Spending Review 2010 - Treasury Contents


Supplementary written evidence submitted by the Institute for Fiscal Studies

NOTE ON THE SCOPE OF THE HM TREASURY'S AND INSTITUTE FOR FISCAL STUDIES' DISTRIBUTIONAL ANALYSIS OF CHANGES TO WELFARE BENEFITS IN THE JUNE 2010 BUDGET AND OCTOBER 2010 SPENDING REVIEW

  1.  This note assesses the scope of the HM Treasury's and Institute for Fiscal Studies' distributional analysis of changes to welfare benefits announced in the June 2010 Budget and October 2010 Spending Review. It does not consider the coverage of the distributional analysis of the personal and indirect tax changes announced in the June 2010 Budget. It also does not consider the coverage of the distributional analysis of the public spending cuts announced in the Spending Review. It is therefore concerned with the HMT analysis published in Chart B.4 and Chart B.5 of the October 2010 Spending Review document, and the earlier analysis in Chart A.1 and A.2 in the June 2010 Budget, and the IFS analysis contained in James Browne's presentation after the October 2010 Spending Review (http://www.ifs.org.uk/publications/5313), and of the earlier analysis in IFS Briefing Note 108 (http://www.ifs.org.uk/publications/5246). We discuss at the end the limited assessment of changes by 2014-15 provided by Chart B.6 of the October 2010 Spending Review document.

  2.  The tables below show the Treasury's costings of the welfare changes announced in the June 2010 Budget and October 2010 Spending Review. Additional columns indicate which measures were included in the HM Treasury's (HMT) (Tables 1-2) and Institute for Fiscal Studies' (IFS) (Tables 3-4) distributional analysis.

  3.  Table 1 shows that the net saving from the welfare changes announced in the June 2010 Budget in 2012-13 is £4,710 million. The package of changes included in the HMT distributional analysis for 2012-13 (in Chart B.4 and Chart B.5 of the October 2010 Spending Review document ) would produce a saving of £2,000 million in that year.[9] The net saving produced by the package of changes included in the HMT distributional analysis is, therefore, 42% of the net saving in 2012-13. If we consider the absolute size of the welfare changes, then the package modelled by HMT reflects 72% of the changes in 2012-13. Table 2 repeats this analysis for the HMT distributional analysis of the October 2010 Spending Review. The package of changes included in the HMT distributional analysis (in Chart B.4 and Chart B.5 of the October 2010 Spending Review document) would produce a saving of £1,410 million out of actual savings of £2,555 million in 2012-13. The net saving produced by the package of changes included in the HMT distributional analysis is, therefore, 55% of the net saving in 2012-13. If we consider the absolute size of the welfare changes, then the package modelled by HMT reflects 65% of the changes in 2012-13.[10] Together, the net saving produced by the package of changes in the June 2010 Budget and Spending Review included in the HMT distributional analysis for 2012-13 is 47% of the actual net saving estimated for 2012-13, and captures 70% of the measures if measured by their absolute size.

  4.  The incomplete coverage in 2012-13 arise because the HMT analysis excludes some of the welfare changes (which is fully documented in the supporting material to the June 2010 Budget and October 2010 Spending Review). Paragraphs B.34 of the Spending Review explains that HMT includes measures within its distributional analysis "where there is sufficiently robust data available to attribute changes in tax, tax credits or benefits to individuals". However, it should be noted that IFS researchers felt able to include some of these omitted measures in their distributional analysis, principally the changes to LHA, DLA and ESA; details of the first two of which are explained in IFS Briefing Note 108 (http://www.ifs.org.uk/publications/5246).

  5.  The Tables also make clear that the net savings from the welfare changes are considerably higher in 2014-15 than in 2012-13, with the savings from the June 2010 Budget measures reaching £11,040 million by 2014-15, and those from the October 2010 Spending Review reaching £7,040 million in 2014-15. Net savings from the June 2010 Budget changes in 2012-13 are 42% of the savings due by 2014-15, and net savings from the October 2010 Spending Review changes in 2012-13 are 36% of the savings due by 2014-15. This is because many of the welfare cuts (such as the switch to the use of the CPI to index benefits, some of the LHA reforms, and the removal of child benefit from families with a higher-rate taxpayer, which is only partially effective in 2012-13) increase in magnitude over the Spending Review period. Unsurprisingly, then, the HMT distributional analysis is not a good guide to the extent to which households will lose from the welfare changes by the end of the Parliament. Table 1 shows that the net saving produced by the package of changes included in the HMT distributional analysis is 18% of the total net saving by 2014-15, and the package modelled by HMT reflects 42% of the changes due by 2014-15. Similarly Table 2 shows that the net saving produced by the package of October 2010 Spending Review changes included in the HMT distributional analysis in Chart B.4 and Chart B.5 of the of October 2010 Spending Review is 20% of the total net saving by 2014-15, and reflects 29% of the absolute size of the welfare changes due in 2014-15.[11] Together, the net saving produced by the package of changes in the June 2010 Budget and Spending Review included in the HMT distributional analysis for 2012-13 is 19% of the actual net saving estimated for 2014-15, and captures 47% of the measures if measured by their absolute size. However, paragraphs B.31 and B.32 of the Spending Review make it clear that HMT was not attempting to model the long-run impact of the tax and benefit measures announced in the Budget and the Spending Review in the analysis presented in Charts B.4 and B.5.

