5 Distributional analysis |
75. The Budget contained, for the first time,
a section giving a distributional analysis of the measures it
contained. In our report on the June 2010 Budget we recommended
that this work be taken further in the Spending Review:
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. 
76. We are pleased that Treasury has responded
to our recommendation and included an Annex within the Spending
Review which models some of the distributional impacts of future
changes to tax, welfare and public spending information on different
households. Carl Emmerson, Acting Director, IFS, agreed that the
analysis was a "welcome development".The
Chancellor revealed to us that this type of analysis had previously
been done by the Treasury but that it had never previously been
77. The distributional analysis produced by the
Treasury included changes already announced and modelled at the
time of the Budget combined with some of the further changes announced
in the Spending Review. Mike Brewer, Programme Director, IFS,
had no criticism of the accuracy of the modelling done at the
Budget. He considered that the analysis done could have been more
extensive if more of the welfare reforms had been included and
that the results had been presented over a longer time period.
78. The IFS produced their own distributional
analysis of the Spending Review. This included more of the changes
to welfare spending than the Treasury had done and looked further
ahead into the future. However, unlike the Treasury analysis,
it did not include any of the impact of cuts in departmental spending.
As Mr Emmerson explained:
One question that we think we are answering very
well is, "To what extent are tax changes and benefit changes
affecting individuals' incomes, and how does that vary by family
type and across the income distribution?" Another question
that is also extremely interesting and important is, "What
about the whole fiscal consolidation package once you include
all the public service cuts?" We have not included any of
that. The Treasury has made a stab at it. Doing it is very, very
difficult, and it is important to bear in mind that even on its
own figures it is including 55%I make itof the consolidation
package of the tax rises, the benefit cuts and the public service
cuts. So no one can claim that they have looked at the whole fiscal
79. While the Treasury had modelled some of the
departmental cuts which the IFS had omitted, the IFS had produced
a more comprehensive model of welfare changes than the Treasury.
Mr Brewer said:
The analysis produced by the Treasury covered about
40% of the welfare cuts in 2012, and the cuts in 2012 are about
40% or 50% of the cuts in 2014. Overall, the analysis printed
by the Treasury covers about 20% of the cuts due in 2014; we got
to about 90% of the cuts in 2014. So, no, we did not cover every
single welfare changeyou have mentioned the very small
increase in discretionary housing paymentsbut our coverage
is a lot greater than that of the Treasury.
80. The IFS also raised questions about the inconsistencies
between some of the charts in the Spending Review document. In
written evidence they pointed out that Chart B.6 (which considers
the impact in 2014-15) includes additional changes to ESA (Employment
and Support Allowance) and DLA (Disability Living Allowance) yet
omits the changes to LHA (Local Housing Allowance). They also
drew attention to the differences between Charts B.4 and B.5,
that show changes as a percentage of net income, and Chart B.6
that shows the impact of changes as a percentage of net income
plus benefits in kind. The IFS told us that "we are also
unclear why HMT did not additionally publish the distributional
impact of the tax and benefit changes due by 2014-15 in the same
form as the analysis in Charts B.4 and B.5".
81. The Chief Secretary robustly defended the
distributional analysis included with the Spending Review document.
He explained that a "number of tax and benefit changes are
difficult or impossible to include, because of data limitations"
The distribution analysis that we have done, which
is shown at the end of the document in chart B6, includes for
the year 2014-15 departmental expenditure, welfare changes and
tax changes. It takes them all together and offers the fullest
possible analysis that we could develop, in the context of the
spending review, of the distributional effect of the decisions
that we have made.
82. The Chancellor agreed that the analysis had
been done in the best way possible and he welcomed input from
the Committee on the methodology:
Speaking for the officials in that part of the Treasury,
I think they would welcome input on that work. As I say, I think
we want to come to an agreed form of methodology, which may be
this Committee, or with the help of the Public Accounts Committee
as well, that we're going to use for future Budgets under whoever
is the Chancellor.
83. We welcome the Treasury's
response to our request greatly to increase its distributional
analysis, showing the effect of measures in the Spending Review
on different households. We recommend the Treasury continues to
extend and improve the analysis it provides and takes account
of our recommendations in our report on the June Budget. We recommend
that the Treasury examine the IFS's proposal that more of the
welfare changes can be modelled and included in its analyses.
We also recommend that the Treasury publish not just the sources
but additional information on the calculations underpinning their
distributional analysis to provide further transparency and encourage
debate on how the methodology of such analysis might be improved.
