Well that’s some Budget. We knew it would be big in both political significance and in scale, but there was a full warren’s worth of rabbits pulled from the hat. The simple truth then is that it is very hard to say with confidence what this will mean for inequality reduction. However we can look at a number of individual policies with some certainty.
Let’s start with the positive. A new national living wage (for workers aged 25 and over) of £7.20 next April and £9 by 2020 is a huge announcement. This is a significant increase in the minimum wage and will unequivocally help those workers on the lowest incomes. There is a legitimate question over whether this represents a genuine ‘living wage’ given it is some way below the current definition of £7.85 outside London and £9.15 in London, but the Government should be applauded for its introduction.
However the same cannot be said for £9bn worth of cuts to tax credits, cuts that will probably hit low and middle income earners the hardest. This has been a fiercely debated topic over the past few weeks, with an interesting argument surfacing that suggests that tax credits are effectively acting to subsidise employers who pay low wages. It’s an argument with obvious appeal to different audiences, but it is not backed by the evidence. Some employers may be paying desperately poor wages to some of their employees, but this doesn’t appear to be a result of tax credits. In fact tax credits provide a lifeline to many working people paid too little to live on.
This highlights another problem with cuts to tax credits and new, higher taper rates. In some cases those on low and middle incomes now face extremely high marginal tax rates, rates that some would argue actually disincentivise work. This is bad policy disguised as prudence, and will do nothing to support hard working people on low and middle incomes, or reduce inequality.
There are other policies that will almost certainly drive further inequality.
Raising the 40p tax threshold to £50,000 has been presented as a tax cut for hard working middle earners. In reality it doesn’t help those on middle incomes at all, unless you have an extremely flexible definition of the terms ‘middle’ and ‘help’. The beneficiaries will be those in the richest 15 per cent, (who gain over £700 from the change), or put another way, someone earning almost double the average income.
Perhaps the most widely anticipated announcement was the raising of the inheritance tax threshold to £1 million. Given the unpopularity of the dreaded ‘death duty’, this seems a shrewd, populist move. But it is also a flagrant sop to the wealthiest, with the poorest 95 per cent gaining nothing at all from this change. For the lucky and increasingly few of us who own a home, it’s nice to think we could see these rocket over the £1m price tag in the near future, but it’s a complete fantasy. The majority of home owners do not own a property that is worth enough to pay inheritance tax on it after their death. This is even true in London where the average house price is under £470,000, well below the current £650,000 inheritance tax threshold for couples.
As my colleague has pointed out, this policy will also likely make it harder for the less well-off to own a home, by distorting market prices. In short, we don’t need to help millionaires pass on wealth to their children, but we do need to help ordinary middle income earners who are struggling to pass anything down or afford a roof over their heads. The positive, if there is one, is that this policy will be paid for by increasing taxes on the pensions of higher earners. But given this is essentially taking from the rich to give back to the children of the rich, it’s hard to be too enthusiastic about it.
A far better policy is the restriction of mortgage interest relief for buy-to-let landlords to the basic rate of interest. This is basic common sense given the current system supports those with large property portfolios but not those struggling to pay off their mortgage.
There are also policies promoted as progressive that are nothing of the sort. Raising the tax free allowance threshold will indeed help those on lower incomes, but it will also benefit those earning much more. In addition it fails to help the 4.6 million too poor to pay income tax, so it is unlikely to help reduce inequality. As we and many others have suggested, a far better option would be to raise the national insurance threshold, as this kicks in at a much lower rate.
Are there any other positives? Yes, removal of non-dom rights is a long overdue policy. This is an important step in making tax fairer, and ensuring members of the super-rich contribute to the country they reside in. This raises a significant amount of money and is a measure to be applauded.
A final important point to make is in response to the Chancellor’s claim that inequality is down from 2010. This is, it may surprise people, true. But we should put this into context. It has fallen, but only from 2009-10 to 2010-11, since then it has remained broadly flat, locking us in as one of the most unequal countries outside of the developing world. The reason for this is falling wages across the board as a result of the recession, rather than government policy. Those at the top saw the biggest fall in income, but welfare payments, the so called ‘automatic stabilisers’, stopped the poorest from losing even more. This is not a government achievement.
So what does this all mean? Well, it’s extremely hard to tell at this stage. It’s possible that the combination of policies announced today will help to reduce the gap between the richest and the rest, but it is just as likely that it will see a further rise. Thankfully the IFS will tomorrow publish a full distributional analysis, providing a better picture of the winners and losers. What we can be sure of is that for inequality to be reduced in a meaningful way, to a level where our economy is balanced and stable, our society is strengthened and a better future awaits the next generation, we simply must adopt a clear goal to reduce it.
John Hood, Media and Communications Manager
UPDATE
The IFS has now produced a distributional analysis of the effects of tax and benefit changes in the Budget, minus the new ‘Living Wage’. It finds the Budget is highly regressive. Responding to this, Director of the Equality Trust, Duncan Exley, said:
“This is a Two Nation Budget that will only increase the gap between the rich and the rest of us. It offers tax giveaways to the rich whilst taking money from the pockets of those on middle and low incomes.
“Making the wealthiest foreign nationals who live in the UK pay their way is a good start, but this is undone by the increase in the inheritance tax threshold. We don’t need to help millionaires pass on their wealth when ordinary people are struggling to pass down to their kids anything at all.
“What’s worse is that this is portrayed as a Budget for ‘middle earners’, it’s nothing of the sort. Reducing tax credits hits middle income families, and raising the 40p tax rate threshold only helps the richest 15 per cent.
“We know that inequality hurts our society, slows our economy and robs our children of a better future. It’s bad enough for our politicians to bury their heads in the sand and ignore it. It’s unforgivable for them to introduce policies that actively increase inequality.”