Economists find 13 million families worse off following ‘regressive’ budget

By The Press Association9th July 2015News EnglandAusterity, Child Poverty, News England, Poverty / Austerity, Welfare Reform

The first Conservative-only Budget for almost 20 years was “regressive”, taking “much more” from the poor than the rich, a respected economic thinktank has found.

The Institute for Fiscal Studies found that “unequivocally”, low-paid workers will be left worse off by the Budget measures announced by Chancellor George Osborne on Wednesday, as the impact of cuts to tax credits and other benefits outweighed the boost to incomes from the introduction of a new “national living wage”.

In its response to the Budget package, the IFS also cast doubts on Mr Osborne’s claim to be delivering a “lower-tax” society, pointing out that the Treasury’s own documents show tax increases totalling £6.5 billion a year by 2020.

IFS director Paul Johnson said: “Given the array of benefits, it is not surprising that the changes overall are regressive, taking much more from poorer households than richer ones.”

Income increases resulting in a move from the current minimum wage of £6.50 an hour to £7.20 under the national living wage for over-25s – due to rise to £9 by 2020 – “simply cannot provide full compensation for the majority of losses that will be experience by tax credit recipients – that is just arithmetically impossible”.

Total additional income as a result of the new living wage level will be around £4 billion a year – far less than the £12 billion being cut from welfare – and many of those benefiting from the higher minimum wage level will anyway not be tax credit claimants, said Mr Johnson.

“Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average,” he said.

Mr Johnson said the Chancellor’s package continued the trend seen since the Government embarked on its programme of “consolidation” following the financial crash of 2008: “Looking over the period of the consolidation as a whole, poorer households have done worse than those in the middle and upper middle parts of the income distribution, though it remains the case that some of the biggest losers have been those right at the very top of the income distribution.”

Mr Osborne has denied Labour claims that his package was “pulling the rug” from underneath thousands of families, insisting it was vital both to continue reducing the “simply unsustainable” welfare bill and to tackle the UK’s “low pay problem”.

Labour, which promised a higher minimum wage in its own election manifesto, said it was “delighted” by the wage hike but warned it would be outweighed by the drop in state support and would act as a “disincentive to work”.

Small businesses warned it would lead to reduced hours and staff lay-offs as many would not benefit from the corporation tax drop and other tax incentives offered to offset the extra costs.

Defending the package, Mr Osborne told the BBC Radio 4 Today programme: “It is a part of saying to our country that we have got to have a better contract.

“We can pay this national living wage but we can’t have this welfare system that just grows and grows and grows, crowds out the kind of spending that I think we should be making on things like education and infrastructure to provide for the real welfare of the country in the future.

“A family where someone is working full-time at the moment on the current minimum wage is better off and that is the package, that is the deal that is offered in the Budget.”

Mr Johnson cast doubt on Mr Osborne’s claim that his Budget represented a major step forward in the Government’s drive to create a “higher wage, lower tax, lower welfare” Britain.

Hopes that the hike in compulsory pay levels would result in a “higher-wage” country were “a gamble”, as the only way of ensuring that goal would be to increase productivity – something which the Chancellor will address in a new plan on Friday.

The IFS director added: “This Budget will lead to a lower-welfare country, as the Chancellor promised. The figures are quite clear though – this was a tax-raising Budget, not quite consistent with the boast that it was aimed at a lower-tax country.”

Most budgets immediately after general elections raise taxes by around £5 billion, and Mr Osborne’s emergency budget was no different – raising “a little more than that”, at £6.5 billion – he said.

The biggest impact from the Chancellor’s welfare cuts will come from the four-year freeze imposed on working-age benefits, which will cost 13 million families an average of £260 a year each, said Mr Johnson.

The freeze, lasting until 2020, will bring most benefit rates below their 2008 levels by 2017, after inflation is taken in to account, the IFS calculated.

Reductions in the level of earnings workers can receive before losing their entitlement to universal credit and tax credits will also have a major impact, costing around three million families an average of £1,000 a year for each benefit and reducing incentives for anyone in a jobless family to take on work.

The decision to make these so-called “work allowances” bear such a large share of the burden of welfare reduction meant Mr Osborne – who yesterday insisted he had crafted a Budget for “workers” – had focused cuts “on families in work much more than those out of work”, said Mr Johnson.

Many of the gainers from the introduction of the national living wage (NLW) were single and childless or married to a partner on higher earnings, and therefore outside the tax credit system, said Mr Johnson. For those receiving the benefits “the more important tax credits are to someone’s income at present, the less likely they are to be compensated by the higher minimum wage”.