Fairness and progressivity
84. A great deal of debate around the Spending
Review has been over whether the measures were 'progressive' and
'fair'. The two are not synonymous but they have sometimes appeared
so. While 'fair' is a word in common use, in this debate 'progressive'
has had a specific meaning. The IFS told us:
The definition [of "progressive"] that
we're using, in a very technical sense, is "How are the gains
or losses from a measure changing as an individual's income rises?"
So, as you move up the income distribution, do you see the gains
or losses increase or decrease? It is a very technical, narrow
definition, and it is our understanding that that was the definition
that the Chancellor had in mind when he used the term in his June
85. The day after the Spending Review was published
the IFS gave a briefing in response to it. At the briefing Mr
Emmerson stated that:
The Treasury yesterday published an attempt to model
the distributional impact of some of the cuts to public services.
This is far from straightforward and it is laudable that the Treasury
has attempted this exercise [...] the Treasury's analysis shows
both the welfare cuts and public service cuts announced yesterday
being regressive. But large tax rises for the very rich announced
by Labour lead, on the Treasury's estimates, to the overall fiscal
consolidation hitting the highest income individuals the most.
86. We questioned Mr Emmerson about how the fiscal
consolidation could have been achieved without being regressive.
He explained that given that the "Government and its predecessor
has chosen to do more on the spending side and less on the tax
side. That clearly makes it harder to do it in a progressive way".
He agreed that the Chancellor was "in some ways trying to
be as progressive as possible by taking child benefit away from
higher rate taxpayers and by cutting the higher education teaching
budget very deeply".
Mr Brewer agreed that "given his [the Chancellor's] choices
about the split between tax rises and spending cuts, it is hard
to imagine how he could have done this without it being regressive".
87. The Chancellor stated that the Budget was
a "progressive Budget."
In contrast we noted that he did not refer to the Spending Review
as progressive. However the principle of "fairness"
was mentioned as one of the guiding principles of the Review.
The IFS were clear that they were not making a judgement about
the fairness of the Spending Review. Mr Emmerson stated that "fairness
and progressivity are not the same thing" and in regard to
previous IFS comments he reminded us that they had "tried
to be very clear that we were not saying the spending review was
fair, or indeed that it was unfair".
88. We had a discussion with Mr Emmerson and
Mr Brewer about 'fairness' and 'progressivity'. Mr Emmerson explained
that in some cases fairness and progressivity may not be aligned:
You can take measures that are progressive that may
well be seen as unfair. They could redistribute from what you
might deem to be the undeserving poor to the deserving people
in the middle of the income distribution, in which case you could
say that it is fair and right, but it wouldn't be progressive.
You could carry out a reform that taxed high-income people to
a really high degree and to such an extent that they worked less
and the economy was smaller. That would be progressive, but you
might not think it was right, because everyone else would have
to pay more tax to pay for public services.
89. The Chief Secretary highlighted the changes
to housing benefit as an example of applying the principle of
There is a need to reform the housing benefit system
to ensure that we are not paying, to people who are out of work,
housing benefit at a level that ordinary working people in work
could not afford. That is a basic principle of fairness, actually.
90. Given the choices made by
the Government to employ more spending cuts than tax rises in
the consolidation, the evidence suggests that it would have been
very hard for the overall consolidation to have been progressive.
Fairness and progressivity are two different concepts. Decisions
that are technically regressive are not necessarily unfair. Whether
or not the consolidation is fair is, and will remain, the subject
of political debate.
91. In written evidence, the Government told
Publishing analyses of tax, tax credit and benefit
changes far into the future may not be representative of the impact
of Government policy. This is because the Government will take
a view on tax and welfare policy based on the emerging fiscal
position in future fiscal events.
Debate about the distributional analysis should take
into account the extent to which government policy is likely to
evolve. The distributional analysis done at the time of the Spending
Review is a snap shot. It should not be seen as immovable but
as a forecast which should be adapted as more detail on tax and
spending is revealed. On 11 November 2010 The Secretary of State
for Work and Pensions announced the publication of a White Paper
on welfare reform in a statement to the House.
The White Paper proposes combining many out-of-work benefits and
in-work support payments into a single "Universal Credit".
The first individuals will receive it in 2013, and full implementation
is expected by October 2017. Such a significant change to the
welfare system will inevitably affect the distributional analysis
for 2013 onwards. We
are confident that the Treasury will update their analysis to
take effect of major policy changes. However, given that the Universal
Credit is to be introduced gradually, as other major changes may
be, care will have to be taken to show both the effect of the
long term reforms, and of transitional measures.
