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Poorer families are bearing the brunt of austerity, making 'we are all in it together' sound fatuous
Britain's high earners have a doughty champion in Boris Johnson. It was one of the senior aides to the Mayor of London who organised last week's letter to the Financial Times urging the government to cut the top rate of income tax from 50%. The argument, based on scant evidence, is that the Treasury will end up losing money because those generating wealth (sic) in the City will emigrate to Monaco or Switzerland where tax rates are lower.
What used to be known as the Square Mile is responsible for a large chunk of the funding for the Conservative party, so George Osborne has little choice but to listen to the case for easing the tax burden on those earning in excess of £150,000 a year.
But as the Liberal Democrat members of the coalition have been quick to point out, if the government has any scope to cut taxes the first beneficiaries should be those on the lowest incomes. There is an economic rationale for this at a time when demand is weak – poorer families are more likely to spend any additional income rather than save it – but an equally strong political case.
The rich have not emerged unscathed from the recession and its aftermath, although that's almost entirely the result of changes to tax rates and allowances brought in by Alistair Darling. Even assuming some leakage through tax avoidance schemes, these will hurt. Work carried out by the Institute for Fiscal Studies (IFS) for a new London School of Economics book estimates that the top 10% of the income bracket in the UK will see their income cut by more than 4% between January 2011 and April 2014 as a result of tax and benefit changes. That is a chunky fall, concentrated among the highest earners, but not nearly as big as the cuts in income in prospect for the poorest families.
Britain is perhaps halfway through a lost decade in which incomes flatline once adjusted for inflation. An excess of debt-fuelled spending meant households artificially raised the level of real income growth for a time, but now it's payback time.
To make matters worse, this is happening at a time when inflation is running ahead of incomes, meaning the weekly wage doesn't buy as much, and when the government is taking a bigger share of national income in taxes. The IFS says there has been nothing like it since at least the second world war. You would probably have to go back 80 years or more to find a time when living standards failed to rise over a 10-year period.
During the recession of 2008-09 and its aftermath, Britain seemed to accept the cap on income growth as a price worth paying for staying in work. Unemployment rose much less rapidly than it did in the recessions of the early 1980s and early 1990s because workers bartered pay increases for job security. Employment levels did fall, particularly among the young, but by far less than might have been expected given a 6.5% drop in national output from its peak in early 2008 to its trough in late 2009.
What is unusual about this period, though, is that real income growth was weak going into the recession (families financed their spending increases through remortgaging their homes) and it remains weak two years into a recovery that is feeble by historic standards.
In these unusual circumstances, the "we are all in it together" shtick is actually pretty fatuous. Very few households can look forward to rising living standards, so the government's strategy should be judged by what it does to child and pensioner poverty, whether it increases or decreases inequality, and whether the tax and benefit system acts progressively by ensuring that sacrifices get bigger the better off people become. According to the IFS analysis, the Osborne plan fails on all three counts.
Under Tony Blair, Labour set ambitious targets for tackling child poverty that it failed to meet. The number of children below the poverty line came down from the levels inherited from the Conservatives in 1997 but it was not halved by 2010 as planned.
Inequality as measured by the international yardstick (the Gini coefficient) remained stubbornly high, although it fell during Gordon Brown's premiership thanks to above-inflation upratings of welfare benefits and targeted increases in child benefits. For the vast bulk of the income distribution (stripping out the very poorest and the very richest), tax and benefit policy was progressive under Labour. Brown has had his fair share of brickbats of late, but there was more to his anti-poverty campaign than slogans of the "we are all in this together" variety.
It is worth reminding ourselves at this point that those people at the very top – those complaining about the injustice of the 50% tax rate – have had more than three decades of living high on the hog. The biggest increases in real income growth under Margaret Thatcher, John Major, Tony Blair and Gordon Brown were the 1% of highest earners. They have plenty of fat to live off.
Life has not been so sweet for the poorest families in Britain. De-unionisation, outsourcing and the hollowing out of manufacturing have resulted in downward pressure on wages for those in the lowest income groups, while benefits have tended to rise less rapidly than earnings.
The IFS says the impact of the government's tax and benefit changes will be to slice 6% off the incomes of the least well-off 20% of households in Britain between 2011 and 2014. They will lose about the same from the cuts in public spending. No matter how well off you are, you notice a 12% cut in your income. But you feel it more keenly if you are on £200 a week rather than £200,000 a year.
Osborne and his coalition colleagues have so far avoided what would be much-deserved criticism for cuts of this scale. In part that's because they have made so many welfare cuts by stealth. It is worth spelling out – as the IFS does here – the changes announced by the government that affect families with children, because it is a classic case of salami-slicing. "Child benefit amounts are to be frozen in cash terms (a real cut) for three years: aggregate child tax credit spending is to be cut; the percentage of childcare costs that can be claimed by those receiving the working tax credit was cut from 80% to 70% in April 2011; the minimum weekly hours requirement for a couple with children to claim working tax credit is to rise from 16 hours to 24 hours in April 2012; and child benefit is to be removed from families containing a higher-rate income taxpayer from January 2013.
"Hence, in contrast to recent trends in the UK, families with children are not to be favoured by tax and benefit reforms in the near future."
The other reason cuts on this scale have been possible is that the government has hidden behind Darling's tax increases, arguing fatuously that it should receive credit for keeping them in place. Cutting the top rate of tax would deprive Osborne of that cover, which is why – unless he is intent on political suicide – the idea will be kicked deep into the long grass.
