House of Commons - June 2010 Budget

June 2010 Budget - Treasury Contents

4 Welfare

Measures announced in the June 2010 Budget

57. The June 2010 Budget contained a significant number of policy measures on tax, tax credits and benefits. In his Budget statement the Chancellor of the Exchequer stressed that "the explosion in welfare costs" had "contributed to the growing structural budget deficit in the middle part of this decade" and that total welfare spending had increased from £132 billion ten years ago to £192 billion today". He said this represented "a real terms increase of a staggering 45 per cent". The Chancellor went on to explain that his overriding goal was "to put the whole welfare system on a more sustainable and affordable footing".[81] In his Budget Statement the Chancellor said that "taken together, all these measures to control the costs of welfare will save the country £11 billion by 2014-15".[82]

58. Key changes proposed by the Chancellor on welfare spending included changing the basis for up-rating benefits and tax credits from the retail price index (RPI) to the consumer price index (CPI) from 2011-12.[83] The Chancellor said that this would save over £6 billion a year by the end of the Parliament.[84] He also outlined plans to:

Abolish what he described as "the poorly-targeted" Health in Pregnancy Grant from April 2011;
Restrict the Sure Start maternity grant to the first child only;
Freeze the rates of child benefit for first and subsequent children for three years from April 2011;[85]
Introduce an objective medical assessment for Disability Living Allowance (DLA) for new and existing claimants;[86]
Change the benefit rules for lone parents whose youngest child is aged 5 or above who would now be eligible for Jobseekers Allowance rather than Income Support.[87]

59. Freezing child benefit will save £1.8 billion in 2012-13, with savings rising to almost £2 billion by 2014-15. In his Budget Statement, the Chancellor said freezing child benefit was "a tough decision", but said it struck "the right balance between keeping intact this popular universal benefit while ensuring that everyone, across the income scale, makes a contribution to helping our country reduce its debts". Changes to Disability Living Allowance will begin producing cost savings in 2013-14 of £360 million, rising to £1.1 billion in 2014-15. The Chancellor said changes to the allowance were necessary because "three times as many people claim it [DLA] today than when it was introduced eighteen years ago" and that costs had "quadrupled in real terms to over £11 billion, making it one of the largest items of government spending".[88]

Housing Benefit reform

60. The Chancellor also outlined his determination to reform Housing Benefit, where spending had "risen from £14 billion ten years ago to £21 billion today", which he said represented "close to a 50 per cent increase over and above inflation". The Chancellor described the situation as one where "costs are completely out of control" and emphasised that the system of housing benefit was "in dire need for reform".[89] Reform measures on Housing Benefit in the Budget included:

Setting Local Housing Allowance (LHA) rates at the 30^th percentile of local rents rather than the median as is presently the case;
Capping the maximum Local Housing Allowance Rates for each property size from April 2011;
Uprating LHA rates in line with the consumer price index from 2013-14;
Reducing Housing benefit awards, from April 2013, to 90% of the initial award after twelve months for claimants receiving Jobseekers Allowance.

The Chancellor stated that this package of measures would reduce "the costs of the benefit by £1.8 billion a year by the end of the Parliament, or 7 per cent of the total budget". He suggested that it would "also improve incentives to work".[90]

61. Our inquiry focussed on one particular Housing Benefit rule change—namely, the proposal to reduce Housing benefit awards, from April 2013, to 90% of the initial award after twelve months for claimants receiving Jobseekers Allowance. Citizens' Advice told us that this seemed "a crude measure as it appears that it will apply even where the tenant is fully complying with their JSA requirements to actively seek work". They felt that the cut would "fall hardest on those who face disadvantage in the labour market, such as people in poor health or with a disability who have failed the harsher medical tests for incapacity benefit and employment and support allowance, and have therefore been moved onto JSA".[91]

62. Edward Troup explained that the rationale behind the measure was "sharpening work incentives" and "creating greater incentives to get out and find a job".[92] When questioned as to whether the sanction would apply to those who had followed the JSA rules and had been looking for work, but unable to find a job, Mr Troup started talking about the cost of Housing Benefit rather than work incentives:

I think it goes to the wider question of what is the right package of support for those people who are out of work and how long should that support continue. It goes to the point that the cost of housing benefit has increased by 50% over the last 10 years and there is a need to impose some degree of control over it. I think it goes to the point that even at the end of these reforms, and we recognise that there are some quite difficult aspects of these reforms, we are still going to see in real terms housing benefit running at the same level that it was in 2008-09.[93]

63. Mr Troup went on to acknowledge that there were "people who try extremely hard to find work and I do accept that individually there are some difficult cases". However, he restated his belief that this measure would "improve work incentives" and "encourage people to get back to work". The Chancellor when quizzed about the 10% reduction in housing benefit to JSA claimants who have been receiving JSA for more than one year referred to the 50% rise in the housing benefit budget to £21 billion before going on to say that the proposals would also "encourage people into work".[94] The Treasury later provided us with more information on this measure, for which we are grateful.

