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Sunday, 29th August 2010

UK: The distributional effect of tax and benefit reforms to be introduced between June 2010 and April 2014: a revised assessment

The distributional effect of tax and benefit reforms to be introduced between June 2010 and April 2014: a revised assessment
Source: Institute for Fiscal Studies (UK)
From the Executive Summary:

The Chancellor claimed in his Budget speech that the June 2010 Budget was a ‘progressive Budget’. Initial analysis of this claim showed that this was not true if measures announced in the Budget were analysed in isolation, or if their effects were considered over the longer term. Furthermore, HM Treasury analysis (as well as our own, in our post-Budget briefing) of the distributional effect of Budget measures did not include the effects of some benefit changes whose effects were difficult to allocate precisely to households. These measures represent £4.1 billion of the £11 billion of welfare cuts announced in the emergency Budget.

In this paper we attempt to allocate the effects of these changes to housing benefit, Disability Living Allowance and tax credits to households. We do this by making assumptions about the impact of changes to Disability Living Allowance and tax credits, and by using analysis published since the Budget by the Government on the impact of the changes to housing benefit. Inevitably, though, these estimates will be less precise than those obtained directly from our tax and benefit microsimulation model. Our analysis shows that the overall effect of the new reforms announced in the June 2010 Budget is regressive, whereas the tax and benefit reforms announced by the previous Government for introduction between June 2010 and April 2014 are progressive.

Low-income households of working age lose the most from the June 2010 Budget reforms because of the cuts to welfare spending. Those who lose the least are households of working age without children in the upper half of the income distribution. This is because they do not lose out from cuts in welfare spending and are the biggest beneficiaries from the increase in the income tax personal allowance.

The biggest change to welfare 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 savings from linking to a lower index will compound over time. The change is predicted to save the Government £1.2 billion in 2011–12 rising to £5.8 billion in 2014–15.

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