2016 tax credit cuts will worsen regional inequality
A new TUC analysis of the tax credit cuts the Chancellor plans for next April shows that the worst impact will be felt in the regions and nations of the UK that already have the lowest average incomes.
In his summer Budget Mr Osborne announced that the government plans to reduce the income thresholds in tax credits and increase the tax credit taper rate. Taken together, these measures will cost low-paid UK workers about £4.5 billion a year but that burden won’t be evenly spread. Low pay isn’t equally spread across the country, so tax credit spending, designed to compensate families for low pay, isn’t spread equally. And, crucially, this means that tax credit cuts won’t hit equally.
The chart below shows, for each nation or English region, the average cut faced by working households who will lose from next year’s changes (*) and the region’s gross disposable household income per capita in 2013.
These cuts will make inequalities between the nations and regions of the UK worse, though it’s worth pointing out that the average loss is very high across the country – even in London, families who lose as a result of these cuts will lose an average of £1,110. And most families who get Working Tax Credit will lose: over the country as a whole we calculate that 91% of WTC households will lose at least some of their tax credits. Generally speaking, poorer nations and regions will have a higher proportion of claimants who lose:
In his summer Budget Mr Osborne announced that the government plans to reduce the income thresholds in tax credits from £6,420 to £3,850, increase the tax credit taper rate from 41% to 48% and reduce the income rise disregard in tax credits from £5,000 to £2,500.
(The income threshold is the income a family can keep before the amount of tax credit they are entitled to starts to be reduced as their earnings rise. The “taper rate” is the proportion of earnings over the income threshold that is deducted from a claimant’s tax credit entitlement.
Tax credits are usually calculated assuming that a claimant’s income in the coming tax year will be the same as in the current one. Most people’s pay goes up each year and when tax credits were first introduced it was found that many claimants had large arrears of overpaid tax credits and that paying them back caused substantial hardship. An income rise disregard – currently £5,000 – was introduced, with increases up to this amount ignored in calculating tax credit entitlement.)
The current government, the coalition government and the last Labour government all emphasised the importance of ‘making work pay’ and these elements of the tax credits guarantee that people who take up even very low-paid jobs will still see their net income rise. George Osborne once praised the people getting up to work in low-paid jobs, contrasting them with unemployed people “sleeping off a life on benefits”. The people these cuts hit are the very people who are doing what Mr Osborne wanted, but their pay is so low that they can’t get by without help.
In most of the country the families facing these cuts will lose over 5% of their income – equivalent to being docked more than two-and-a-half weeks’ pay.
Mr Osborne has hinted that he will use the Spending Review on 25 November to mitigate some of these impacts, but there’s a limit to what he can do. As I’ve mentioned before, he’s relying on these cuts to save a lot of money straight away – £4.5 billion in 2016/17. The rumours suggest that the Chancellor is considering transitional protection for existing claimants covering perhaps one of these changes. Now, “transitional protection” means that existing claimants keep the cash value of their existing benefits (for as long as their circumstances don’t change). Over time, inflation cuts away at the value of their entitlement.
More important, new claimants – people in exactly the same position as the existing claimants, people who need the tax credits just as much – will find themselves in exactly the same situation. From a news management perspective, it means there won’t be anyone on TV talking about what they’ve lost, but there will still be thousands of working families left struggling.
(*) Calculated from April 2016 on a before housing costs basis and using the Institute for Public Policy Research’s tax/benefit model. The cash values are available on the TUC website.