DSS says 25,000 more caught in 'poverty trap'

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THE NUMBER of people in the 'poverty trap' rose by about 25,000 last year to nearly 200,000, according to figures from the Department of Social Security.

These are part-time employees for whom it is not worthwhile to work longer hours because any extra pay they earn would be offset by cuts in their Income Support. Part- time workers have become increasingly important to the economy, as many employers find they can be tailored to peak business periods.

The rise is likely to increase the Chancellor's determination to reform the way low-paid workers are treated under the benefit system, which he sees as damaging to incentives and the efficiency of the labour market.

Since before Christmas the Chancellor has been looking at the feasibility of 'basic income' schemes which would replace some means- tested benefits with automatic payments made irrespective of need. However, independent studies of the scheme suggest it could only be paid for by raising the basic rate of income tax to at least 40 per cent from its current 25 per cent.

Income Support is withdrawn one-for-one with rises in earnings for people working less than 16 hours a week. People with children who work more than 16 hours a week move on to Family Credit, which is withdrawn at a marginal rate of only 70 per cent. About 750,000 people in Britain face marginal rates of tax and benefit reduction of 70 per cent or above.

Andrew Dilnot, director of the independent Institute of Fiscal Studies, said it would be better for Income Support to be withdrawn at less than a 100 per cent marginal rate. But he added that high marginal rates at these levels of earnings could be justified because 'these people are unlikely to be working for the money'.

Many of the 200,000 are the working wives of men who have become unemployed. The wife's income makes little contribution to household income while the husband is claiming Income Support but it would be valuable if the husband returned to work. Mr Dilnot said the Chancellor was unlikely to adopt any full-blown basic income scheme.