Almost half of Budget 2018 income tax cuts are set to go to the top ten per cent of households
The Chancellor set out a significant easing of austerity in a £55bn giveaway Budget yesterday that set out major increases in public service spending, tax cuts and a reversal of cuts to the generosity of Universal Credit. But the squeeze is set to continue for low and middle income families, the Resolution Foundation said today (Tuesday) in its overnight analysis of the Budget, How To Spend It.
Faced with a total fiscal windfall of £73.8bn from the Office for Budget Responsibility over the forecast period, the Chancellor chose to use 75 per cent of it in a £55bn giveaway Budget. But while yesterday’s Budget represents a significant shift in overall direction of public spending, it does not spell the end of the squeeze – either for unprotected public services, or over ten million working age families in receipt of benefits.
Key findings from How To Spend It include:
The squeeze continues for low and middle income families
- The analysis shows that over three quarters of the £12bn of welfare cuts announced after the 2015 election remain government policy, despite the welcome £1.7bn boost to Work Allowances in Universal Credit.
- Half of the welfare cuts that hit family budgets are yet to be rolled out – including a £1.5bn benefit freeze next April that will see a couple with children in the bottom half of the income distribution losing £200.
Better news for the ‘more than just managing’
- 84 per cent of the income tax cuts announced yesterday will go to the top half of the income distribution next year, rising to 89 per cent by the end of the parliament (2022-23) when almost half (45 per cent) will go to the top ten per cent of households alone.
- The richest tenth of households are set to gain 14 times as much in cash terms next year from the income tax and benefits giveaways in the Budget as the poorest tenth of households (£410 vs £30).
- The overall package of tax and benefit changes announced since 2015 will deliver an average gain of £390 for the richest fifth of households in 2023-24, compared to an average loss of £400 for the poorest fifth of households.
Cuts to public services are eased, but not ended
- Overall day-to-day departmental spending per capita is now set to rise by 4 per cent between this year and 2022-23, rather than fall by 4 per cent as previously planned.
- However, the promises of extra spending on the NHS, defence and international aid mean that unprotected departments will continue to see cuts in every year from 2020-21. Their per capita real-terms budgets are set to be 3 per cent lower in 2023-24 than 2019-20.
- If allocated equally this would mean day-to-day spending cuts of 48, 52 and 77 per cent between 2009-10 and 2023-24 for the departments of Justice, Business and Transport respectively.
The economic backdrop to Budget 2018
- Despite the slight upgrade in the OBR growth forecasts, GDP per capita is set to grow by 4.9 per cent between 2018 and 2023, compared with an IMF forecast of 5.5 per cent across the rest of the G7.
- Real average earnings are not set to return to their pre-crisis peak until the end of 2024 – representing an unprecedented 17-year pay downturn.
Torsten Bell, Director of the Resolution Foundation, said:
“The Chancellor was able to navigate the near impossible task in his Budget of easing austerity, seeing debt fall and avoiding big tax rises, thanks to a £74bn fiscal windfall. He chose to spend the vast majority of this on the NHS, income tax cuts and a welcome boost to Universal Credit.
“But while yesterday’s Budget represented a seismic shift in the government’s approach to the public finances, it spelt an easing rather than an end to austerity – particularly for low and middle income families.
“The Chancellor made a very welcome £1.7bn commitment to Universal Credit, but has left intact three quarters of the benefit cuts announced following the 2015 general election. Meanwhile income tax cuts announced yesterday will overwhelmingly benefit richer households, with almost half of the long term gains going to the top ten per cent of households. On public services the NHS saw a big spending boost – but unprotected departments still have further cuts pencilled in.
“This Budget was much easier for Philip Hammond than many expected. But there will be tougher choices for Chancellors in the years ahead. Brexit must be delivered smoothly, public spending will remain tight, and forecasts may not always be so rosy.
“Looking further ahead, living standards growth is set to be sluggish and the tax rises to meet pressures in the 2020s from our ageing society will still be needed – as and when there’s a government with the majority to deliver them. Austerity has been eased, but there are still tough times ahead.”