92. We were keen to understand more about the
process for deciding and the implications of removing child benefit
from higher rate tax payer households. The Chancellor confirmed
to us that the decision had not been discussed with the Cabinet
prior to its announcement at the Conservative Party conference
on 4 October 2010. He explained that this was partly due to the
fact that it was technically a tax measure, and therefore did
not need to go to Cabinet, and partly because Cabinet discussion
in a coalition was impractical during conference season. He did
state however that there had been consultation and planning as
"the people with the direct responsibility and the Deputy
Prime Minister were involved for many weeks beforehand. This was
not sprung on them."
The Chief Secretary reiterated that there had been discussions
and said that officials in HMRC had been consulted a "significant
number of weeks"
before the child benefit announcement.
93. We asked Indra Morris, Director, Personal
Tax and Welfare Reform, HM Treasury, why the Chancellor had initially
announced the changes to child benefit would save £1 billion
yet in the Spending Review the saving was in fact £2.5 billion.
She explained that
The difference is essentially that, as officials,
we were being overly cautious ahead of the OBR certifying the
costings and, therefore, that was fed into our advice to the Chancellor.
It is very much as simple as that.
Ms Morris explained that she considered the changes
chosen were "incredibly simple"
in comparison to the other option which had been considered which
would have involved complex means testing. She did however concede
that one of the reasons that the changes were not being introduced
until 2013 was due to the current change programme at HMRC and
the work being done on PAYE and tax avoidance.
94. Treasury officials and Ministers defended
their decision to withdraw child benefit by asking higher rate
tax payers to confirm whether or not child benefit was claimed
in their household, rather than by means testing, on the grounds
of administrative simplicity. The Chancellor told us:
What I've sought to do is introduce this in the simplest
possible wayto use the existing systems we have. We know
who higher rate taxpayers are. The alternative, if one wanted
to remove child benefit from higher rate taxpayers or tax it in
some way, would have been to create some means-tested system.
I just don't think that was sensible because what I've done preserves
the way child benefit is claimed by the vast majority of people
in this country. 
95. The Chancellor's decision to preserve the
way that child benefit is claimed is important because, as the
HMRC website points out, Child Benefit not only provides income
directly to mothers, but it gives those who stay at home to care
for children under 12 access to state pension credits:
If you have a child under 12and you're either
looking after them at home or you work but don't earn enough to
pay National Insurance contributions Child Benefit can
help you qualify for 'credits' for being a parent or a carer.
These credits count towards your State Pension.
Claiming child benefit builds up
entitlement to the state pension for parents of children under
12 who cannot pay National Insurance contributions. When the Government
implements its changes to child benefit, clear information will
be essential to ensure that parents are aware that if they simply
cease to claim Child Benefit it could affect their pension entitlement.
96. We have other concerns about how removing
child benefit from higher rate taxpaying household will work in
practice. We raised the practicalities of compelling couples to
discuss financial arrangements with each other. Ms Morris did
not think this would be a problem stating "all we are asking
for is a very reasonable conversation between a couple".
The Chief Secretary responded to our questions by saying:
There are many things that higher-rate taxpayers
are required to declare in the context of filling in their tax
return. We will be adding a further item to that list and, in
common with other areas of the tax system, there will be penalties
for failing to do so.
We [the Treasury] will set this out in legislation.
The requirement on the higher-rate taxpayer will be to declare
whether child benefit is being received in their household or
97. We consider there are some risks involved
in the new system. When we questioned Mr Brewer about the difference
between two couples that collectively earn the same amount but
only one of which has a higher rate tax payer and will therefore
lose their child benefit he agreed that there was an issue of
We [the IFS] have avoided using the word "fairness"
when talking about progressivity, but I am happy to use that word
here, when we are talking about two families who are apparently
very similar. It seems unfair that those two families should be
treated so differently.
He also pointed out another problem regarding incentives.
What also seems economically perverse is that families
who are just below the higher rate threshold, who get a pay rise,
will find themselves worse off. A £1 increase in one of those
families' incomes will lead to a loss of all their child benefit,
which could be £1,700. That is economically distorting and
perverse. The Treasury published a figure in the Budget that suggested
that it expected to lose £270 million a year in tax revenues
from people tax planning around this. That sounds like an inefficient
way to devise a means test.
