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10 January 2011

The coalition’s benefit cuts: the pain to come

Benefit cuts will hit families far harder than the abolition of the 10p tax rate.

By George Eaton

In this week’s magazine, Gavin Kelly, chief executive of the Resolution Foundation and the former deputy chief of staff at No 10, has a piece on why a combination of rising prices, falling wages, higher taxes and lower benefits will lead to “the biggest squeeze on living standards since the 1970s”.

Of particular interest is an accompanying graphic that compares the losses families will suffer as a result of the coalition’s benefit cuts to those they suffered as a result of the abolition of the 10p income-tax rate. The results speak for themselves.

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Few of these cuts have received significant media attention but the scale of the losses could soon change that. The removal of the 10p tax band cost the average family £232, but the cut in support for childcare means half a million mothers on low to middle incomes will lose almost £500 a year on average, with the hardest hit losing a remarkable £1,300. The abolition of the Education Maintenance Allowance, which paid up to £30 a week to 16-to-18-year-olds from low- and modest-income families, will cost families up to £1,200.

The coalition’s plan to raise the income-tax threshold by £1,000 to £7,475 will benefit low-to-middle-income earners by around £170. But, as Kelly notes, this is not enough “to offset the rise in VAT, let alone the far larger tax credit cuts”. A study by Grant Thornton suggests that the VAT increasese will cost each household £517 a year on average.

The problem with the abolition of the 10p tax, of course, wasn’t the losses per se, but rather Gordon Brown’s insistence against all evidence to the contrary that there were “no losers”. This government hasn’t made a similar claim. But it has disguised the scale of the losses to come.

So, rather than any single “10p tax moment”, I expect a slow-burning rage as voters are overwhelmed by successive tax rises and benefit cuts.

George Osborne has consistently emphasised those meaures that target workless families – an attempt to marginalise Labour as the party of the “undeserving poor”. But many of these cuts will fall hardest on working families, those Nick Clegg today described as “alarm-clock Britons“. Indeed, a TUC study found that working households will suffer a loss of about £9.4bn, nearly twice the level of losses for non-working households.

For too many people, as Kelly writes, the next few years will be a “tale of growth without gain”. The government will need a better response than “There is no alternative” if it is to avoid permanently alienating these voters.