The big Budget losers? Working families

IFS analysis finds that a million working families will lose £500 a year as new tax changes come in.

Amidst the clamour over pasties, jerry cans, and email surveillance, the Budget seems like a distant memory. But with the new financial year starting tomorrow, certain changes will come into force – and it is not looking good for middle-income families.

Despite the raft of negative headlines about George Osborne’s so-called “granny tax”, analysis published today by the Institute for Fiscal Studies (IFS) has found that pensioners stand to suffer the least.

In fact, it is families with children who will bear the brunt. Up to a million families with children stand to lose £511 a year under new tax and benefit changes.

More than 850,000 families on middle incomes – with an average income of £38,000 – will lose their entire child tax credit, which is worth around £545 a year. The picture is bleaker lower down the income scale. Up to 212,000 working couples with children, earning less than £17,000 a year, will lose all their working tax credit – worth up to £3,870 a year – unless they increase their working hours.

This is because of two changes to tax credits. The first is a cut in the income limit for child tax credit from about £40,000 to about £26,000 for a family with one child. The second is an increase in the number of hours that families with children must work to qualify for working tax credit from 16 to 24 hours a week.

Despite the increase in the personal allowance – which is incorporated into the IFS figures –these families will still see a net loss. Separate analysis by the Resolution Foundation suggests that the changes to working tax credit mean that a single earner on the minimum wage (£6.08 per hour) who works 20 hours a week will lose £3,910 – more than a quarter of their income.

It is a political tight spot for the coalition, which purports to be a family friendly government. The “squeezed middle” is set to be a potent battleground, both in upcoming local elections and in the next general election.

The Treasury highlighted the rise in personal tax allowance, and stressed that the analysis was commissioned by the Labour shadow chancellor, Ed Balls.

But in conjunction with the cut in the top rate of tax for those earning over £150,000 a year, this squeeze on ordinary families is difficult to defend. Indeed, reducing the 50p rate of tax presented a gift for Labour: tax cuts for millionaires as the rest of the population continues to suffer is a clear, media-friendly message. Polls already show that a majority of people think the cabinet is out of touch with ordinary voters; this will do nothing to help. So far, a loss of support for the coalition’s austerity has not been matched by an upsurge of trust in Labour on the economy. The question is whether these real cuts to the incomes of working families – the very demographic the coalition claims to defend – will lead to a shift in public opinion. It is certainly clear – once again – that the government cannot truthfully claim that its cuts are fairly distributed.

Ed Balls commissioned the IFS analysis. Photograph: Getty Images

Samira Shackle is a freelance journalist, who tweets @samirashackle. She was formerly a staff writer for the New Statesman.

Getty Images.
Show Hide image

Is anyone prepared to solve the NHS funding crisis?

As long as the political taboo on raising taxes endures, the service will be in financial peril. 

It has long been clear that the NHS is in financial ill-health. But today's figures, conveniently delayed until after the Conservative conference, are still stunningly bad. The service ran a deficit of £930m between April and June (greater than the £820m recorded for the whole of the 2014/15 financial year) and is on course for a shortfall of at least £2bn this year - its worst position for a generation. 

Though often described as having been shielded from austerity, owing to its ring-fenced budget, the NHS is enduring the toughest spending settlement in its history. Since 1950, health spending has grown at an average annual rate of 4 per cent, but over the last parliament it rose by just 0.5 per cent. An ageing population, rising treatment costs and the social care crisis all mean that the NHS has to run merely to stand still. The Tories have pledged to provide £10bn more for the service but this still leaves £20bn of efficiency savings required. 

Speculation is now turning to whether George Osborne will provide an emergency injection of funds in the Autumn Statement on 25 November. But the long-term question is whether anyone is prepared to offer a sustainable solution to the crisis. Health experts argue that only a rise in general taxation (income tax, VAT, national insurance), patient charges or a hypothecated "health tax" will secure the future of a universal, high-quality service. But the political taboo against increasing taxes on all but the richest means no politician has ventured into this territory. Shadow health secretary Heidi Alexander has today called for the government to "find money urgently to get through the coming winter months". But the bigger question is whether, under Jeremy Corbyn, Labour is prepared to go beyond sticking-plaster solutions. 

George Eaton is political editor of the New Statesman.