Budget 2013: The £10k personal allowance won’t reverse the impact of welfare cuts

The small benefits the lowest earners will see from today's tax allowance rise does little to compensate for the enormous hit they will take from cuts to benefits.

One of the key measures in today’s budget was an increase in the personal tax allowance, which will rise from £9,440 in to £10,000 in 2014/15. It was always an ambition of the Coalition to reach 10k before the next election, but they have revealed today that they will get there a year earlier. Taking people out of the tax system has an intuitive appeal if, like the Chancellor, you want to ‘set free the aspirations of the nation’. But what is the actual impact on household incomes?

The red bars in the chart below shows what the distributional impact of the change. While personal allowance rises are often presented as a measure benefitting those on the lowest incomes, in actual fact it is middle and higher earning households that gain the most. Indeed, the lowest earners will only gain 0.05 per cent of weekly incomes from the change. The biggest winners are those earning more than median earnings, who will see their weekly income rise by over than 0.2 per cent. The reason for this is simple – the lowest earning households are less likely to have incomes above the personal allowance anyway, so an increase has little or no effect on them. The highest earners, on the other hand, will often have two earners earning above the personal allowance, so they get the full benefit.

When compared to the impact of the 1% benefit up-rating cap announced in the Autumn Statement, the regressive nature of the coalition's tax and benefit policies is even starker. The red bars in the chart show the distributional change in household incomes as a result of the reforms announced last December. It is clear the small benefit the lowest earners will see as a result of today’s tax allowance rise does little to compensate for the enormous hit they will take because of real-terms cuts in child benefit, tax credits and a host of other working-age benefits.

The Chancellor wants to do something to help hard-working families, but some of the hardest-working families on low-incomes will see little benefit from today’s announcement on income tax, while at the same time bearing the brunt of the coalition’s cuts to welfare. Looking to the future, with the prospect of even more cuts to come, we have to ask whether it is fair for the poorest to shoulder so much of the burden.

A demonstrator wears a mask depicting George Osborne during a gathering by the Public and Commercial Services Union. Photograph: Getty Images.

Spencer Thompson is economic analyst at IPPR

Photo: Getty Images
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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.