The long-term distributional impact of the Budget
The Budget Report includes a section on the impact of tax increases, cuts to services and benefits and it points out that the richest will lose more than everyone else. What it doesn’t point out is that the government’s policies mean that, in the long-term, the reverse will be true.
Including a section on the distributional impact of the Budget is a real reform. It does not cover everything – the ‘localisation’ of Council Tax Benefit for instance – but it is a genuine improvement. The chart below, take from the Report, shows the impact of cuts in services (grey), cuts in benefits and tax credits (black) and increases in taxes (green) on the population divided into ‘quintiles’ (fifths) by income.
Everyone is worse off in this analysis (not a point George Osborne emphasised) but what I’d like to concentrate on is the long-term consequence of the composition of these losses. In the bottom four quintiles people lose out because of cuts in services and benefits; in the top quintile people lose because of tax increases.
Now, as George Osborne made clear yesterday when he was talking about the 50 per cent rate of income tax, the government regard the tax increases as temporary measures, which they are going to reverse as soon as possible. But, as I’ve pointed out before, they have no such intention when it comes to the cuts (though there may be a genuine difference here between the two parties of the coalition).
So, in the long-term, this chart is going to look very different – when the tax increases are reversed but the cuts are still in place, the richest fifth of the population will have lost much less than the rest of us.