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New Research refutes Chancellor’s ’Progressive Budget’ Claim 25.08.10

The Chancellor claimed in his Budget speech that the June 2010 Budget was a ‘progressive Budget’, backed up by distributional analysis in the Budget documentation that showed that tax and benefit changes due to come into effect between now and 2012–13 will hit the richest more than the poorest.

Institute for Fiscal Studies researchers have previously cast doubt on this claim, noting that the main measures which will lead to losses amongst better-off households were announced by the previous government, and that the reforms to be in place by 2014–15 are generally regressive. The distributional analysis in the Budget documents also excluded the effects of some cuts to housing benefit, Disability Living Allowance and tax credits that will tend to hit the bottom half of the income distribution more than the top half.

IFS research published today makes use of analysis published by the for Work and Pensions since the Budget, and attempts to reflect the impact of all the benefit cuts announced in the Budget. It shows that, once all of the benefit cuts are considered, the tax and benefit changes announced in the emergency Budget are clearly regressive as, on average, they hit the poorest households more than those in the upper-middle of the income distribution in cash, let alone percentage, terms. The distributional effect of all tax and benefit reforms due to be implemented by 2014–15 is clearly regressive within the bottom nine decile groups of the income distribution when losses are expressed as a percentage of net income, although it is less clear cut when losses are expressed as a proportion of expenditure.

The report also considers the impact of tax and benefit reforms on different sorts of households. Low-income households of working age lose the most as a proportion of income from the tax and benefit reforms announced in the emergency Budget. Those who lose the least are households of working age without children in the upper half of the income distribution. They do not lose out from cuts in welfare spending, and they are the biggest beneficiaries from the increase in the income tax personal allowance.

The biggest single change to benefit policy in the June 2010 Budget in fiscal terms was the decision to link benefits with the Consumer Price Index (CPI) rather than the Retail Prices Index (RPI) or Rossi index from April 2011. This is very likely to mean less generous benefits in the years ahead. The Government argued that the CPI is a better measure of inflation than the indices to which benefits are currently linked because the way it is calculated allows for the fact consumers are able to protect themselves from price changes by substituting towards relatively cheaper goods, and because the goods and services it covers better reflect the "inflation experience" of households receiving benefits. We find the first of these arguments to be sound but the second to be more questionable – only 23% of benefit claimants are unaffected by increases in mortgage interest payments and council tax, which are the main items that are excluded from the CPI but included in the RPI.

Peter Shield

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