The budget on March 20th is likely to concentrate on growth, on avoiding an ‘omnishambles’, and on fighting the notion that Osborne has taken the country from triple A to triple dip. But it’s also the time to take stock of who’s bearing the brunt of (attempted) deficit reduction. This graph shows the combined effect of all the coalition’s tax and welfare changes, as modelled by the Institute for Fiscal Studies. It doesn’t look good.
Impact of modelled tax and benefit reforms since Jan 2010, by income decile group (Copyright of the IFS*)
The blue line shows just those changes that come into effect in 2013-14. With benefit cuts, the large personal allowance increase and the top rate dropping from 50% to 45%, the net result is distinctly regressive: “a net takeaway from lower-income households and a net giveaway to middle- and higher-income households”. This is what Labour will be concentrating on with their “Tory Millionaire’s Day” campaign.
But we shouldn’t be concerned about how one year or one change look in isolation. The most important line is the green one, which shows the impact the coalition will – on current plans – have had by 2015 (though in reality Universal Credit – a good thing – won’t have been fully rolled out by then). As both coalition parties are eager to point out, it is the top 10% on average who are losing the most as a fraction of their income.
They are less keen to point out that aside from the top 10%, the effect of the coalition’s tax and benefit changes is regressive. The bottom 10% are hit second hardest, and the group least affected are those in the top half but not in the top 10%. Lib Dem MP Andrew George has said, “The Government’s overall fiscal measures fail its own ‘fairness’ test. Lower income working and non-working families are hit harder than the better off – with the exception of the top 10%.”
Fundamentally, we could blame the chancellor’s balance of tax increases to spending cuts (also balanced with growth to close the cyclical deficit). His aim was a ratio of 80:20 in favour of spending cuts. Given that both public spending and taxation are progressive, targeting deficit reduction in this way makes it hard to avoid the outcome illustrated above. Departmental spending isn’t included in the graph, but this doesn’t much change the overall picture (see Chart 1.G here). What deserves more attention is that we are on track to reach an 85:15 ratio by 2017-18. That will need to change if we are to avoid huge further cuts in some departments and see upper-middle income households play a greater role in deficit reduction.
These sorts of graphs aren’t perfect, and progressivity is not the be-all and end-all, but with three budgets to go, and three manifestoes to follow, we should be aiming for better.
* Taken with permission from Chapter 7 of The IFS Green Budget 2013, edited by Carl Emmerson, Paul Johnson and Helen Miller. Some government policies, such as the council tax benefit changes and corporation tax cuts can not be included in this model.
* Adam Corlett is an economics researcher at CentreForum, the liberal think tank, and vice-chair of the Liberal Democrats for Drug Policy Reform.