Benefits conundrum fuels the cash-in-hand economy

Benefits conundrum fuels the cash-in-hand economy
Faisel Rahman – The Guardian

Welfare reform should recognise that harnessing people’s desire to work is more effective than the threat of jail or poverty.

Living on benefits is tough. Tony McNulty, former employment minister, admitted to Radio 5 Live earlier this year that he couldn’t survive on the money his department gives out to people. The minimum income standards for Britain estimates that a person needs £158 a week in order to have the opportunities and choices necessary to participate in society. A single adult receives £60.50.

With unemployment reaching 2.5 million nationally, the impact locally is clear in the surge in demand for Fair Finance services – for our advisers helping people manage a drop in income and rising costs, and for our lending officers helping people avoid moneylenders. About a quarter of our interviewees admit to some form of cash-in-hand job to supplement their benefits.

This is unsurprising, according to east London charity Community Links, which has been campaigning for better recognition of this issue through its Need NOT Greed campaign. Its online survey reveals that up to three-quarters of people admit to working cash in hand at some point. The point is the classic benefits trap conundrum: living on state support is almost impossible, and the marginal rate of tax for people moving off benefits and into low-paid work is so high (up to 95% of additional income being used to pay for lost benefits) that it is actually a barrier to getting a job. Added to this is the difficulty in now finding an appropriate job. So the campaign argues that working cash in hand is the only way some people can live above the poverty line.

The cases documented in the campaign reflect many of the stories I hear from our clients. Pete (not his real name), a father of three, told the campaign: ‘In the last two years, I have been working for cash in hand. I know what I am doing may be benefit fraud, but I had no choice. I was being threatened by the people I owed money to and I had to do something before the situation got out of hand. I couldn’t use my benefits to pay debts as that’s my family’s lifeline, and I owed a lot.

‘Most people who work informally have multiple problems. It’s because they have poor educational background, never had a decent job, single parents with childcare issues, like me, those who are in debt, like me . . . it’s very difficult to get out of such a situation and find proper work. You feel trapped.’

The Department for Work and Pensions last year estimated there to be nearly £1.1bn of social security fraud – a huge amount, but far less than the £1.9bn lost because of errors or the estimated £25bn lost in tax avoidance. Yes, there are high-profile stories of benefits cheats fleecing the system, but these seem to be the minority compared to those earning up to an extra £150 a week to raise their heads above the poverty line.

Clearly, there’s a problem with a system that doesn’t pay people enough to live on, is so fiendishly complicated, and seemingly designed to trap people into a life of benefits. With the government spending £130bn on social security annually, cutting it looks an easy way for tough-talking MPs to fix our deficit. Every time I hear the phrase ‘benefit reform’ I hear ‘benefits cut’. The net result will only force more people to work informally, and arresting and stigmatising people who are just trying to get by will only create fear and drive the problem further underground.

Ultimately, we need a simpler system that helps people step out of benefits progressively, with tapering support such as raising the earnings disregard – the amount someone can earn before they are taxed or have part their benefits reduced. The Tory thinktank, the Centre for Social Justice, is looking at reforming the structure of the benefits system through ‘dynamic’ benefits, while the government is focusing on conditionality and personalised support through welfare-to-work reforms.

If the two parties worked together they might find that harnessing people’s desire to work is much more effective than the threat of poverty or jail.