Donald Hirsch fears that new Labour's Budgets, though helpful to the poor, will have only a partial effect on social exclusion

Put away your pocket calculator. Forget about scouring the papers to discover the weekly gain from 6 April of a mythical family that matches your own (you never find one anyway). Gordon Brown's Budgets stand out from those of most of his predecessors in taking the long view, in concentrating on the structure of the tax system rather than on distributing miscellaneous goodies. This Chancellor is pursuing a huge social ambition. The simple "before and after" computations make little sense after a single Brown Budget. Its effects stretch up to two years ahead and they link into previous Budget decisions that are still some months from being implemented.

But, as Labour's mid-term approaches, it is possible to take a preliminary look at how far the Chancellor's accumulated announcements on taxes and benefits will have made a difference to the distribution of income in Britain by 2001. New Labour remains committed, in principle, to tackling poverty. It also wants to encourage work and to help families and children.

The radicalism of Brown's first three Budgets does not lie in the quantity of redistribution. What is truly radical is the way he has reorganised the tax and benefit structures to favour systematically the values of work and family.

To promote work, the most important change has been a flurry of tax credits. These transfer money to all manner of groups in (mainly low-paid) work without having to count as public expenditure, as the payment of benefits would. They bring huge extra resources to children in low-paid working families - resources that they had no hope of getting under the label "in-work benefits". The critics of the working families tax credit too easily ignore this underlying political reality. But tax credits emphasise the divide between those in and out of work. They concentrate help on those who have jobs and that is the Achilles heel of a government that purports to be inclusive. So the Chancellor is right to think of integrating some credits and allowances available in and out of work, as has happened in Australia.

If the working families tax credit was the star turn of the 1998 Budget, the reorganisation of family benefits takes the honours in 1999. With great panache, Brown simultaneously abolished the married person's allowance, introduced an affluence-tested children's tax credit and increased the real (inflation-discounted) value of child benefit.

The move restored the principle, abandoned 30 years ago, that the tax system should impose a smaller burden on parents to take account of their extra spending needs. But it also met a thoroughly modern demand: that help should be at least mildly targeted away from the rich, without the administrative nightmare (and, in some eyes, anti-women implications) of taxing child benefit. The experts may think the end result is an ugly hybrid between a universal and a targeted approach, but it looks pretty fair to Joe Public.

As is now widely accepted, Britain experienced a huge increase in inequality between 1979 and 1997: the poorest 10 per cent of the population started out on about two-thirds of median income and fell to about half. What is extremely hard to forecast is the cumulative effect of Labour's changes. The table overleaf gives some examples of who will win and who will lose from the various measures announced so far in this parliament. They do not include indirect effects such as the high tobacco taxes, which will hit the poor, or taxation of pension fund dividends, which is perhaps the biggest sting so far on the middle class.

We can pick out several trends. First, while the amounts are not always large, the direction of change in direct income transfers has mainly been "progressive" - that is, the poor get proportionately more, or money is taken away from the rich or middle classes. The biggest exception illustrates the rule. The reduction in the basic rate of income tax was an underlying objective for the last government, but it looks out of character with the other policies of the present one. Another (partial) exception is the abolition of mortgage interest tax relief. The losers are mainly middle class but the loss of £7 a week means most to the poorest home owners. Here, the Chancellor failed to follow through the true logic of reform. He should have created a level playing field between people in different housing tenures. This would have allowed poor owner-occupiers to claim a mortgage benefit in the same way as the poor in rented property can claim housing benefit.

Second, some groups have enjoyed substantial gains, relative to their overall income. These include not only poor working families but also pensioners who depend on means-tested support. Including the winter fuel payment, the guaranteed income of a single pensioner will be about £6 a week or 8 per cent higher in real terms than in 1997. That is not a full restoration of the 20 per cent decline in income relative to living standards that pensioners have suffered since 1981 (when benefits were pegged to prices rather than earnings), but it is a significant recovery, boosted by a return to the earnings link.

Third, however, the largest group now living in poverty, non-working households below retirement age (unemployed and lone parents, for example), have seen relatively modest gains. Those without children are generally no better off than before. Families with children on income support have had the same child benefit rises as everyone else (though not the children's tax credit), plus as much again for each child under 11. But this is part of a one-off adjustment to correct for the anomaly of young children getting lower allowances. While £6 a week will be most welcome to a family on the breadline, it represents only about half the percentage increase as the same amount going to a single pensioner.

The big contrast, however, is the spirit with which benefits are being given to these two groups. Pensioners get a guaranteed minimum income linked to general living standards. But this guarantee is not being extended to families of working age.

A Joseph Rowntree Foundation report*, published later this month, presents an alarming picture of how children in these poorest families have lost out in the past three decades. The number living below half average incomes has tripled, and even on absolute measures these children have done appallingly: the poorest 20 per cent have no more spent on their toys or shoes in the age of Nintendo and Nike than the meagre amount spent on poor children in 1968.

The report lends support to the government's strategy of using work as a way out of poverty: the biggest reason for the decline in poor children's fortunes has been that more now live in households where nobody works. But another factor is that non- working families themselves have become poorer. Even Gordon Brown, with his long perspective, is highly unlikely to preside over a return to work for a majority of today's five million working-age adults in three million workless households containing two million children. The next pressing item on his ever-full agenda is therefore to address the issue of welfare beyond work.

*"Child Development and Family Income", by Paul Gregg, Susan Harkness and Stephen Machin, is available from York Publishing Services, £10.95 (plus £2 p&p). Tel: 01904 430033
Donald Hirsch is special adviser to the Joseph Rowntree Foundation

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