64. The proposals to reduce Housing Benefit to JSA claimants after a year are designed both to sharpen work incentives and to cut the cost of Housing Benefit. These changes to JSA will require primary legislation. The information provided by the Treasury shows that up to 300,000 individuals may be affected by this measure. However, those scrutinising the legislation would be helped by fuller information, such as the extent to which the changes affect households with children, and a projection of the numbers expected to move into employment as a result of this measure, given the Treasury's assertion that some claimants may not be fully considering certain vacancies when looking for work.

Tax credits

65. The Chancellor considered that "tackling spiralling welfare costs" also meant "addressing the bill for tax credits". He highlighted the fact that spending on tax credits had increased from £18 billion in 2003 to £30 billion this year and pointed out that there were "over 150,000 families with incomes over £50,000 receiving tax credits". The Chancellor described this situation as "unsustainable".[95]

66. The Chancellor proposed:

Reducing the second income threshold for the family element of the child tax credit from £50,000 to £40,000 from April 2011, whilst from April 2012 withdrawing the family element of the child tax credit;
Raising the rate at which tax credits are reduced as income rises from 39% to 41% from 2011-12;
Removing the baby element from the child tax credit from April 2011 and removing the 50 plus element from the working tax credit from April 2012;
Reducing the level of in-year rises of income that will be disregarded from calculations of tax credit entitlement from £25,000 to £10,000 for two years from April 2011 with a further reduction to £5,000 from April 2012;
Reducing the period for which a tax credit claim and certain changes of circumstances can be backdated from three months to one month;
Reversing the supplement for each child aged one and two from April 2012, which was announced at the March 2010 Budget.

67. However, as well as making these changes, the Chancellor also announced that in April 2011, the child element of the child tax credit would increase by £150 above CPI indexation and in April 2012 would increase by £60 above indexation.[96] This represents a substantial rise in the payments made to qualifying households and will cost the Government approximately £1.8 billion in 2012-13, rising to almost £2 billion by 2014-15.[97]

A progressive Budget?

68. There has been considerable public debate over whether the Budget is 'progressive' or 'regressive'. The Government has argued that it has acted in a progressive way. In his conclusion to the Budget Statement, the Chancellor declared that his priority:

in putting together this Budget has been to make sure that the measures are fair. That all sections of society contribute, but that the richest pay more than the poorest. Not just in terms of cash, but as a proportion of income as well. That is far from straightforward when the deficit is this high and when the burden of reduction must rightly fall on government spending. Too often when countries undertake major consolidations of this kind, it is the poorest—those who had least to do with the cause of the economic misfortunes—who are hit hardest.[98]

69. As well as the benefit changes detailed above, the Chancellor also announced a number of changes to the tax system, including:

Increasing the personal allowance for under 65s by £1,000 to £7,475 in 2011-12, with a corresponding decrease in the levels at which the 40% higher rate of tax and the two per cent rate of NICs are paid, to ensure that the majority of higher rate taxpayers will pay the same total level of tax and National Insurance Contributions as previously planned.[99] This was estimated to cost £3.5 billion in 2011-12, rising to £3.9 billion in 2014-15;[100]
An increase in VAT from 17.5% to 20% from January 2011. This was estimated to raise £12.1 billion in 2011-12, rising to £13.5 billion by 2014-15.[101]

70. The Chancellor has argued that the Government's policies taken as a whole mean "that all sections of society contribute, but that the richest pay more than the poorest". This analysis is presented in charts A1 and A2 which were produced by the Treasury as part of the June 2010 Budget and which, as the Chancellor emphasised to us was "the first time any Chancellor has ever published a table like this".[102] These tables—which are a snapshot for the year 2012-13—demonstrate that the impact of all Budget measures (which includes measures announced in the previous Government's March 2010 Budget and which the present Government intends to take forward as well as the policy proposals contained in the June 2010 Budget) result in the lowest income decile paying less than the top income decile, both in cash terms and as a percentage of net income.

