Chancellor Rachel Reeves faces mounting criticism over a significant flaw in her inaugural budget that threatens to trap young people in poverty. The controversial policy creates what experts are calling an "effective tax rate" of up to 80% for those attempting to transition from benefits to work.
The Budget's Unintended Consequence
At the heart of the issue lies the interaction between two key measures announced in the autumn statement. The government plans to increase the national minimum wage for young workers while simultaneously raising the basic universal credit allowance. This combination creates a perfect storm where young people moving from benefits into employment could lose 80p for every pound they earn.
The mathematics behind this trap reveals a deeply concerning picture. When a young person receiving universal credit takes a job paying the new higher minimum wage, they face not only the standard income tax and national insurance deductions but also the gradual withdrawal of their benefits. This triple whammy of reductions means that working more hours or accepting higher pay often results in minimal financial gain.
Who Bears the Brunt?
This policy failure disproportionately affects young workers aged 18-20, who are already among the most vulnerable in the labour market. Many in this demographic work in sectors like retail, hospitality, and social care - industries where the new minimum wage will apply but where hours can be irregular and progression opportunities limited.
The situation becomes particularly acute for young people living independently, who rely on universal credit to cover essential housing costs. The steep withdrawal rate of benefits as earnings increase means that taking on additional shifts or seeking promotion often fails to translate into meaningful improvements in their standard of living.
The Urgent Need for Reform
Economic analysts and anti-poverty campaigners are united in their call for immediate government action. The Resolution Foundation has highlighted similar issues in previous analyses, noting that marginal deduction rates above 70% create significant work disincentives.
Several potential solutions have been proposed to address this crisis. These include reforming the universal credit taper rate specifically for young workers, introducing a "young person's work allowance" that protects a portion of earnings from benefit reductions, or adjusting national insurance contributions for this age group.
The Treasury now faces pressure to acknowledge and rectify what many are calling a fundamental design flaw. With young workers already facing higher unemployment rates and greater job insecurity than older cohorts, this budget miscalculation could have long-term consequences for both individual livelihoods and the broader economy.
As the implementation date approaches, all eyes are on Rachel Reeves to demonstrate whether her commitment to "fairness" extends to the youngest members of the workforce. The credibility of Labour's economic strategy may well depend on how quickly and effectively they address this emerging crisis.