  6.  Tables 3 and 4 repeat this for the IFS distributional analysis of the Budget and Spending Review. The net saving produced by the package of changes in the June 2010 Budget included in the IFS distributional analysis for 2012-13 is 84% of the actual net saving estimated for 2012-13, and the IFS distributional analysis captures 91% of the measures if measured by their absolute size. The net saving produced by the package of changes in the June 2010 Budget included in the IFS distributional analysis for 2014-15 is 91% of the actual net saving estimated for 2014-15, and the IFS distributional analysis captures 94% of the measures if measured by their absolute size. The net saving produced by the package of changes in the October 2010 Spending Review included in the IFS distributional analysis for 2012-13 is 100% of the actual net saving estimated for 2012-13, and the IFS distributional analysis captures 97% of the measures if measured by their absolute size. The net saving produced by the package of changes in the Spending Review included in the IFS distributional analysis for 2014-15 is 95% of the actual net saving estimated for 2014-15, and the IFS distributional analysis captures 94% of the measures if measured by their absolute size.

  7.  Together, the net saving produced by the package of changes in the June 2010 Budget and Spending Review included in the IFS distributional analysis for 2012-13 is 90% of the actual net saving estimated for 2012-13, and captures 93% of the measures if measured by their absolute size. Together, the net saving produced by the package of changes in the June 2010 Budget and Spending Review included in the IFS distributional analysis for 2014-15 is 92% of the actual net saving estimated for 2012-13, and captures 94% of the measures if measured by their absolute size.

  8.  Chart B.6 of the October 2010 Spending Review presents an analysis of the impact of change to departmental expenditure and changes to taxes, tax credits and benefits due in 2014-15. Compared with Charts B.4 and B.5, the Treasury additionally included an assessment of the impact of the changes to DLA and ESA in Chart B.6 (as well as adding their assessment of the changes to departmental expenditure, which we do not discuss here). However, it is not clear why even this assessment of the impacts in 2014-15 omits the changes to LHA. 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.[12]

November 2010

Table 1

HMT DISTRIBUTIONAL ANALYSIS OF JUNE 2010 BUDGET



Net saving
Absolute change
Modelled by HMT?
Size of net cut modelled
Absolute size of change modelled
20122014 20122014
CPI indexation2,2405,840 2,2405,840Yes 2,2402,240
DLA01,075 01,075Yes 00
Conditionality for lone parents50 18050180 00
Pregancy150150 150150 00
SSMG7575 7575Yes 00
SMI-1065 1065 00
Saving Gateway75115 75115 00
Set LHA at 30th centile365 425365415 00
NDDs225340 225320 00
Underoccupation of social housing0 4900490 00
Link LHA to CPI0390 0300 00
Cut HB for long-term unemployed0 1100100 00
Extra bedroom for carers-15 -151515 00
National caps and 4-bedroom limit65 656570 00
Discretionary payments-40 -404040 00
Lower 2nd threshold in CTC145 145145145 Yes145145
Increase taper in TCs710 765710765 Yes710710
Scrap family element of CTC510 480510480 Yes510510
Scrap baby element of CTC275 275275275 Yes275275
Scrap 50+ element of WTC35 403540 Yes00
Scrap toddler tax credit180 180180180 Yes00
Lower £25,000 disregard to £5,000 140420140 420Yes0 0
New disregard of £2,500 when incomes fall 550585550 585Yes0 0
New backdating rules315 330315330 Yes00
Higher per child element of CTC-1,845 -1,9951,8451,995 Yes-1,8451,845
Freeze CB695975 695975Yes 695695
Earnings-index BSP-195 -450195450 Yes-195195
Increase PC-535-535 535535Yes -535535
Scrap Child Trust Fund550 560550560 00
Total4,710 11,0409,990 16,9852,000 7,150
HMT modelled as % change in 2012-13 42%72%
HMT modelled as % change in 2014-15 18%42%

Table 2

HMT DISTRIBUTIONAL ANALYSIS OF OCTOBER 2010 SPENDING REVIEW



Net saving
Absolute change
Modelled by HMT?
Size of net cut modelled
Absolute size of change modelled
20122014 20122014
Time-limit contributory ESA1,025 1,0252,0102,010
SRR change130130 215215
Family cap00 270270
DLA6060 135135
Freeze maximum savings credit215 215330330 Yes215215
SMI-2020 00 0
Cold weather-5050 -5050 0
Reform CTB00 490490 0
Taper CB from HRTaxpayers590 5902,5002,500 Yes590590
Freeze WTC415415 625625Yes 415415
Lower childcare tax credit320 320385385 Yes320320
Higher per child element of CTC-510 510-560560 Yes-510510
Lower WTC hours requirement for couples 380380390 390Yes380 380
Better earnings data in TCs0 0300300
Total2,555 3,7157,0408,260 1,4102,430
HMT modelled as % change in 2012-13 55%65%
HMT modelled as % change in 2014-15 20%29%


