A landmark study of the coalition’s tax and welfare policies six months before the general election reveals how money has been transferred from the poorest to the better off, apparently refuting the chancellor of the exchequer’s claims that the country has been “all in it together”.
According to independent research to be published on Monday and seen by the Observer, George Osborne has been engaged in a significant transfer of income from the least well-off half of the population to the more affluent in the past four years. Those with the lowest incomes have been hit hardest.
In an intervention that will come as a major blow to the government’s claim to have shared out the burden of austerity equally, the report by economists at the London School of Economics and the Institute for Social and Economic Research at the University of Essex finds that:
■ Sweeping changes to benefits and income tax have had the effect of switching income from the poorer half of households to most of the richer half, with the poorest 5% in the country in terms of income losing nearly 3% of what they would have earned if Britain’s tax and welfare system of May 2010 had been retained.
■ With the exception of the top 5%, who lost 1% of their potential income, it is the better-off half of the country that has gained financially from the changes, with an increase of between 1.2% and 2% in their disposable income.
■ The top 1% in terms of income have also been small net gainers from the changes brought in by David Cameron’s government since May 2010, which include a cut in the top rate of income tax.
■ Two-earner households, and those with elderly family members, were the most favourably treated, as a result of direct tax changes and state pensions respectively.
■ Lone-parent families did worst, losing much more through cuts in benefits and tax credits and higher council tax than they gained through higher income tax allowances. Families with children in general, and large families in particular, also did much worse than the average.
■ A quarter of the lowest paid 10% have shouldered a particularly heavy burden, losing more than 5% of what would have been their income without the coalition’s reforms.
The development is likely to fuel Labour’s charge that neither the pain of austerity nor the rewards of the economic recovery have been equitably shared. On Saturday Ed Miliband told a meeting of party members in the West Midlands: “This country is too unequal and we need to change it.”
The report also claims that the transfer of funds from the poorest half of the country to the more affluent did not contribute to deficit reduction.
It says: “The revenue gains from some tax changes and benefit cuts were offset by the cost of tax reductions, particularly the increase in the income tax personal allowance.”
On Saturday night Chris Mould, chairman of the Trussell Trust, which helped more than 900,000 people with its emergency food banks in 2013/14, and which is forecasting a further increase in attendance in the next few months, told the Observer: “It is not true to say that we have all been in this together. It is time we were honest about that and made a decision about whether we are happy with that.”
Matthew Reed, chief executive of the Children’s Society, said: “This important analysis offers further evidence that children in low-income families are among the groups losing the most as a result of cuts to benefits and tax credits.”
The report, to be published on Monday, claims that the cumulative impact of tax and welfare changes, from in-work benefits to council tax support, to the cut in the top rate of income tax and an increase in tax-free personal allowances, has been regressive across the income spectrum.
Its authors, Paola De Agostini and Professor Holly Sutherland at the university of Essex, and Professor John Hills at the LSE, write: “Whether we have all been ‘in it together’, making equivalent sacrifices through the period of austerity, is a central question in understanding the record of the coalition government … It is clear that the changes did not lead to uniform changes in people’s incomes. The reforms had the effect of making an income transfer from the poorer half of households (and some of the very richest) to most of the richer half, with no net effect on the public finances.
“In effect, the reductions in benefits and tax credits financed the cuts in taxes. Some groups were clear losers on average – including lone-parent families, large families, children, and middle-aged people (at the age when many are parents). Others were gainers, including two-earner couples, and those in their 50s and early 60s.”
The transfer of income from the poor to the affluent was partly due to changes to benefits and tax credits which make them less generous for the bottom and middle of the income scale.
Changes to council tax, with a freeze on the level of tax but a loss of support for the poor, also aided those in the middle but not the least well off.
Those aged over 65 had gains averaging more than 2% of their incomes from “triple-locked” state pensions rising much faster than earnings, although this was partly offset by cuts to other benefits, particularly for the oldest pensioners.
The report also questions the Treasury’s previous claims that the best-off 10% have been harder hit proportionally than the worst-off. It points out that the Treasury had taken as its starting point the policy set in January 2010 rather than May 2010, at which point Labour’s changes to the top rate of tax had come into force.
A Treasury spokesman said: “The government has published groundbreaking cumulative distributional analysis with every budget and autumn statement of this parliament. This has clearly shown that the richest households are making the biggest contribution to reducing the deficit.”
Shadow chancellor Ed Balls claimed that Labour planned to balance the books in a fairer way. He said: “This is a damning analysis of David Cameron and George Osborne’s record. It demolishes any last pretence that we are somehow all in this together.”
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