Four-fifths of the gains from tax and benefit changes coming into effect later this week (6 April) will go to the richest half of households, with the poorest third of households set to be £70 worse off on average, according to a new briefing note published by the Resolution Foundation. The analysis looks at the winners and losers from key tax and benefit changes taking place at the start of the next financial year (the first week of April 2017).
This includes over £2bn of income tax cuts comprising:
The welfare cuts being introduced this week amount to more than a £1bn takeaway, made up of:
In total, changes this week amount to a net £1bn giveaway next year. However, with the better-off half of households receiving 80 per cent of the tax cut windfall, and the poorest third of households shouldering two-thirds (67 per cent) of the benefit losses, the overall package of reforms add up to a significant transfer from low and middle-income households to richer ones.
The Foundation notes that other non-tax and benefit policies that come into effect next financial year – including the welcome 30p rise in the National Living Wage from 1 April, tax-free childcare from the end of April and an extra 15 hours of free childcare from September – will also benefit some households.
However, the majority of this additional support will benefit richer households and is not sufficient to offset losses for the poorest households. The additional £35m support through the Autumn Statement’s reduction in the UC taper to 63 per cent will do little to offset the overall impact on incomes in 2017 given how few households currently receive UC.
The briefing note looks beyond the averages to show that specific family types will face much bigger impacts from tax and benefit policy changes next year and finds that:
The briefing shows that while the package of the reforms is a £1bn giveaway next year, over time the policies will turn into a net takeaway as more families are affected by benefit changes that affect only families with new children.
By 2020, the total benefit savings from policies introduced since the 2015 general election are expected to grow to over £12 billion a year, up from just over £1 billion in 2017-18. This increase is driven by the number of households affected by cuts to in-work support through Universal Credit (put in place from April 2016) growing to around 2 million, a greater number of families being affected by the reduction in support for children, and the growing effect of the benefit freeze.
Torsten Bell, Director of the Resolution Foundation, said: “Following the Budget the rights and wrongs of a relatively small National Insurance change for the self-employed have dominated the headlines. But the real tax and benefit debate is about much bigger policy changes being rolled out this week and in the coming years. These amount to unwise giveaways to richer households and unjustifiable takeaways from less well-off families. The result is higher inequality and a decision to squeeze living standards for low and middle-income families at a time when rising prices are already outstripping wage growth.
“As the Prime Minister rightly looks to bring the country back together and ensure 21st Century Britain works for everyone, thinking again about these policy choices would be a good place to start.”
David Finch, Senior Economic Analyst at the Resolution Foundation, said “The overall package of measures amounts to a £1bn net giveaway from the public purse. But the skewed nature of this generosity means that better-off households will receive four-fifths of the gains, while the poorest third of households will actually be worse off overall. The impact of cuts in the generosity of Universal Credit – which also reduce work incentives – will affect relatively few families this year. But as millions more families move onto Universal Credit towards the end of the parliament their effect on living standards will become much clearer. The Chancellor still has plenty of Budgets to rethink the tax and benefits changes inherited by his predecessor.”