Latest Public Sector News

03.04.17

Benefit cuts and tax changes to hit poorest third of households hardest

The richest half of the population will benefit from four fifths of the cuts to tax and benefits that the government will introduce this week, a report by the Resolution Foundation has revealed.

In plans that are set to be implemented on Thursday 6 April, over £2bn will be cut from income tax from policies such as the personal tax allowance above CPI indexation being raised from £11,100 to £11,500 and welfare cuts amounting to more than £1bn including a freeze on working age benefits which would have otherwise increased by 1%.

This will see the poorest third of households be hit the hardest, the Foundation argue, as the poorest third will be £70 worse off on average after the changes. In total, the Foundation predicts that this week’s changes amount to a net giveaway of £1bn next year.

The report states “with the better-off half of households receiving 80% of the tax cut windfall, and the poorest third of households shouldering two-thirds (67%) of the benefit losses, the overall package of reforms add up to a significant transfer from low and middle income households to richer ones”.

The Foundation also looked at specific age demographic and revealed that low income families were set to be even less well-off whilst the more affluent in society would benefit from gains stemming from cuts to tax for high earners.

A single parent earning £17,000 with a baby will lose around £530 overall, losing £610 worth of benefits but gaining £80 from tax cuts.

Middle income couples are also set to be hit hard by the changes, as a couple with a combined salary of £33,500 and feeding three children including a new baby will be £2,500 worse off overall and were only set to gain £160.

On the flip side, a couple earning £100,000 between them and with two children would be £480 better off as they lost nothing from benefits whilst gaining everything from tax cuts.

The Foundation went on to state: “The briefing shows that while the package of the reforms is a £1bn giveaway next year, over time the policies will turn into a net takeaway as more families are affected by benefit changes that affect only families with new children.”

Director of the Resolution Foundation Torsten Bell described the tax giveaway as “unwise”, and represented a “unjustifiable takeaway from less well-off families”.

“Following the Budget the rights and wrongs of a relatively small National Insurance change for the self-employed have dominated the headlines. But the real tax and benefit debate is about much bigger policy changes being rolled out this week and in the coming years,” said Bell.

“These amount to unwise giveaways to richer households and unjustifiable takeaways from less well-off families. The result is higher inequality and a decision to squeeze living standards for low and middle income families at a time when rising prices are already outstripping wage growth.

“As the prime minister rightly looks to bring the country back together and ensure 21st Century Britain works for everyone, thinking again about these policy choices would be a good place to start.”

His colleague, David Finch, senior economic analyst at the Resolution Foundation, said the “skewed nature” of the government’s generous tax cuts meant that the poorest third of households would actually be the ones hit the hardest by changes.

“The impact of cuts in the generosity of Universal Credit – which also reduce work incentives – will affect relatively few families this year,” argued Finch.  “But as millions more families move onto Universal Credit towards the end of the parliament their effect on living standards will become much clearer.

“The chancellor still has plenty of Budgets to rethink the tax and benefits changes inherited by his predecessor.”

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