The government's changes to tax and benefits will hurt poorer households significantly harder, according to the respected think tank
The government’s planned changes to tax, tax credits and benefits will reduce household incomes significantly, especially for those on very low incomes, according to new analysis by the independent Institute for Fiscal Studies (IFS).
Among households with someone in paid work, those eligible for benefits and tax credits will lose an average of £750 per year because of the changes to tax and benefits announced by the chancellor for this parliament.
And the losses will not be offset by the planned increase in the minimum wage for those aged 25 and over – described by the chancellor as a ‘National Living Wage’ (NLW).
Looking at the extent to which the new NLW will compensate for losses caused by the tax and benefit changes, according to the IFS the average gain from the new NLW for the 8.4 million working-age households who are eligible for benefits and tax credits will be around £200 per year. Factoring in losses from tax benefit changes, this would leave these households worse off by on average £550 a year.
Overall, only around 13 per cent of the losses due to tax and benefit changes for all working age households – including non-working households who for obvious reasons cannot benefit from a NLW – will be offset by the increased NLW.
This is because households gaining from the new NLW are often not the households set to lose the most from tax and benefit reforms. Households in the lower half of the income distribution stand to lose the most from the reforms to taxes and benefits whereas households gaining from the NLW are more evenly distributed across the income distribution, with bigger gains in the middle.
The IFS’ calculations may also be overly optimistic. In its analysis the think tank assumes that the new NLW will have no effect on GDP, employment or hours of work; yet elsewhere it concedes that the the new NLW is likely to depress GDP and employment.
William Elming, a research economist at the IFS and co-author of the briefing note, said:
“The new ‘National Living Wage’ will only offer partial compensation to working age households who will see their incomes fall as a result of tax and benefit changes announced for the current parliament. There may be strong arguments for introducing the new NLW, such as increasing earnings and the incentives to work for the low paid. However, the new NLW cannot be considered a direct substitute for benefits and tax credits aimed at lower income households. The wage increases are not as large as the benefit cuts. And, it is not targeted at the same group who lose from the cuts.”
James Bloodworth is the editor of Left Foot Forward. Follow him on Twitter