Who is paying for the chancellor’s announcements?

Richard Exell follows the money on the chancellor's autumn statement, and finds that it's the poor who are paying the price.

Everyone who thinks George Osborne increasingly resembles Gordon Brown will have felt vindicated by the way he saved the plum announcement in his autumn statement for the end: rail fares are to be capped at one per cent above the retail price index, January’s fuel duty increase is deferred to August and the August inflation increase is cancelled.

The chancellor himself emphasised the fact that none of the announcements are being paid for by extra spending (which would resemble Plan B too closely). So the question is: who pays?

There are two big groups of losers.

One will be public sector workers, who face two years of pay increases limited to one per cent after the pay freeze comes to an end. The OBR forecasts that CPI will never go below two per cent over the next five years and RPI will range between 2.9 and 3.8 per cent – a cumulative cut in benefits of around 11 per cent plus the increased pension contributions.

The other group to lose out will be people on tax credits. It is certainly a relief that the rumours about freezing benefits have proved false, but wait for next year when the forecasts are revised down again and the commitment to deficit reduction has to be paid for somehow

What we have this year is the decision to slash the real value of tax credits:

• Scrapping the planned above inflation increase to the child element of the child tax credit.
• Not uprating the couple and lone parent elements of the working tax credit in 2012–13.

When he announced this year’s extra increase in the child element of the CTC in last year’s emergency budget Mr Osborne said that the government was doing it to “provide additional support to families in poverty” because

“These are among the most vulnerable people in our society and they need our help.”

And it will be families in poverty who lose out. The Resolution Foundation’s Squeezed Britain includes a very useful table of receipt of tax credits by income groups:

Table 5.3:

Tax credit receipt among adults by income group: UK 2008-09

LMEs Higher
All family
WTC only 2% 3% 0% 1%
CTC only 17% 12% 5% 9%
CTC & WTC 3% 8% 1% 4%
Total in receipt 22% 23% 7% 14%

People who mainly live on benefits or rely on a mix of benefits and low pay are far more likely to need tax credits than better-off groups.

This is reflected in the fact that the Treasury’s distributional analysis (pdf) to accompany the autumn statement accepts that the tax and benefit changes will increase the number of children in poverty by “around 100,000 in 2012-13”.

The above-inflation increase in the child element of CTC was supposed to be one of the great Liberal Democrat achievements, one of the reasons we should believe that this is a “progressive” government. That claim is much harder to credit now.

See also:

“We’re all in this together” – when ‘we’ means the bottom 80%Will Straw, November 29th 2011

OBR confirm Osborne will borrow more than the Darling projectionDaniel Elton, November 29th 2011

How the OBR’s growth projections have fallenWill Straw, November 29th 2011

Whatever Osborne’s growth forecasts today, the reality is probably worseDaniel Elton, November 29th 2011

Osborne’s stimlu-lite is more pork for vested interestsAlex Hern, November 29th 2011

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