Chart A1 here

71. Although the Chancellor is right to claim that the Budget measures impacted more on those with the highest incomes than those on the lowest incomes, Chart A2 of the Red Book shows that as a percentage of income the poorest are worse affected than those in the middle of the income distribution. The Chancellor did not refute this claim, but responded by telling us that there was "inevitably a focus of public expenditure, like welfare spending towards lower deciles" which meant lower-income groups would be affected during a period of fiscal consolidation. He went on to say that the Government had attempted to "mitigate the impact of that by increasing, for example, the child tax credit".[103] The Chancellor also made reference to his decision to increase the personal tax allowance by £1,000. He explained this would not benefit the lowest income decile because "these tend to be people who are not paying direct taxes", but "that deciles two, three, four, five and so on would benefit from the income tax changes".[104]

Chart A2 here

72. The Chancellor went on to argue that the bottom income decile included "groups of people such as students who have irregular income patterns", telling us that this meant "the figures for the bottom 10% are somewhat distorted".[105] When questioned as to whether he was suggesting the figures were "dodgy" or "unreliable", he replied:

No, I am just saying that in any income distribution in the bottom 10% there are always going to be categories of people who have low incomes but, for example, relatively high expenditure. That is why among the tables we produced we also produced the impact of the changes in indirect taxes on incomes as assessed by expenditure.[106]

(The table to which the Chancellor referred is shown below in Chart A4). In subsequent analysis the Treasury told us "In the bottom decile 43 per cent of households contain an adult that is self-employed, unemployed or a student. While some of these households may have permanently low incomes many may not." We note that the Treasury makes no attempt to disaggregate these three categories.

73. The Chancellor expanded on his statement later in the session, stating that if "you break the population up by expenditure distribution you can see that the impact of indirect taxes is very clearly progressive and the lowest decile pay the lowest".[107]

Chart A4 here

POLICY MEASURES NOT INCLUDED WITHIN TREASURY ANALYSIS

74. Charts A1 and A2 in the Red Book do not tell the whole story abound the income distribution consequences of the Budget measures. Robert Chote told us that:

the Treasury does not take account, and neither would we in an analysis because it is very difficult to allocate them to specific households, of the impact of things like cuts to housing benefit, disability living allowance and the in-year changes to tax credits, all of which, you might assume, would hit the poorer half of households harder than the rich. On the other hand, the Treasury analysis does not include capital gains tax changes, which you would expect to hit the rich harder than the poor, but those are relatively small.[108]

This point was reiterated in briefing received from the Trades Union Congress (TUC) who said the model only included two-thirds of the benefits and tax credit changes proposed in the Budget. They listed some of the changes which were not included:

Housing Benefit changes;
Disability Living Allowance changes;
increased lone parent conditionality;
the abolition of the Health in Pregnancy Grant and the Sure Start Maternity Grant;
the reduction in the tax credit income disregard.[109]

75. The Chancellor acknowledged the charts excluded a number of measures, but argued that excluded items also included measures "that affect people right at the top of the income distribution". The Chancellor went on to refer to the difficulties in modelling the impact on income of certain policy changes, justifying his approach on the grounds that it was "almost identical to the approach of the Institute of Fiscal Studies".[110] When pressed, the Chancellor agreed to a commitment to consider again whether it was possible to assess the impact of certain benefit changes, but stopped short of a full commitment on the grounds that he did "not want to commit to something which it may not be possible to do".[111] In a subsequent note, the Treasury provided a fuller account of the difficulties, many of which appear to stem from lack of data as well as methodological difficulties.

Disaggregating the March 2010 and June 2010 Budgets

76. Mr Chote concurred that judged by the Chancellor's yardstick the Budget was indeed progressive. However, he added a number of caveats to this statement, telling us that the Budget looked progressive when assessing whether the lowest income decile paid less than the highest income decile largely because of the reforms that had been announced by the previous Government in its March 2010 Budget rather than the specific measures announced in the June 2010 Budget.[112] When the Chancellor appeared before us, we asked him why he had not separated out the impact of the June 2010 Budget measures from the Budget measures announced by the previous Government. The Chancellor retorted that:

I have included things that I am going to ask the House of Commons to vote on, so I have not unreasonably made the assumption that as Chancellor the things I am going to ask the House of Commons to legislate on are the things that I am responsible for and if you take those as a collective package it is progressive across the income distribution.[113]

TREASURY ANALYSIS BEYOND 2012-13?

