Budget is not progressive, declares IFS

Liberal Democrat and Conservative claims that the Budget was "tough but fair" and "progressive" have been blown apart by the independent Institute for Fiscal Studies.

Although the IFS agrees that the richest will pay proportionately more than the poor to repair the public finances, the institute's director, Robert Chote, said that "the Budget looks less progressive – indeed somewhat regressive – when you take out the effects of measures that were inherited from the previous government, when you look further into the future than 2012, and when you include some other measures that the Treasury has chosen not to model".

Mr Chote also pointed out that the cuts to public services, which don't appear in most assessments of the "fairness" of the Budget, "are likely to hit poorer households significantly harder than richer households".

Cuts in housing benefit and in disability living allowance, again much more likely to affect the most vulnerable, are not taken into account either by the IFS or the Treasury, another reason why the official and IFS figures may underestimate how hard the coalition Government's plans will penalise the poor.

Analysis of the Budget by the IFS reveals that the poorest tenth of society will lose about 2.5 per cent of their income, despite the removal of 880,000 low-paid workers from income tax when the threshold was raised by £1,000 to £7,475. Most of that loss was engineered by George Osborne, as they would have lost hardly anything under Alistair Darling's plans.

Mr Osborne has added to the burden on the rich, but only by about 1 per cent of their average income, bringing the total loss in their income as a result of current tax and benefit measures to about 7.5 per cent. Thus the Chancellor has placed about two-and-a-half times the burden on the poorest as he has on the richest – a loss of 2.5 per cent against one of 1 per cent.

The rise in VAT to 20 per cent will be a regressive move, though the IFS concedes that, once an individual's lifetime spending is taken account of, it is a more progressive form of tax than often assumed. Cuts in benefits through altering the way they are uprated will also hit those dependent on them hard, and the freeze in child benefit and cap on housing benefit will also add to the difficulties facing families on tight budgets. A rise in unemployment will also damage the Government's "progressive" credentials.

Mr Osborne did do some things to help protect the poor, the IFS agrees. An increase in the child element of the child tax credit by £150 above indexation next year will cost £2bn, and he is of course retaining such measures as the 50p rate on income over £100,000.

Pensioners, though, including poorer ones, do better under Mr Osborne's plans than younger people. The limit on housing benefit will not apply to them, for example, and neither will there be cuts to the equivalent of the disability living allowance, the attendance allowance. Most striking is the pledge to restore the earnings link from next year, or the rise in prices or 2.5 per cent, whichever is the greater. The winter fuel allowance, concessionary TV licences and bus passes are untouched.

The reforms to housing benefit could have far-reaching effects, the IFS also claims. Breaking the link between housing benefit allowance and actual rent rises, substituting CPI for future uprating, will eventually leave many expensive areas such as London out of reach. The decision to cut housing benefit for those out of work for more than a year was also criticised by the IFS, who suggested it was an inappropriately punitive way to get people into work again.

Though the IFS did not say so in stark terms, a rise in homelessness seems an inevitable consequence of the Budget, one of the more painful and graphic ways that society will become less equal in coming years.