Summary
The aims of our Report
In this Report, we examine the impact of the abolition
of the 10 pence rate of income tax, considering separately the
effects of initial implementation and the effects in the light
of the changes to personal allowances announced on 13 May 2008.
We consider future policy options relating to the personal tax
system and the wider tax and benefits system of which it forms
a part.
Low-income households and the abolition of the
starting rate
We have received and summarised very detailed information
on the size and composition of the group of people who stood to
lose from the removal of the starting rate of income tax as initially
implemented. The losers from the measures as initially implemented
were people whose taxable income was small, and for whom the loss
might be significant when required to manage a personal or household
budget at a time of sharply rising prices for many essential goods
and services.
Options for 2008-09 and the changes announced
on 13 May 2008
The problem arising from the removal of the starting
rate of income tax was based within the tax system, and required
a tax solution. For the current tax year, in the circumstances
which the Chancellor of the Exchequer faced, the option chosen
on 13 May of increasing personal allowances, but confining the
benefits to basic rate taxpayers, was probably the least bad option,
with the benefits of simplicity, transparency and greater incentives
to work on the basis that fewer taxpayers face high marginal deduction
rates. However, £2 billion of the £2.7 billion committed
to that measure in the current financial year is not devoted to
compensating losers from the removal of the starting rate of income
tax, and as such was not substantially well-targeted.
The broader context
If the Government wishes to meet its fiscal rules,
it will have to take them fully into account when proposing further
changes to the personal taxation and welfare systems. The case
for action to meet the Government's target to halve child poverty
by 2010-11 is more pressing than ever given the further rise in
child poverty by 100,000 children in 2006-07 to 2.9 million before
housing costs. Pensioner poverty rose significantly in 2006-07,
by 300,000 to 2.6 million before housing costs, reversing the
welcome downward trend since 1997, and progress on fuel poverty
is threatened by rising fuel prices. The advances made in tackling
poverty among those out of work in the last decade has not been
matched by comparable progress in tackling poverty among those
in work.
Getting the process right
The Government must learn lessons relating to budgetary
processes. We recommend that the Government publish a Household
Impact Assessment alongside future Budgets and Pre-Budget Reports.
This would analyse the impact on individual, family and household
finances of Budget measures and other changes to the welfare system.
We welcome the emphasis by the Government on the 2008 Pre-Budget
Report, but the Government should not simply respond to a short-term
political problem by turning the 2008 Pre-Budget Report into an
early Budget. Instead, the Government must re-establish the consultative
nature of the Pre-Budget Report. For personal tax decisions, the
sudden and final nature of Budget decisions has been less about
the need to prevent forestalling activity than it has been about
the perceived benefit of seeming to pull rabbits from the hat.
Recent experiences suggest that such short-term benefits are outweighed
by the longer term benefits resulting from proper consultation.
The way forward
No reforms other than those to the tax system are
likely to be effective if viewed principally as mechanisms for
compensating the remaining 1.1 million households who lose from
the removal of the starting rate of income tax even after the
13 May changes. There is a pressing need for the Government to
seriously examine ways in which these remaining households can
be compensated. For future years, the Government must ensure that
the original 5.3 million losing households do not suffer losses
from the abolition of the starting rate. The Government should
set out proposals to achieve this by the time of the 2008 Pre-Budget
Report. The announcement on the 13 May of the raising of personal
allowances was a welcome step towards a simpler tax system with
fewer low paid people paying income tax; further complications
should now be resisted. Although the fiscal circumstances remain
challenging, every effort should be made to avoid returning low-paid
people into the income tax system.
In the longer-term, reforms should be centred on
the greater challenges faced by the Government in combating poverty.
We recommend the establishment of a Poverty Commission on a similar
basis to the Pensions Commission to examine the public policy
challenges relating to poverty.
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