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

Getty Images.
Show Hide image

PMQs review: Theresa May shows how her confidence has grown

After her Brexit speech, the PM declared of Jeremy Corbyn: "I've got a plan - he doesn't have a clue". 

The woman derided as “Theresa Maybe” believes she has neutralised that charge. Following her Brexit speech, Theresa May cut a far more confident figure at today's PMQs. Jeremy Corbyn inevitably devoted all six of his questions to Europe but failed to land a definitive blow.

He began by denouncing May for “sidelining parliament” at the very moment the UK was supposedly reclaiming sovereignty (though he yesterday praised her for guaranteeing MPs would get a vote). “It’s not so much the Iron Lady as the irony lady,” he quipped. But May, who has sometimes faltered against Corbyn, had a ready retort. The Labour leader, she noted, had denounced the government for planning to leave the single market while simultaneously seeking “access” to it. Yet “access”, she went on, was precisely what Corbyn had demanded (seemingly having confused it with full membership). "I've got a plan - he doesn't have a clue,” she declared.

When Corbyn recalled May’s economic warnings during the referendum (“Does she now disagree with herself?”), the PM was able to reply: “I said if we voted to leave the EU the sky would not fall in and look at what has happened to our economic situation since we voted to leave the EU”.

Corbyn’s subsequent question on whether May would pay for single market access was less wounding than it might have been because she has consistently refused to rule out budget contributions (though yesterday emphasised that the days of “vast” payments were over).

When the Labour leader ended by rightly hailing the contribution immigrants made to public services (“The real pressure on public services comes from a government that slashed billions”), May took full opportunity of the chance to have the last word, launching a full-frontal attack on his leadership and a defence of hers. “There is indeed a difference - when I look at the issue of Brexit or any other issues like the NHS or social care, I consider the issue, I set out my plan and I stick to it. It's called leadership, he should try it some time.”

For May, life will soon get harder. Once Article 50 is triggered, it is the EU 27, not the UK, that will take back control (the withdrawal agreement must be approved by at least 72 per cent of member states). With MPs now guaranteed a vote on the final outcome, parliament will also reassert itself. But for now, May can reflect with satisfaction on her strengthened position.

George Eaton is political editor of the New Statesman.