The Budget Policies That Could Increase or Decrease Inequality

In the weeks leading up to any Budget, it’s inevitable that policy proposals will be floated, leaked and lobbied for. Amidst the subterfuge and political manoeuvrings, it’s not always easy to separate the possible from the probable. We’ve already been told to expect further ‘belt-tightening’ to the possible tune of £4bn, as well as tax cuts. If this is true, the key questions become: who will bear the burden of further spending cuts, and who will gain from cuts to their taxes?

At this point there are worrying signs that the richest households are set to benefit at this Budget, at the expense of everyone else.

What’s been proposed?

In his Summer Budget last year, the Chancellor announced plans to increase the threshold at which the 40p rate of tax becomes payable, from £42,385 to £50,000 by 2020. This week’s Budget is likely to provide details of the next step towards this higher threshold. It’s a pure giveaway, a sop to the well-off, and one that the Resolution Foundation has calculated will cost £2bn over the next two years. It’s also a policy that will benefit only the richest 15% of earners; by definition, those least in need of extra cash in their pocket. Not only is this policy skewed towards the well-off, but it is one that can only increase the gap between them and the rest of us. That’s a hard sell when you’re telling middle and low income workers to brace for further austerity, and we would urge the Chancellor to reconsider.

On Wednesday, we are also likely to learn by how much the income tax personal allowance will rise, as it makes its way towards meeting the Chancellor’s target of £12,500 by the end of this Parliament. This has been frequently pitched as a policy designed to help the poorest, but it is actually very poorly targeted, and at £4bn extra a year is also extremely costly. The 4.6 million workers who earn too little to pay income tax will see absolutely no benefit at all, while most benefits flow to the richest half of households.

So are there any positive nuggets that might help to reduce inequality? Yes – more promisingly, detail should be provided on a ‘Help to Save’ matched savings scheme in which the Government will top-up money low-paid workers manage to put aside. Some have already pointed out the similarities to the Savings Gateway scheme that Osborne cancelled in his first Budget in 2010, but the new one should be welcomed; measures that incentivise saving by those on low incomes represent better value than yet more carrots for the well-off. The Government will consult on this proposal after the Budget, and we’ll be watching closely to see how it interacts with the savings allowance in Universal Credit.

How the Budget can reduce inequality

If Wednesday’s Budget is to reduce inequality rather than actively exacerbate it, we will need to see far more progressive measures than those we have heard about so far.

A major problem area is with the Government’s flagship Universal Credit programme – a sound idea in theory, but one whose aim of making work pay has been undermined at every step. Our analysis found that cuts to the work allowance mean a single parent with two children, working full time on the minimum wage, will be £554 a year worse off. They will have to work almost an additional week per month just to earn the same as they did before the cuts. Reversal of these cuts, along with a reduction in the rate at which in-work benefits are withdrawn, would be two well-targeted measures to let the poorest workers do more with their hard-earned cash. Then they might also be left with something to save in a Government scheme at the end of the month.

Much-neglected in recent Budgets has been the issue of council tax, one of the most regressive taxes in our system. The poorest lose 8% of their incomes to it, but the richest just 2%. Announcing a more progressive property tax by re-evaluating properties and creating new bands with higher rates for high value properties would raise money, help to rectify current unfairness, and start to challenge rising wealth inequality.

Budget transparency

Ultimately, whatever decisions the Government makes, the public is entitled to see how households across the income spectrum will be affected by policy changes to tax and spending. But last year the Treasury said it would no longer produce a full distributional analysis of its Budget measures. It is a matter both of honesty and good governance to clearly detail the effects on family finances, and we urge the Government to reinstate it. A briefing on this can be found here.

Speculation around Budget promises and giveaways gets the Westminster bubble giddy, but these decisions are make or break for families on low incomes across the country. We can all see the poorest being squeezed to pay for rewards for the rich. Enough rabbits – let’s have a fair Budget.

Lucy Shaddock, Policy & Campaigns Officer