating the £20 uplift to Universal Credit which was withdrawn on October 6th – and extending this to all income-related benefits; removing the ‘two-child’ limit, dubbed ‘the worst social policy ever’ by Jonathan Bradshaw; removing the overall benefit cap which particularly impacts on larger families in areas where rents are high; reducing the harsh, counter-productive and basically inhuman conditionality and sanctions regime; and ensuring that benefits keep pace with price/rent inflation.

These reforms do not come without a cost, of course, though in the shadow of the social investment used to tackle the Covid-19 crisis the costs look relatively modest – and the benefits are considerable.  The Institute for Fiscal Studies (IFS) has estimated that reversing the two-child limit would make about 700,000 households with children better off by an average of £3,000 per year, at an annual cost of about £2 billion. And abolishing the benefit cap would help about 100,000 working-age families by an average of roughly £2,000 per year, costing around £200 million per year.

The cost of tackling poverty and inequality may seem high in some respects, but the cost of doing nothing is also considerable: poverty impacts people’s health, wellbeing and life chances. As well as the huge personal cost, poverty also costs the UK an estimated £78 billion a year in health and other associated welfare costs. The evidence shows that we can afford to tackle poverty and inequality during these challenging times – and we really cannot afford not to do so.

There are also many ways of paying for this which may also meet other goals of levelling up, hence the second area for reform: wealth taxes.

Reforming wealth taxes

Taxation is rarely popular, but a recent survey of public attitudes, carried out by the University of Birmingham and Ipsos MORI in July/August 2020, showed that 44% of the public were prepared to personally pay more taxes rather than see cuts to public services.

And the Johnson government in 2021 has, indeed, announced plans to increase national insurance by 1.25 percentage points, to raise £12bn a year to fund health and social care.  However, this plan has been criticised for hitting younger workers more than pensioners and continuing to tax earnings from work more than income from wealth, thus doing nothing to help ‘level up’, quite the reverse.

This approach is also surprising given that the public are much more supportive of taxes on wealth than income.  Indeed, when posed a hypothetical scenario in which the government needed to raise an extra £10 billion per year through taxes, survey respondents in the University of Birmingham/Ipsos Mori study showed the highest level of support for introducing a new annual wealth tax. The public particularly supported introducing the tax on financial investments and property wealth (excluding people’s main residence), with a tax threshold of £500,000 and a tax rate of 1% on everything above that threshold.

Other ways of reforming wealth taxes may also support the levelling up agenda very directly.  For example, IPPR has proposed replacing council tax and stamp duty with a tax proportional to the value of property itself, arguing that this would reduce tax bills for 75 per cent of households and mean that areas with lower property prices would no longer pay higher property tax rates than areas with higher house prices, as they do under the current system of council tax.

Wealth taxes may sound highly partisan but, in his essay on “Beyond levelling up”, Tim Pitt, former senior adviser to two Conservative Chancellors of the Exchequer (Sajid Javid and Phillip Hammond) has put “The Conservative case for tackling inequalities of income and wealth” in which he advocates not only for a similar kind of wealth tax to the IPPR but also for a land value tax and reformed lifetime capital receipts tax.

Longer-term levelling-up: reforming our broader political economy

The reforms to income-related benefits discussed earlier in this blog are vital to relieve the economic distress and personal indignity caused now by poverty but they will only provide a short-term fix. And the wealth tax reforms mentioned above will help both pay for this but also play a role in ‘levelling up’ wealth across the country in terms of re-balancing regional inequalities in property prices.

But these changes to the social security and taxation systems rely on a ‘redistributive’ approach rather than tackling the fundamental causes of inequality.  In the longer-term we need to take a more fundamental look at our system of ‘social security’ and its interactions with the labour market and the housing market so that people, across the country, can afford a decent home and decent living standards without having to resort to claiming income-related benefits.

In relation to the labour market, reforms here should include far greater investment in training and skills across the life course but also greater involvement of workers and their representatives in decision-making within organisations.  This latter policy may again seem particularly left-wing politically but it was part of the Conservative manifesto in 2016 if not ultimately implemented by the government when in office.

So if this, or any, government is serious about ‘levelling up’ it needs to look beyond regional inequalities to national inequalities.  And it needs to provide support in the short-term through redistributive measures while also tackling the more fundamental, long-term drivers of inequality.

Phot credit: Michael Longmire on Unsplash

About the author

Karen is a Professor of Social Policy in the Department of Social Policy, Sociology and Criminology at the University of Birmingham and is a member of the Centre on Household Assets and Savings Management (CHASM).