Another Budget, another missed opportunity to address the dangerously high levels of inequality that exist in the UK today. A series of measures announced by the Chancellor today are quite obviously regressive, and while some policies may be a move in the right direction, it seems highly likely that the overall effect of the Budget will be to increase inequality.
Let’s start with the good news. Some of the better measures announced in the Budget were measures to tackle tax avoidance. The Government has announced that it will introduce a whole suite of measures to stop companies abusing different countries’ tax systems in order to reduce their total tax bill. This will bring it into compliance with new guidelines set by the OECD (a club of developed nations). The Government has said it hopes to raise £12 billion from reduced tax avoidance – a helpful step in the right direction, given that much of this avoidance is channelled towards the wealthy. Despite this good news, these measures were counterbalanced by a further cut in corporation tax which will reduce the total revenue raised.
Now for the bad news. This Budget includes multiple tax cuts which will overwhelmingly help people with high incomes, at the expense of ordinary and low-income households.
The Government has continued its regressive policies of raising the income tax personal allowance, and raising the threshold for the higher rate of income tax. The rise in the income tax personal allowance will cost billions of pounds. Families with the lowest incomes will see no benefit from this rise, with the vast majority of the benefit going to households in the top half of the income distribution. Raising the threshold for the higher rate of income tax exclusively helps richer households, with only employees in the richest 15% seeing any benefit from this whatsoever. On top of this, the Government also announced a reduction in capital gains tax, which is mainly paid by the richest households.
These billions of pounds in tax cuts for some of the highest earners should also be seen in the context of the billions of pounds in benefit cuts announced in the Summer Budget that have reduced the incomes of the very poorest. Not least cuts to Universal Credit, which will see many low-income households lose money almost as fast as they earn it.
The Government has also continued to mess about with the consumption taxes which tend to hit the poorest harder. A freeze on beer, cider, spirit and fuel duty is welcome, but the introduction of a tax on sugary drinks less so. As we showed in our Unfair and Unclear report, these taxes on the everyday items that people buy tend to hit poor people harder, as they spend a greater proportion of their income on these. Some would argue that these taxes help to improve the health of those affected by them, and so are worth the cost, however it’s not altogether clear that’s the case. A tax on sugary drinks therefore needs careful thought if it is not to be a regressive tax that hits the poorest hardest.
Another area which has seen significant announcements made and that will have an impact on economic inequality is government support for saving. The Government has announced one new scheme for low-income households, and two much bigger changes to help much wealthier households. The Government has announced a Help to Save scheme which will help match £1 for every £2 low-income households in work save, giving them up to £600 every two years if they save enough, for up to four years. Meanwhile it has also announced a lifetime ISA, where any individual who saves will see their income matched £1 for every £4 with the Government giving up to £1,000 every year. This means that richer households who can put more into savings can get over three times as much from the Government each year. The Government has also increased the annual ISA allowance, which will mainly benefit higher rate tax payers, as basic rate tax payers already pay no tax on their savings. Overall, these changes to savings will benefit wealthier households much more than poorer ones, and the savings schemes that help wealthy households will cost more than those that help poorer ones.
Sadly, we won’t know the full extent of whether this Budget reduces inequality until tomorrow, when the IFS produces a distributional analysis. This is because, as with last year’s emergency Summer Budget, the Treasury has once again failed to produce its own distributional analysis. As we suggested in a letter to the Guardian yesterday, we believe it is a vital function of government to provide information on how households on different incomes will be affected, and we are disappointed this analysis has not been reinstated.
However, this initial analysis does not look good, with multiple tax breaks for wealthier households overshadowing small inequality-reducing measures. It looks like this is another Budget where once again the Government has failed to take the opportunity to tackle inequality, and improve the quality of life for all that live in the UK.
Tim Stacey, Senior Policy and Research Advisor