A good deal of money?

Now that some actual data has been released about the number of recent arrivals from elsewhere in the EU claiming tax credits, and we know something too about the deal on the renegotiating table, there’s the basis for very rough estimation of what money might be saved by the proposed restrictions on in-work benefits.

Firstly, a brief reminder that the although the Conservative manifesto promised that the Government would insist on stopping payment of child benefit and tax credits to people during their first four years in the UK, there appears to be no restriction on child benefit in the draft deal, and only tapered restriction of tax credits.

Secondly, that although the DWP statistics rushed out to support the Prime Minister’s negotiation-opening speech last November (which I wrote about at the time here) suggested that ‘between 95,000 and 105,000’ claims to tax credits or other benefits were being made by EEA nationals that had arrived on the previous four years, the new data from HMRC suggests that there are around 61,000 tax credits families in the UK having arrived in the previous four years. That number comes from a back of the envelope calculation to exclude households where one member of a couple was not a recent arrival as it seems most unlikely that it would be proposed that e.g. a UK single mum would lose her benefits if she coupled up with someone recently arrived.

Obviously there’s no suggestion that people already here will have their benefits restricted either, so this gives a basis for calculation on the assumption that people likely to arrive in the next four years will be much like the present group of previous arrivals in terms of total number and entitlement to tax credits.

So how much might benefit restrictions save if, as the government appears to have conceded, they are unlikely to have any real effect on flows? Let’s make a simple assumption about the kind of taper that might be applied by saying that new arrivals would have no entitlement at all in their first year, 25% in their second year, 50% in their third year and 75% in their fourth year, leading up to full entitlement after a full four years in the UK.

We also have to make an assumption about the extent to which the most recent arrivals are less likely to claim than those who have been here longer, as survey data appears to indicate. But just in case that’s wrong, we can also make an alternative assumption that there isn’t any difference between more and less recent arrivals.

So if there are a rounded 60,000 families claiming who have arrived (or will arrive) in a four year period, the ‘increasing’ assumption will be that 5,000 are first-years, 10,000 are second-years, 15,000 are third-years and 30,000 are fourth-years. In the alternative ‘flat’ assumption they are split evenly so that 15,000 are from each post-arrival year.

Next we have to estimate how much each family might claim each year. As this is only a rough calculation, let’s use the figure of £6,000 that the Prime Minister said was the average amount of in-work benefits paid to recent EEA arrivals in his speech. It’s not clear whether this referred just to tax credits or to housing benefit and/or child benefit too, but if we assume it’s all tax credits that will ensure there isn’t any under-estimation of the effect of restrictions.

The very simple arithmetic then gives an ‘unrestricted’ cost of £360 million a year, and a post-restriction cost of £195 million for the increasing scenario and £135 million for the flat scenario. This gives annual ongoing savings after four years, all other things being equal, of £165 million and £225 million respectively, or between 0.6% and 0.8% of the UK’s tax credits bill.

However, four years on from now, the likely amount of entitlements to in-work benefits for lower-earning families will be affected by a National Living Wage significantly higher than the present National Minimum Wage and the full introduction of Universal Credit. Just as a example, the House of Commons Library has calculated that entitlement of a two-earner couple on NMW with two children to £3,790 tax credits now will reduce to only £1,635 on NLW under Universal Credit in cash terms. So we might be looking at something less than £100 million a year savings: around a third of one per cent of the present tax credits bill. Or looking at it another way about three days worth of the UK’s annual net contributions to the EU.