98. The change to Child Benefit
is not being made until 2013. Government will want to carefully
consider the issues raised with us in evidence: perverse economic
incentives; perceived unfairness; and enforceability.
99. The Spending Review announced reforms to
housing benefit and social housing intended to reduce housing
benefit costs and increase incentives to build while significantly
decreasing public sector capital investment. These changes have
been controversial. Indeed, the Work and Pension Committee are
undertaking a major inquiry into the housing reforms announced
in the June Budget. We do not intend to replicate that inquiry
but wished to explore the effect of Spending Review changes on
public spending, and on the operation of the housing market.
100. As one of the Government's aims is to reduce
the housing benefit bill we were keen to understand the drivers
behind the increases in it in the past. The Chief Secretary considered
that one of the reasons that housing benefit had increased in
the past decade was that "rents would follow housing benefit
which would follow rent, and you would get a sort of ratchet effect".
David Orr, Chief Executive, National Housing Federation, agreed
that this was an issue but felt that the underlying reason that
housing benefit bill was so high is the "desperately overheated
housing markets characterised by an absence of supply right across
He attributed the increase in the housing benefit bill to
a lack of social housing:
Most of the recent increase in housing benefit costs
has been due to the number of people who might traditionally have
expected to live in social housing at rents of perhaps £80
a week, but who now live in privately rented accommodation at
rents of maybe two or three times as much, the cost of which is
still covered by housing benefit. Unless we find some way of addressing
that core issue, we will not resolve the problem.
David Montague, Chief Executive, L&Q, also felt
that increasing supply from "the housing association sector,
because we currently charge about 50% of the market rent"
would be an important way of reducing the housing benefit bill.
101. Mr Montague considered that the changes
to increase new social housing rents to an intermediate level
of 80% of the market rate would help his housing association (which
is based in London and the South East) to increase supply. He
did not think it would be effective in areas in the north where
rents were lower.
Mr Orr agreed that these changes would be less effective in other
areas of the country, where differentials between the social housing
and private sector rental market were lower or non-existent. Indeed
he said that in some areas charging 80% of the market rent would
require housing associations to reduce their rents.
Mr Orr agreed that more houses would be built but was concerned
that the provision "will be a net transfer away from social
housing to these intermediate [80% of market rent] offers".
Mr Orr was frustrated that the decision to cut capital investment
by 74% would mean less social rented housing to provide a good
offer for the working poor.
102. While increasing the income from housing
would help increase the housing supply, Mr Montague also said
that certainty over housing benefit was necessary to ensure there
would be investment in new housing. He explained that investor
"confidence sits on the security of our income
stream, and that security sits on housing benefit, so we really
do need certainty about the future of housing benefit".
David Orr said that "If we get nothing else in the next year,
a real commitment to flexibility would make a huge difference."
He claimed such flexibility would increase the effectiveness of
the sector. As an example, he said that was important to use the
existing stock as effectively as possible but that it would be
very hard to encourage current social housing tenants to move
to smaller more suitable properties if this meant that their rent
would increase significantly to the new 80% level.
103. Gillian Guy, Chief Executive, Citizens Advice,
considered that the higher rents that will be charged in future
mean "there is lower work incentive coming through this package"
as people would become more reliant on housing benefit to pay
their rent. She
was also concerned about the 10% cut in housing benefit for people
on Job Seekers Allowance for over a year.
104. We were interested in better understanding
the numbers of people affected by the proposed changes to housing
benefit. Lizzie Iron, Head of Welfare Policy, Citizens Advice,
considered that over 21,000 households (17,000 of which are in
London) would be affected by the cap in housing benefit and therefore
could potentially have to move.
Mr Orr said that as many as 1.3 million people could be affected
by all of the different housing benefit cuts announced and "as
many as 80,000 households could be displaced in London".
In a debate in Whitehall on 4 November 2010 the Parliamentary
Under-Secretary of State for Work and Pensions said:
What is important is that the Government have an
important role in the private rental sector. Some 40% of people
in that sector are in receipt of housing benefits, so we are part
of the market-making, and we must recognise that. We cannot stand
back and let the market control the sector, as the Opposition
did when they were in government. We must take action and, at
the same time, protect the sort of people in the constituency
of my hon. Friend the Member for Nuneaton (Mr Jones) who he mentioned.
That is why we have put in place £140 million transitional
relief to ensure that the support is there if it is needed. That
problem was anticipated by the previous Government and it was
in Labour's manifesto.
