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 economic analyst and Lib Dem member
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15 Comments
The above graph only measures equality. Whilst we aim for equality, it ignores that economic growth is the most important factor. Corporation tax cuts will create jobs in the UK and where do most of the unemployed fall on the income distribution?
What cuts? Local government bleeding stumpery meant that any actual services went a long time ago.
Good analysis, most interesting and informative post I’ve seen on here for a while.
We were told that the cuts would be progressive but the reality is that the poorest have been hit hardest. These figures are shocking. People on benefits are living on subsistence levels and cannot afford to live on less. This government has increased poverty, pure and simple.
An interesting analysis, but one that has a major flaw: the idea that once you are in a particular decile you stay there for ever and a day. Such an analysis cannot model the effects of people moving between deciles. Low income is often related to particular temporary situations, like being a student or working part time before you become a full time worker. The incentive effects of things like the £10,000 personal allowance mean it is more likely people will move out of unemployment and into work (as seems may be happening disproportionately in low wage areas like the North East, where unemployment is falling quite rapidly). Therefore, while it may make a good stick to beat the Coalition with at a time when difficult choices are having to be made, I think this chart is a lot less illuminating than it might seem at first glance.
Even if we accept it on face value, I’m not quite sure what we are supposed to be doing that would be (a) neutral or positive for the public finances; (b) help people out of poverty while preserving incentives to work.
It’s all very well saying that it’s the wealthiest being hit hardest but bear in mind that they are the ones that can afford to withstand that hit without having a serious effect on thier lives.
The poorest on the other hand are struggling to cope as it is & April’s council tax contribution coupled with decreases in tax credits, uprating of benefits at below inflation and possible charges from having a bedroom too many (even if they have no hope of finding somewhere smaller to live) & a perfect storm is brewing.
“What deserves more attention is that we are on track to reach an 85:15 ratio by 2017-18. ”
I am quite content with that as long as Defence is allowed to achieve the ambitions of the SDSR.
I agree completely with RC. To take one example – let’s say you’re on benefits and in the lowest 1 or 2 deciles. If we increase benefits by say 5% this would be “fair” on this graph’s analysis, whereas a cut of benefits by 5% would be unfair. But let’s say instead that this person gets a job, increasing their income considerably – they now move from the first or second decile into the 4th or 5th say. But this would not be counted as “fair” on this graph, because the incomes of people in each decile will barely have moved.
One concern I have is that those in the top 10% are well placed to avoid being adversely effected in the way presented: they can choose to change the timing, location or nature of their income (inside or outside the tax rules) and as we have seen, they will do so. Those lower down the range have no such options, whether on benefits or in standard PAYE employment. The research and the graph may allow the coalition to make claims about the broadest shoulders bearing the burden based upon the theoretical impact of tax and benefit changes, but the reality is probably a lot less bad for the richest than this suggests.
Peter Watson; I think you have a slightly misguided view of the income of the top decile. ONS data shows that the gross income of this group starts at £1405/week. That’s £73,000 a year; a very nice salary, yes; but hardly one that puts you in the tax planning/offshore vehicles bracket! I think you are thinking of the top one or wo per cent!
@David “I think you have a slightly misguided view of the income of the top decile. ONS data shows that the gross income of this group starts at £1405/week. That’s £73,000 a year; a very nice salary, yes; but hardly one that puts you in the tax planning/offshore vehicles bracket!”
You’d be surprised how many people (contractors) working through/as private limited companies fall into the lower end of that income bracket and are capable of managing their finances to minimise tax as the rules change. On a related note, the two faces of the Daily Mail never cease to amaze me, but in particular they vigorously opposed IR35 tax rules that would clamp down on contractors (such as myself at that time) but nowadays speak out against the use of limited companies to minimise tax.
There is also the effect of indirect taxes on people with low actual incomes but high wealth and expenditure, which makes the above graph look worse for the bottom decile than it actually is. Previously we have seen analysis by expenditure decile which has corrected for this (but is possibly inaccurate re direct taxes).
I’m not convinced social mobility makes any difference to this analysis. For each person leaving a given decile, one other will enter it. However this sort of graph doesn’t show the effect of changes in inequality due to anything other than tax and benefits. The gini index fell in 2010/11…
“There is also the effect of indirect taxes on people with low actual incomes but high wealth and expenditure, which makes the above graph look worse for the bottom decile than it actually is. Previously we have seen analysis by expenditure decile which has corrected for this (but is possibly inaccurate re direct taxes).”
There are anomalies with the very bottom decile whichever way the data are grouped. But these anomalies are much larger for expenditure grouping, and are significant for other deciles as well, which may be why the IFS seems to have abandoned this classification.
For example, in the bottom expenditure decile, income is on average about three times as high as expenditure. In the second expenditure decile, income is on average about twice as high as expenditure. In the third, income is something like 50% higher than expenditure on average. Obviously these groupings are not characterising poor or vulnerable people.
Joe,
social mobility matters, not only as a measure of equality, but as a measure of opportunity too.
Looking more closely at the graph above it shows two clear trends: firstly, that the richest decile are being hit hardest (some might argue fairly), but beneath them the trend is one-way traffic- relative inequality is increasing even while the overall inbuilt inequality in society has reduced.
This says a great deal about the dependence on state services among those at the bottom of the pile.
We know that state expenditure must be sustainable over the long term in order to provide security, as cutbacks which follow government overreach will cause greater strain where there is less flexibility to cope, and the effects feel that much more dramatic.
And we also know that state expenditure cannot overcome the income gap.
A measure of social mobility matters because it’s not about money, but about access to the better choices which can reverse the trend. So it’d be far more informative to be able to see the same graph for each of the past 50 years and make an honest comparison.
Individual chances should not be tied to the fortunes of whichever political composition of the day makes up the government. Because social mobility is the freedom to make a positive difference in your own life – and I for one don’t think our party should be overlooking financial freedom as a yard-stick of well-being and quality of life.
@Thomas Long, Joe Otten – You’re quite right that wages and employment are even more important than taxes and benefits. As Joe says, 2010/11 saw “the largest one-year fall [in inequality] since at least 1962” as real incomes for the rich dropped more than for those at the bottom. But we can’t assume that will continue and that the proceeds of growth – if and when it comes – will be distributed in a way that decreases inequality.
On corporation tax cuts, we can probably assume that they’ll boost wages (eventually) but I don’t know how significantly or for whom.
@RC, Joe Otten – I agree. As I said, “These sorts of graphs aren’t perfect”. A rough lifetime analysis would be good, and it’s an area in which work is ongoing. The bottom decile is indeed particularly problematic, with students and others muddying the picture. But a lifetime approach is unlikely to change the results completely. People on low pay or out of work for long periods are likely to stay low paid.
As for what we could do about it that doesn’t cost money, one of my points was that we need to raise more through taxes. Shift the 80:20 / 85:15 balance towards taxation. There are also some spending cuts that target the richest but which the government’s been afraid to do, like taxing pensioner freebies or capping statutory maternity pay.
@Oranjepan – I do like your last paragraph. “Individual chances should not be tied to the fortunes of whichever political composition of the day makes up the government.” Tying into the points I’ve just mentioned about wages, I’d absolutely say that ensuring children leave school & home with the skills needed to do well in life is more important than any tax and benefit distribution. Education. Education. Education. … Education.