77. The Red Book provides a snapshot income distribution analysis for the year 2012-13. Robert Chote explained to us that the focus on 2012-13 made the Budget measures look more progressive because there were:

further changes, for example, on benefits that go beyond 2012-13 and you would expect those to hit poorer households proportionately more.[114]

The Chancellor was asked to justify why he had chosen 2012-13, rather than producing similar charts taking us through the whole of the forecast period. He replied that he would be delivering subsequent Budgets in 2011 and 2012 and that as a result "it would not be an accurate table going forward because it would not include potential subsequent announcements in subsequent Budgets."[115]

78. Mr Chote concluded that based upon the three factors he had outlined—taking out the measures inherited from the previous Government, looking further into the future than 2012-13 and including some of the other measures which the Treasury had chosen not to model in their analysis of tax and welfare changes on households—the June 2010 Budget was "regressive".[116]

79. There is also uncertainty about the extent to which the Comprehensive Spending Review will affect different groups. In his evidence to us the Chancellor told us that he "held open the door to finding further welfare savings as part of the spending review";[117] it is possible that there may be further changes announced this autumn.

80. We share the Chancellor's desire to make sure that the measures are fair, both in absolute terms, and as a proportion of income. Taken together the effects of the measures in the March and June Budgets ensure that the least well off are less affected than richest. We are concerned that, as shown in Chart A2 of the Red Book, the poorest fare slightly less well than middle income groups, as a result of the impact of all measures and when considered as a percentage of net income. We acknowledge though that the June Budget is only the first part of a wider range of measures and there may be changes as a result of the current review of poverty, the Comprehensive Spending Review and future Budgets.

81. Despite the limitations in the data they contain, the charts in Annex A of the Red Book, which show the distributional effects of the Budget measures, are an extremely welcome innovation. We applaud the Chancellor for introducing them. We hope that in future years such charts will use a greater range of data, and provide a fuller picture of Budget effects, including the national and regional effects. We note that the Treasury has cited data problems as a reason for its inability to give a more complete analysis. We recommend that Government's data collection is improved to enable these sorts of analyses to be provided in future.[118]

82. It is likely that the Comprehensive Spending Review will also have different effects on different income groups. We recommend that the Treasury builds on the approach taken in the Budget to give information about the impact of CSR changes on different households. We would like the analysis for both the CSR and future Budgets to take two forms: a narrowly drawn set of figures based on those measures most easily modelled and a wider analysis, using more assumptions, which would allow a fuller set of measures to be included.

VAT rise

83. Our inquiry also touched upon some of the individual tax and benefit measures announced in the June 2010 Budget. The Government has said that VAT will increase from 17.5% to 20% on 4 January 2011.[119] We asked our expert witnesses whether the VAT increase was a 'progressive' or a 'regressive' measure. Robert Chote told us that the key issue when assessing this question was whether you looked at the impact of a VAT rise on people "according to their living standards in a particular snapshot as measured by income or over a lifetime period". He explained that VAT looked particularly regressive when compared against income because "the poorest decile spend a relatively high amount relative to their income, you hit high spenders hardest and, therefore, not surprisingly that shows it to be regressive". Mr Chote explained that the alternative expenditure-based approach, dividing people up by the amount they spend, could be "a better indicator, a better proxy for their lifetime living standards". He gave examples of individuals to whom this applied such as people on relatively low incomes consuming past savings or people in self-employment whose incomes were volatile and "who may be at one end of the income distribution one year if you are doing the snapshot and a different point at the other".[120]

84. Mr Chote stated that:

On balance, the consensus would be that total expenditure is probably a better guide to people's lifetime living standards and so that would give you a less regressive or a progressive pattern overall.[121]

However, Mr Chote was at pains to stress that the two alternative measurements he had outlined were "alternative views" and that there was "no right answer to this".

81 HC Deb, 22 June 2010, col 172 Back

82 HC Deb, 22 June 2010, col 174 Back

83 HM Treasury, Budget 2010, June 2010, p 47, para 2.32 Back

84 HC Deb, 22 June 2010, col 172 Back

85 HC Deb, 22 June 2010, col 173 Back

86 HC Deb, 22 June 2010, col 173 Back

87 HM Treasury, Budget 2010, June 2010, p 49, para 2.59 Back

88 HC Deb, 22 June 2010, col 173; Budget 2010, June 2010, p 40-41, table 2.1 Back

89 HC Deb, 22 June 2010, col174 Back

90 HC Deb, 22 June 2010, col 174; Budget 2010, June 2010, p 48, para 2.50-2.57 Back

91 Citizens Advice Bureau, Briefing: The Coalition Budget 2010: Key welfare changes and their impact on low income households, July 2010 Back

92 Q 184 Back