There was concern from some representatives of the
housing sectors that the reforms may adversely affect new and
105. The Government's housing
benefit reforms attempt to reshape the housing market. We shall
monitor their effectiveness both in terms of their effect on public
expenditure, and on the regional and national housing market,
and on the London market.
106. As a committee we wanted to understand more
about the regional impact of the Spending Review. The Joseph Rowntree
Foundation told us:
JRF is concerned about the geographical and regional
impact of the spending review. The Joseph Rowntree Foundation
and the Joseph Rowntree Housing Trust (a provider of housing and
care services) are both based in York and we have a ten year commitment
to working in partnership with the district and people of Bradford.
The JRHT runs operations in Hartlepool, Scarborough and Leeds
as well as York and its surrounding area. From this base, as well
as from our research evidence, we are very aware that the spending
review will have markedly different impacts on different towns,
cities and regions across the UKand may be particularly
damaging for Northern towns and cities, where the public sector
is a major employer as well as a major source of private sector,
voluntary sector and social enterprise contracts, and grant funding
for community and voluntary sector organisations. 
107. Given the variations in the extent to which
different regions relied on public sector employment, the regional
effects of headcount reductions caused particular concern. Mr
McCafferty said that there was a "worry that [...] the regional
match, in terms of where the jobs will disappear and where the
new jobs will be created, will be absolutely as one would hope".
This concern was also echoed by Mr Patel who spoke about a "regional
Dr Philpott said that he would recommend "more regionally
targeted support for small businesses [...] getting more credit
and help to them".
108. Mr McCafferty expressed some concerns over
the new Local Enterprise Partnerships (LEPs), which have replaced
Regional Development Agencies (RDAs):
The worry that we have had, and that John Cridland
[Deputy Director-General, CBI] has expressed, is whether these
new forms of regional economic management have sufficient scale
to be effective; whether they are sufficiently focused to allow
the business view to be heard and acted upon; and whether they
have sufficient resources to carry out their job.
Mr Patel also had some concerns "On the equity
side, we think that there is probably a lot more that the Government
can do [...] one thing that the RDAs did well was promote a lot
of these regional equity schemes".
109. We raised our concerns with the Chief Secretary
about the significant cut in funding that the LEPs will receive
in comparison to the RDAs. He agreed that "across the board
of Government spending, we are having to make spending reductions,
and regional spending cannot be immune from that".
However the Chief Secretary considered that the new LEPs would
help in "empowering businesses and local authorities to work
together at a local level"
and disagreed that requiring LEPs to bid to a centrally managed
fund would be a problem.
The Chancellor also considered that the RDAs were "not an
effective tool of policy" as "at the end of more than
a decade, the gap between the regions was growing".
We note the Business, Innovation and Skills Committee is conducting
an inquiry into LEPs.
110. The Chancellor said that "producing
a new model of growth that is not so dependent on debt, or so
concentrated in one part of the country, is a major challenge".
He pointed out "that for every 10 private sector jobs created
in the south-east of England over the last decade, only one was
created in the north". The Chancellor told us that:
I don't accept that any particular regions should
do worse out of the Government's economic policy. Our intention
is that all regions do well and, indeed, we have a bit more of
a rebalancing of this economy geographically in the way that I
was just describing." He noted that " there are some
very specific regional tools that we are using through, for example,
the distribution of the capital projects, where they are located,
and partly through, as I say, the Regional Growth Fund, the regionally
based tax reduction, which is, again, not something that has been
tried before. So there are a number of tools which also, I think,
111. In written evidence after the hearings,
the Treasury drew attention to these policies to support local
growth, citing the Regional Growth Fund, the NICs holiday and
infrastructure programmes. In addition, we were told the Local
Growth White Paper
- Sets out a new approach to
supporting growth in all places, including
- a framework of powerful incentives to ensure
that local authorities who deliver sustainable economic development
benefit from that growth, including considering options to enable
councils to retain locally-raised business rates
- launching the first round of bids to the £1.4bn
Regional Growth Fund
- reform of the planning system so that it promotes
rather than hinders growth, including a national presumption in
favour of sustainable development establishing 24 Local Enterprise
112. While the economy grew
in the last decade, some regions benefited more than others. We
agree with the Chancellor that it will be a "major challenge"
to ensure that all parts of the United Kingdom benefit from future
growth. The Government has announced some policies designed to
help achieve this. We will monitor their progress.
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