Meanwhile the extension to 2020 of the 1% cap on public sector pay rises will take wages in the sector to their lowest level compared with private sector salaries since at least the early 1990s and “well below their long-term average relative to pay in the private sector”.

The IFS recognised that Mr Osborne had set out a “gentler than planned path” for spending cuts than in his March Budget four months ago, largely by shifting the target date for getting the nation’s books in balance back by a year to 2019/20.

But it warned that this does not represent “a let-up in the overall scale of cuts”. With defence added to the list of priorities protected from savings, unprotected Whitehall departments are facing reductions totalling around £19 billion between 2015 and 2020, with details to be announced in the autumn spending review.

This means that departments like the Home Office, Foreign Office, environment and transport will have taken a total cut of around one-third in their budgets between 2010 and 2020, said Mr Johnson.

Despite the spending cuts and predicted increases in tax receipts, borrowing forecasts rose for each of the next three years, largely because Mr Osborne has decided to spread the pain over a longer period, said the IFS.

Mr Johnson also raised questions about Mr Osborne’s “surprising” decision to cut corporation tax to 18% by 2020, at a time when the UK has the lowest rate in the G20, and about the decision to take estates less than £1 million out of inheritance tax, which would “add yet further to the generous treatment of owner occupied housing”.

It was “odd” for Mr Osborne to present a 1% cut in social sector rents as a welfare cut, when it was in fact a subsidy to tenants which simply transfers costs from the housing benefit bill to local councils and housing associations, he said. And changes to the tax treatment of private landlords “will not solve” the problem of lack of housing supply.

It was “difficult to justify” lowering pension contribution limits further to £10,000, which would bring the total extra revenue from reductions in pension tax relief to £6 billion a year, said Mr Johnson.

And there was “little coherent rationale” to the removal of the climate change levy exemption for renewable power.

Shadow chancellor Chris Leslie said Labour was “delighted” that Mr Osborne had “stolen” some of its manifesto policies, such as the increase in the minimum wage.

But he told Today: “The difficulty with the Chancellor’s position though is that he is not bringing in those increases in wages in time for the pulling of the rug from underneath hundreds of thousands of working people with the introduction of what is effectively a work penalty into the tax system.

“Do not under-estimate how important those tax credits have been for many, many people who will be waking up this morning and I think left reeling by the massive reduction to their quality of life that will come because of the nature of this set of decisions.

“It will really hit working families hard.”

CBI director general John Cridland said the NLW was a “gamble” that risked politicising the process and causing problems for some small businesses.

“The businesses that will be under the most pressure, paying a significantly higher minimum wage – 6% higher on average every year in this Parliament – aren’t the same businesses as a whole who will get the benefit from the tax reductions,” Mr Cridland told Today.

“Setting the minimum wage isn’t about morality. What we have done with the minimum wage is do the best we possibly can for low-paid workers while keeping them in a job by forensically setting a rate that small businesses could afford to pay. Now that is being prejudged by politicians to achieve a social objective.”

But Mr Osborne said: “What I am offering is a new contract with the country.

“What we are saying to businesses is: pay higher wages and you will get lower taxes. What we are saying to people is: you will get a bigger cheque but there will be a less generous benefits system.

“What we are saying to the country is: we are going to spend less but we are going to live within our means.

“That is the new settlement. I think it is the new centre of British politics.”

The IFS said the Budget figures implied real-terms cuts to spending in unprotected departments of £19 billion – or 12.6%.

If public sector pay had not been capped at 1% for another four years about 400,000 jobs would have needed to be lost. However, that figure has reduced to 200,000.

The think-tank noted that “by far the biggest beneficiary” from the Budget policy for banks to only be taxed on UK liabilities was HSBC – which threatened to move its headquarters out of Britain earlier this summer.

Analysis by the IFS suggested that the poorest tenth of society would lose around £800 a year as a result of tax and benefit changes in the years up to 2019 – equivalent to almost 7% of their net income.

But the second-poorest tenth- many of them low-paid workers – will be hardest hit, losing around £1,300 a year, or more than 7% of net income.

By contrast, the wealthiest tehth lose less then £400, while the second-richest section actually gain almost £200.

The changes mean that the poorest three-tenths of society have made a larger contribution than the richest tenth to the process of deficit reduction since 2010, as a proportion of their income.