Rich get best deal over VAT on fuel: Budget 'hits poorest hardest'

(First Edition)

THE IMPOSITION of VAT on domestic fuel will hit the poorest 10 per cent of households more than seven times as hard as the richest 10 per cent, according to a computer analysis of the Budget by Cambridge University.

Research by the microsimulation unit in the Department of Applied Economics also found that VAT on domestic fuel will hit the bottom 40 per cent three times as hard as the top 40 per cent.

The analysis, published yesterday, concluded that, as an overall result of last week's Budget, the poorest 10 per cent will lose double the amount lost by the top 10 per cent as a proportion of their income.

The work confirmed preliminary findings by Holly Sutherland, one of the authors, in the Independent immediately after the Budget speech. Ms Sutherland, director of the microsimulation unit and Gerry Redmond, a research officer, found that the largest proportional losses will be in the lowest income group, the poorest 10 per cent, who will lose 3.2 per cent of their incomes in increased tax, compared with the richest 10 per cent, who will lose 1.6 per cent. Most households would lose 2 per cent of their incomes.

The report also claims that compensating the poor for VAT on domestic fuel by increasing means-tested benefits will be only partially effective.

This is because not all those entitled to benefits, particularly the elderly, claim them; a fixed rate of compensation will not cover VAT for groups with special heating needs such as the sick, very old and very young; and there will be no help for families with incomes just above benefit thresholds.

The Impact of the 1993 Budget Plans on the Distribution of Household Incomes; Department of Applied Economics, Cambridge University.