The richest will reap 80% of the rewards from the tax and benefit changes that start to come into effect this week, while the poorest will become worse off, according to detailed analysis by the Resolution Foundation.
The independent thinktank’s research shows that the effect of £2bn of income tax cuts and more than £1bn of welfare cuts will add up to a huge transfer of wealth from low- and middle-income households to richer ones.
The reforms, set in train by former chancellor George Osborne, run directly contrary to the political mantra of Theresa May, who has said she wants to govern in the interests of everyone and “not just the privileged few”.
The changes include raising the personal tax allowance from £11,000 to £11,500; lifting the threshold for higher-rate tax from £43,000 to £45,000; freezing all working-age benefits; removing the family element (£545) from tax credits and universal credit for new claims or births; and applying a two-child limit to new claims or births in the tax credit system.
David Finch, senior economic analyst at the Resolution Foundation, said: “The overall package amounts to a £1bn net giveaway from the public purse. But the skewed nature of this generosity means that better-off households will receive four-fifths of the gains, while the poorest third of households will be worse off overall.”
Finch said that reductions in the generosity of universal credit, which will have the effect of reducing work incentives, would affect relatively few families this year. But as millions more move on to the new system, the effects on the living standards of those on low incomes would become much clearer.
“The chancellor still has plenty of budgets to rethink the tax and benefits changes inherited from his predecessor, given their impact on the living standards of low- and middle-income households,” he said.
The thinktank notes that other changes coming into effect in 2017, including a 30p rise in the national living wage from the beginning of this month and additional support through tax-free childcare from the end of it, as well as an extra 15 hours of free childcare from September, will provide some benefit to lower-income households.
But overall, it says, most of the additional support will benefit the better-off. Assessing the impact of the changes, the research finds that:
• A low-income single parent with a baby, earning £17,300 a year, will be £530 worse off, losing £610 from benefit cuts while gaining £80 from tax cuts.
• A middle-income working couple earning £33,500 a year, with three children including a baby, will be £2,500 worse off overall, losing £2,700 from benefit cuts while gaining £160 from tax cuts.
• A high-income couple with two children, earning £100,000 a year, will be £480 better off, with no benefit losses and all gains stemming from tax cuts.
By 2020, the benefit savings are expected to grow to more than £12bn a year (up from just over £1bn in 2017-18). This increase is driven by the number of households affected by cuts to in-work support through universal credit (put in place from last April) growing to around 2 million, the freeze biting again in 2018 and 2019, and a greater number of families being affected by the reduction in support for children. .
Torsten Bell, director of the Resolution Foundation, said : “The rights and wrongs of a relatively small national insurance change for the self-employed have dominated the headlines. But the real tax and benefit debate is about much bigger policy changes being rolled out this week and in the coming years.
“These amount to unwise giveaways to richer households and unjustifiable takeaways from less-well-off families. The result is higher inequality and a decision to squeeze living standards for low- and middle-income families at a time when rising prices are already outstripping wage growth.
“As the PM rightly looks to bring the country back together and ensure 21st-century Britain works for everyone, thinking again about these policy choices would be a good place to start.”
In her speech outside No 10 last July, as she started her premiership, Theresa May made a specific pledge to help the poorest in society.
A Treasury spokseperson said: “By cutting taxes for millions of people; giving the lowest earners a pay rise with the national living wage; doubling free childcare for nearly 400,000 parents and freezing fuel duty, we are helping people who need it most.”
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