Budget Aftermath: Mid-earners hit hardest but the poor also suffer: Institute of Fiscal Studies says tax rises in 1993 Budgets will recapture handouts of 1980s

Click to follow
The Independent Online
MIDDLE-INCOME earners will bear the brunt of the tax increases announced in this year's Budgets, but the less well-off will also face significant cuts in their disposable income, according to an analysis by the Institute for Fiscal Studies.

The IFS said the measures announced by Kenneth Clarke on Tuesday and Norman Lamont in March would cut post-tax household incomes by 3.54 per cent on average. Andrew Dilnot, the IFS director, said the Budgets had captured for the Government almost all the money handed back to taxpayers in the tax cuts of the late 1980s.

The IFS analysis assumes that all the tax increases to be phased in over the next couple of years are imposed in April 1994, so as to assess their overall impact. The IFS's conclusions are thought to be similar to those reached in studies carried out by the Treasury.

The biggest losses will be among the middle classes, hit by cuts in mortgage tax relief, higher National Insurance contributions and the freezing of personal tax allowances - the slice of income on which no tax has to be paid.

Couples with two children and earning between pounds 215 and pounds 390 net will on average lose 4.15 to 4.25 per cent of their post-tax income - between pounds 9 and pounds 16 a week. Similar percentage losses will be suffered by single childless people earning pounds 89 to pounds 161 a week after tax, and childless couples earning between pounds 148 and pounds 264 a week net.

In contrast, the highest-earning tenth of the population lose 3.04 per cent of their after-tax income, less than the average. In part, this is because the restriction in mortgage tax relief accounts for a smaller proportion of the incomes of households earning this much.

These households typically include couples with two children and taking home more than pounds 720 a week after tax, childless couples taking home pounds 487 or more, and single people taking home pounds 297 or more.

The lowest-earning third of the population lose less than most households from the Budgets, but still face significant losses in income. The post-tax income of the poorest tenth - single people taking home up to pounds 57 a week, childless couples taking home up to pounds 93, and couples with two children taking home up to pounds 138 a week - will fall by 2.3 per cent, up to pounds 3 a week.

Working couples - most of whom are middle-income households - are the biggest losers in terms of household type. Single pensioners lose 1.16 per cent on average of their after-tax income and married pensioners 2.12 per cent, both groups helped by the assistance provided to pensioners in paying for the imposition of value- added tax on domestic fuel. Single parents and the unemployed fare worse than pensioners but better than the average household, losing around 2.5 per cent of their after-tax income a week.

The increases in excise duties hit the less well-off proportionately more than the better off, because drink, cigarettes and petrol take up a larger share of their income.

Mr Dilnot added that the decisions to restrict mortgage interest tax relief and the married couple's income tax allowance to 15 per cent suggested that both 'no longer look like secure parts of the tax system'.

He predicted Miras would be abolished soon after the next election, with earlier abolition constrained by the Conservatives' manifesto commitment to retain the relief. The Chancellor said yesterday that this commitment did not mean Miras would stay at the same rate, suggesting that it may still be reduced year by year.

The IFS welcomed the decisions to help fund child care for people on family credit and to transfer the costs of statutory sick pay to employers, which Mr Dilnot said could put pressure on companies to provide safer workplaces.

The IFS was less confident that Mr Clarke would keep to his spending promises, which involve keeping the cumulative increase in spending well below that achieved by the Thatcher administrations of the 1980s. Much of the restraint depends on a fall in spending next year, last achieved when boom conditions in the economy were cutting benefit bills dramatically in 1988.

Mr Dilnot said the package to compensate the less well-off for VAT on fuel, worth pounds 400m next year and rising to pounds 1.25bn, was probably adequate to help most people affected, although some - especially non-pensioners - are likely to be short-changed.

(Photograph omitted)

Comments