• The effect of the great recession on household income distribution, LSE
Larry Elliott
guardian.co.uk © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds
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Poorer families are bearing the brunt of austerity, making 'we are all in it together' sound fatuous
Britain's high earners have a doughty champion in Boris Johnson. It was one of the senior aides to the Mayor of London who organised last week's letter to the Financial Times urging the government to cut the top rate of income tax from 50%. The argument, based on scant evidence, is that the Treasury will end up losing money because those generating wealth (sic) in the City will emigrate to Monaco or Switzerland where tax rates are lower.
What used to be known as the Square Mile is responsible for a large chunk of the funding for the Conservative party, so George Osborne has little choice but to listen to the case for easing the tax burden on those earning in excess of £150,000 a year.
But as the Liberal Democrat members of the coalition have been quick to point out, if the government has any scope to cut taxes the first beneficiaries should be those on the lowest incomes. There is an economic rationale for this at a time when demand is weak – poorer families are more likely to spend any additional income rather than save it – but an equally strong political case.
The rich have not emerged unscathed from the recession and its aftermath, although that's almost entirely the result of changes to tax rates and allowances brought in by Alistair Darling. Even assuming some leakage through tax avoidance schemes, these will hurt. Work carried out by the Institute for Fiscal Studies (IFS) for a new London School of Economics book estimates that the top 10% of the income bracket in the UK will see their income cut by more than 4% between January 2011 and April 2014 as a result of tax and benefit changes. That is a chunky fall, concentrated among the highest earners, but not nearly as big as the cuts in income in prospect for the poorest families.
Britain is perhaps halfway through a lost decade in which incomes flatline once adjusted for inflation. An excess of debt-fuelled spending meant households artificially raised the level of real income growth for a time, but now it's payback time.
To make matters worse, this is happening at a time when inflation is running ahead of incomes, meaning the weekly wage doesn't buy as much, and when the government is taking a bigger share of national income in taxes. The IFS says there has been nothing like it since at least the second world war. You would probably have to go back 80 years or more to find a time when living standards failed to rise over a 10-year period.
During the recession of 2008-09 and its aftermath, Britain seemed to accept the cap on income growth as a price worth paying for staying in work. Unemployment rose much less rapidly than it did in the recessions of the early 1980s and early 1990s because workers bartered pay increases for job security. Employment levels did fall, particularly among the young, but by far less than might have been expected given a 6.5% drop in national output from its peak in early 2008 to its trough in late 2009.
What is unusual about this period, though, is that real income growth was weak going into the recession (families financed their spending increases through remortgaging their homes) and it remains weak two years into a recovery that is feeble by historic standards.
In these unusual circumstances, the "we are all in it together" shtick is actually pretty fatuous. Very few households can look forward to rising living standards, so the government's strategy should be judged by what it does to child and pensioner poverty, whether it increases or decreases inequality, and whether the tax and benefit system acts progressively by ensuring that sacrifices get bigger the better off people become. According to the IFS analysis, the Osborne plan fails on all three counts.
Under Tony Blair, Labour set ambitious targets for tackling child poverty that it failed to meet. The number of children below the poverty line came down from the levels inherited from the Conservatives in 1997 but it was not halved by 2010 as planned.
Inequality as measured by the international yardstick (the Gini coefficient) remained stubbornly high, although it fell during Gordon Brown's premiership thanks to above-inflation upratings of welfare benefits and targeted increases in child benefits. For the vast bulk of the income distribution (stripping out the very poorest and the very richest), tax and benefit policy was progressive under Labour. Brown has had his fair share of brickbats of late, but there was more to his anti-poverty campaign than slogans of the "we are all in this together" variety.
It is worth reminding ourselves at this point that those people at the very top – those complaining about the injustice of the 50% tax rate – have had more than three decades of living high on the hog. The biggest increases in real income growth under Margaret Thatcher, John Major, Tony Blair and Gordon Brown were the 1% of highest earners. They have plenty of fat to live off.
Life has not been so sweet for the poorest families in Britain. De-unionisation, outsourcing and the hollowing out of manufacturing have resulted in downward pressure on wages for those in the lowest income groups, while benefits have tended to rise less rapidly than earnings.
The IFS says the impact of the government's tax and benefit changes will be to slice 6% off the incomes of the least well-off 20% of households in Britain between 2011 and 2014. They will lose about the same from the cuts in public spending. No matter how well off you are, you notice a 12% cut in your income. But you feel it more keenly if you are on £200 a week rather than £200,000 a year.
Osborne and his coalition colleagues have so far avoided what would be much-deserved criticism for cuts of this scale. In part that's because they have made so many welfare cuts by stealth. It is worth spelling out – as the IFS does here – the changes announced by the government that affect families with children, because it is a classic case of salami-slicing. "Child benefit amounts are to be frozen in cash terms (a real cut) for three years: aggregate child tax credit spending is to be cut; the percentage of childcare costs that can be claimed by those receiving the working tax credit was cut from 80% to 70% in April 2011; the minimum weekly hours requirement for a couple with children to claim working tax credit is to rise from 16 hours to 24 hours in April 2012; and child benefit is to be removed from families containing a higher-rate income taxpayer from January 2013.
"Hence, in contrast to recent trends in the UK, families with children are not to be favoured by tax and benefit reforms in the near future."
The other reason cuts on this scale have been possible is that the government has hidden behind Darling's tax increases, arguing fatuously that it should receive credit for keeping them in place. Cutting the top rate of tax would deprive Osborne of that cover, which is why – unless he is intent on political suicide – the idea will be kicked deep into the long grass.
• The effect of the great recession on household income distribution, LSE
- Economic growth (GDP)
- Economics
- Tax and spending
- Economic policy
- George Osborne
- Pay
- Tax credits
- Family finances
- State benefits
Larry Elliott
guardian.co.uk © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds
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