Table 3

IFS DISTRIBUTIONAL ANALYSIS OF JUNE 2010 BUDGET



Net saving
Absolute change
Modelled by IFS?
2010
2014
20122014 20122014 Size of net cut modelled Absolute size of change modelled Size of net cut modelledAbsolute size of change modelled
CPI indexation2,2405,840 2,2405,840Yes 2,2402,2405,840 5,840
DLA01,075 01,075Yes 001,075 1,075
Conditionality for lone parents50 18050180 00 00
Pregancy150150 150150 0000
SSMG7575 7575Yes 757575 75
SMI-1065 1065 0000
Saving Gateway75115 75115 0000
Set LHA at 30th centile365 425365415 Yes365365 425425
NDDs225340 225320Yes 225225340 340
Underoccupation of social housing0 4900490 Yes00 490490
Link LHA to CPI0390 0300Yes 00390 390
Cut HB for long-term unemployed0 1100100 Yes00 110110
Extra bedroom for carers-15 -151515 00 00
National caps and 4-bedroom limit65 656570 Yes6565 6565
Discretionary payments-40 -404040 00 00
Lower 2nd threshold in CTC145 145145145 Yes145145 145145
Increase taper in TCs710 765710765 Yes710710 765765
Scrap family element of CTC510 480510480 Yes510510 480480
Scrap baby element of CTC275 275275275 Yes275275 275275
Scrap 50+ element of WTC35 403540 Yes3535 4040
Scrap toddler tax credit180 180180180 Yes180180 180180
Lower £25,000 disregard to £5,000 140420140 420Yes140 140420420
New disregard of £2,500 when incomes fall 550585550 585Yes550 550585585
New backdating rules315 330315330 Yes315315 330330
Higher per child element of CTC-1,845 -1,9951,8451,995 Yes-1,8451,845 -1,9951,995
Freeze CB695975 695975Yes 695695975 975
Earnings-index BSP-195 -450195450 Yes-195195 -450450
Increase PC-535-535 535535Yes -535535-535 535
Scrap Child Trust Fund550 560550560 Yes00 00
Total4,710 11,0409,990 16,9853,895 9,0459,970 15,930
IFS modelled as % change in 2012-13 84%91%
IFS modelled as % change in 2014-15 36%54% 91%94%

Table 4

IFS DISTRIBUTIONAL ANALYSIS OF OCTOBER 2010 SPENDING REVIEW


Net saving
Absolute change
Modelled by IFS?
2012
2014
20122014 20122014 Size of net cut modelled Absolute size of change modelled Size of net cut modelledAbsolute size of change modelled
Time-limit contributory ESA1,025 1,0252,0102,010 Yes1,0251,025 2,0102,010
SRR change130130 215215Yes 130130215 215
Family cap00 270270Yes 00270 270
DLA6060 135135 0000
Freeze maximum savings credit215 215330330 Yes215215 330330
SMI-2020 00 0000
Cold weather-5050 -5050 0000
Reform CTB00 490490Yes 00490 490
Taper CB from HRTaxpayers590 5902,5002,500 Yes590590 2,5002,500
Freeze WTC415415 625625Yes 415415625 625
Lower childcare tax credit320 320385385 Yes320320 385385
Higher per child element of CTC-510 510-560560 Yes-510510 -560560
Lower WTC hours requirement for couples 380380390 390Yes380 380390390
Better earnings data in TCs0 0300300
Total2,555 3,7152,5658,260 2,5653,585 6,6557,775
IFS modelled as % change in 2012-13 100%97%
IFS modelled as % change in 2014-15 36%43% 95%94%


9   This does not necessarily mean that the distributional analysis in Charts A1 and A2 of the June 2010 Budget show a pattern of losses which together amounts to £2 billion a year, as it is possible that the HMT distributional analyses suggests that reforms cost or raise different amounts from the figures given in the Budget or Spending Review documents (the same is also true for the IFS distributional analysis). Back

10   A coverage of 65% is line with paragraph B.35 of the Spending Review document, and the remarks made on the opening slide of James Browne's post-SR presentation. Back

11   A coverage of 65% is line with paragraph B.35 of the Spending Review document, and the remarks made on the opening slide of James Browne's post-SR presentation. Back

12   Chart B.6 shows the impact of changes as a percentage of net income PLUS benefits in kind, but Charts B.4 & B.5 show changes as a percentage of net income. Back


 
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