The benefits scandal Kwasi Kwarteng should tackle next

I was at an end-of-summer party for the Centre for Social Justice last night, with some politicians and others interested in the welfare-to-work agenda. The reaction to the budget was mixed. The various donors there were stunned to have been given the biggest tax cut of their lives – the biggest since Nigel Lawson cut the top rate of income tax from 60 to 40 per cent.

These are philanthropists, by and large, highly likely to give a chunk of their tax cut to causes they support. That’s why Kwarteng’s budget will have gone down very well amongst the charity fundraisers who depend on such people. The Charities Aid Foundation once calculated that 9 per cent of the UK population contributes 66 per cent of donations, a group they call the ‘Civic Core’. A good chunk of that ‘core’ has just been given a stimulus.

But then again, most of the people I spoke to last night would have liked to have seen more done for the millions who have become detached from the economy: the 5.3 million who are on out-of-work benefits. This is 13 per cent of Britain’s working-age population, rising to 18 per cent in Manchester, 19 per cent in Dundee and Glasgow, 20 per cent in Liverpool, and 25 per cent in Blackpool. This is a scandal, and one never recognised because these figures are not published (you need to dive deep into a government database to find them). The ‘record low unemployment’ spin from the government is too widely accepted.

The sweeping and significant cuts in National Insurance and income tax will help those liable – i.e. those earning above £242 per week. But the financial lives of those on welfare are now governed by Universal Credit, which has its own dynamics. Specifically, there is a hidden tax on work: the ‘taper rate’ which determines how much benefits you lose when you work.

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When leaving benefits, work can be sporadic at first: a few shifts here and there, with one thing hopefully leading to another. Under the UC system you keep all of the first £340 of weekly earnings. But above this ‘work allowance’ you lose 55p in benefits for every extra pound you earn: a de facto tax rate of 55 per cent. So if you’re cleaning floors for £10 an hour, you’d be better-off by just £4.50 an hour if you take on an extra shift. It used to be £3.70 until a few months ago but Rishi Sunak changed the ‘taper rate’ from 63 to 55 per cent.

The point of UC was to create a tool that allows politicians to recognise this taper rate as a tax, and to adjust accordingly. But this means recognising those who work in this strange matrix of low-paid work and welfare, and such people are easily forgotten.

Sunak said he’d lower the taper further when funds allowed – this (in my view) was the trick missed by Kwasi Kwarteng yesterday. His tax cut was aimed very much at middle earners: everyone gets not just 1p off income tax but 2.5 per cent off National Insurance (money that’s split now between employer and employee). A welcome, radical and overdue change.

But if the UC taper rate had been lowered from 55p to 45p or even 40p, it could have done a lot more to help move people from welfare to work. If the UK economy is to return to decent growth, it will have to fire on all cylinders – and that means doing more about the scandal of a fifth of Manchester, Liverpool, Glasgow being on benefits at a time of near-record vacancies. It is, above all else, a waste of human potential.

Cutting the UC taper rate is not popular with HM Treasury and doesn’t even feature on its ready-reckoner list of possible tax cuts. There’s a lot of history between HMT and the DWP. The Treasury once micro-managed the working poor via its ‘tax credits’ empire, and still resents UC for supplanting that system. But if the Truss/Kwarteng administration is going to be one of radicalism, it should seize the tool of Universal Credit taper rates to get people back to work – thereby addressing the most urgent economic problem in the UK right now.