The regressive reality behind George Osborne’s “Budget for the next generation” has been laid bare, after analysis of the Chancellor’s latest tax and benefit decisions showed the richest 10 per cent of households are easily the biggest beneficiaries.
The Institute for Fiscal Studies and the Resolution Foundation both pointed to calculations showing a cash gain next year of more than £250 a year for the top decile, as a result of the Budget.
The next richest 10 per cent will get £150 extra, and the next richest decile after that receives a benefit of around £75. In contrast, the gains for those in the bottom half of the income distribution are negligible – and concerns were growing among Tory MPs that their Chancellor’s cuts in disability benefits will add to financial worries among the most vulnerable in society.
The regressive result of the Budget was largely a consequence of the Chancellor’s decision to increase the threshold at which the higher 40 per cent rate of income tax becomes payable – by £1,100 – to £45,000 from April 2017.
“Eighty per cent of the gains [go] to the top half of the income distribution and nearly half [go] to the top 20 per cent,” researchers at the Resolution Foundation think-tank said. They labelled the decision to increase the higher-rate threshold “particularly misguided” at a time of increasing strain in the public finances.
The Office for Budget Responsibility had revised down its forecast of the productivity growth potential of the UK economy in the years ahead, prompting the substantial downgrades to estimates of tax revenues over the next five years.
This compelled Mr Osborne to pencil in a big cut in spending in 2019-20 to hit his self-imposed “fiscal mandate” of running an absolute budget surplus in that year.
However, the IFS said that his chances of achieving a surplus by the end of the parliament now stand at just 50-50.
The IFS director, Paul Johnson, said that the effects of the OBR’s downgrade would extend beyond the public finances.
“That loss largely arises from changes in assumptions about future productivity growth leading in to lower economic growth over the rest of parliament,” he said. “If the OBR is right about that, we should all be worried. This will lead to lower wages and living standards, not just lower tax revenues for the Treasury.”
George Osborne 2016 budget at a glance
George Osborne 2016 budget at a glance
1/8 Debt forecasts up, growth forecasts down
The OBR’s new forecasts have downgraded growth in all of the next five years to 2020. The watchdog says the economy will only grow by 2 per cent in 2016, as opposed to the anticipated 2.4 per cent. Borrowing and productivity growth are also down – with forecast borrowing in 2018-198 £16 billion higher
2/8 New tax on sugary drinks
The Chancellor announced a new tax on sugary soft drinks, which is projected to raise £520 million. At least some of the money will be spent on doubling funding for school sport, the Chancellor says. Labour leader Jeremy Corbyn welcomed the levy
3/8 Tax cut for higher earners paying the 40p rate
The Chancellor has raised the threshold for paying the higher rate of income tax to £45,000. The higher rate is paid by roughly the richest 15 per cent, currently people earning over £42,386
4/8 Increase in tax-free income tax threshold
The tax-free allowance increase to £11,500 in April 2017 – up from £10,600 now. The Chancellor previously raised the allowance from £6,475 in coalition with the Liberal Democrats. The Conservative manifesto pledges to put the allowance up to £12,500 by the end of the Parliament
5/8 New devolution for counties and powers for London and Manchester
The West of England, the East of England and Greater Lincolnshire will all get elected mayor-led combined authorities with new powers. The Chancellor says they are backed by £1 billion new funding. Greater Manchester will get new powers of criminal justice while London will keep its business rates – giving whoever is elected Mayor a lot more spending power
6/8 Fuel duty frozen for sixth year running
The Chancellor had planned to end the fuel duty freeze he had put in place for the whole previous parliament. In the event, he has announced a freeze for another year
7/8 All schools to become academies
As reported yesterday the Chancellor unveiled legislation to turn all schools into academies. He said all schools would either be academies or on their way to being academies by 2020, and that funding had been set aside to fund the change
8/8 Lifetime ISA
The Chancellor announced a new savings account to encourage under-40s to save for retirement – for every £4 saved, the Government will top this up by £1 up to the value of £4,000 a year. Tax-free ISAs will also be increased from £15,000 to £20,000
The impact of the Budget reinforces a regressive trend from this Government since last May’s election.
Taking all of Mr Osborne’s post-election tax and benefit measures together, the IFSon 17 March estimated that the incomes of the poorest 10 per cent of the population are set to fall by 7 per cent by the end of the parliament and the second poorest decile by 9 per cent. That equates to an annual loss of £1,300 and £1,600 respectively.
The incomes of the richest 10 per cent, however, will remain unchanged.
Analysts have already warned that Mr Osborne’s attempt to push the public finances into surplus by 2019-20, partly by squeezing the welfare bill by £12bn, is set to send inequality and child poverty rates up sharply again over the coming years.
One of the welfare savings that keeps Mr Osborne on course to achieve his budget surplus in 2019-20 is a new tightening of access to personal independence payments for the disabled.
Labour’s shadow Chancellor, John McDonnell, argued that people with disabilities were paying for tax cuts for the rich. “We would reverse them, it’s unacceptable,” he said.
The number of people paying higher-rate marginal income tax has risen by almost three million in the past 25 years as successive chancellors have failed to increase the threshold in line with wage inflation – the total now stands at 4.65 million.
However, around 80 per cent of income-tax payers continue to pay income tax at the basic 20 per cent rate. So reducing the numbers affected by the higher rate still disproportionately benefits those at the top of the household income distribution.
The Conservative manifesto committed the party to raising the higher-rate tax threshold to £50,000 a year by the end of the parliament. Assuming that manifesto promise is kept, future Budgets from Mr Osborne will mean more cash gains for those towards the top of the income distribution.
Another tax decision that favoured the well-off in the Budget was Mr Osborne’s surprise decision to reduce the main rate of capital gains tax from 28 per cent to 20 per cent. This tax is only payable on gains above £11,000, meaning that it is the already wealthy who are most likely to benefit.
Factoring in this tax break, which will cost the Treasury £735m a year by 2020-21, the Resolution Foundation estimated that the average income of the top 10 per cent of households would rise by £600 a year by the end of the decade.
The IFS forecast last month that, over the rest of this decade, household income inequality will increase, driven in large part by the Conservatives’ tax and benefit policies.
It also projected absolute child poverty to rise from 15 per cent to 18 per cent, thanks entirely to welfare cuts for families with three or more children.
The Chancellor cited the “next generation” 17 times in the Budget. But many argue that government policy since 2010 has consistently favoured the interests of older generations.
The IFS estimates that young adults took the biggest knock from the 2008-09 recession and have still not recovered.