Tax increases and benefit cuts 'likely' after 2015 election


Tax and benefit changes introduced since the 2010 election caused an average drop of £1,127 in household income across the UK, according to a report by the Institute for Fiscal Studies (IFS).

With strict targets to meet and a budget deficit to claw back, the Government had to raise taxes and cut spending - but as the IFS report found [pdf], the impact of those changes has not been felt equally.

For most, any promise of an increase in income was more than cancelled out by cuts to welfare and increases in taxes. But it's been the lowest-income households who've been hit the hardest, losing on average 5% of their income (more than £1,500) each year since June 2010.

High-income households have also lost out, losing an average 2.5% of their income (more than £2,000). Middle-income couples with no children have actually benefited - slightly - seeing an average income increase of £199. Pensioners have seen little change to their incomes.

With the next election looming, the IFS warn it's "likely" the next Government could still bring "additional tax rises or benefit cuts... not discussed" before the vote.

Tax increases, spending cuts

Back in 2010, the coalition Government set two fiscal targets: its main target of achieving a budget surplus by 2019, and a supplementary target to reduce public sector debt by 2016.

To meet these tight deadlines, they set out an emergency budget in June 2010, cutting public spending by £6.2 billion, capping housing benefit and freezing child benefit.

Furthermore, the Government hoped to provide financial incentive to work and encouragement for people to earn more, thereby reducing the financial burden on the State.

This was done by increasing the minimum earning threshold for income tax to £10,000, and that for National Insurance Contributions (NICs) to £153.

But while workers would therefore expect to see an increase in income, this hasn't been the case. According to the IFS report, any expected income increases were "undermined" by cuts to in-work benefits and increases in other taxes, including VAT and NIC rates.

In April 2013 the Social Fund, which provided small loans of £50-£1,000, was scrapped. As a further hit to low-income households claiming housing benefits, the "bedroom tax" was introduced. This reduced housing benefit for people with one spare room by 14%, and by 25% for those with two spare rooms.

With a forecasted budget surplus of £26 billion forecast for 2019, the tax and benefit changes appear to have had the desired effect on the deficit.

But despite cuts to public spending, it's still forecast to exceed public revenue - which means public sector debt is set to increase.

Unequally affected

Rather than examining individual tax and benefit changes, the IFS report examined the overall effect of tax and benefit changes made by the Government, in order to see the combined effect of these changes on household incomes.

This method highlights how different income groups and household types each fair. Worst affected by the tax and benefit changes are low-income and, to a lesser extent, very high-income households.

The average loss to all households from benefit cuts is £477 per year.

Diving the total range of incomes in each particular type of household into ten groups, poorest to wealthiest, the graph below shows the impact of tax and benefit reforms introduced between May 2010 and May 2015:

IFS: Impact of tax and benefit reforms

SOURCE: IFS: The effect of the coalition's tax and benefit changes on household incomes and work incentives, January 2015.

All households with children have seen a loss in income, the biggest factor being cuts to child benefits. In addition to the three-year freeze on child benefits, the Government introduced a tax on child benefit for high-income earners and more thorough testing of child tax credit eligibility.

Middle-income households and pensioners faired the best overall with pensioners seeing little change to their incomes, and some middle-income houses even seeing an increase in income.

Middle-income households with no children are less affected by cuts to housing and child benefits. They therefore profited from the increase in income tax personal allowance, with an up to 2% increase in income.

Income squeeze to continue

The existing Government say they believe they can meet most of their fiscal targets from "savings on welfare budgets and efficiency savings in government bureaucracies".

But the IFS suggest the next government will also be under pressure to meet tight fiscal targets, and could well introduce additional tax rises or benefit cuts post-election.

The last time any government introduced net tax cuts was before the 2001 election. Since then tax increases have occurred every year, regardless of the political party in power.

Furthermore, after each of the past five elections, relatively small tax increases pre-election have been followed by relatively large tax increases post election.

It's reasonable to assume, then, that we might see further tax increases following the 2015 election regardless of who forms the next government.

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