Will another ‘inequality chancellor’ give more to the rich than the poor?

Philip Hammond inherits from George Osborne policies for social security and taxation which will widen the gap between rich and poor. There is no indication that he intends to reverse them, even though new Fabian Society research shows that the Treasury now gives more financial support to rich than poor households.

For years now, the Conservatives have been increasing tax reliefs at the same time as they have cut social security, and both policies are planned to continue for the rest of the decade. The former overwhelmingly benefits the richer half of households; the latter harms the poorer half. Together they are a direct redistribution from low income households to those with much more. So if Theresa May’s new chancellor continues with these policies he cannot claim to be acting in the interests of families who are ‘just about managing’. A continuity chancellor means an inequality chancellor.

New Fabian Society analysis prepared in advance of the Autumn Statement demonstrates what happened under George Osborne. We examined all the financial support which the government provides households, looking at social security and tax allowances side-by-side. We took existing official statistics on benefit receipts and estimated the annual cash value of the ‘shadow welfare’ of tax reliefs, such as the income tax personal allowance.

The results are startling. When the Conservatives came to power in 2010, typical low income non-retired households received considerably more state support than affluent households, in benefits and tax allowances combined. Households in the poorest quintile of the income distribution received around £10,000 per year on average, while those in the fourth quintile received £8,500 per year (2014/15 prices).

But over the next four years, average support for low income households fell by 2 per cent in real terms, as benefit cuts took effect. Meanwhile more generous tax allowances led to a significant increase in assistance for affluent households: the average ‘cash’ support for a fourth quintile household increased by 23 per cent.

But that’s not the most remarkable finding. The chart shows that by the end of the last parliament government support for affluent households was actually higher than for poor households, when tax allowances and benefits are taken together. Through tax-breaks and benefits combined, households in the fourth quintile of the income distribution received £10,500 per year in 2014/15, while those in the poorest got £9,800 per year. It would have been a similar story for those in the richest quintile (the methodology we’ve used under-states how much tax relief the highest income households receive).

This was the position before the last election: now, with current Treasury plans, things are getting a lot worse. The cash value of most working-age social security benefits has been frozen until 2020, which will translate into a significant reduction in real incomes once inflation starts to rise more quickly. On top of that there are big cuts to Employment Support Allowance and Universal Credit. By contrast, tax allowances benefitting richer households are becoming more generous. By 2020, the income tax personal allowance will be raised to £12,500 per year and the threshold for the 40 pence tax rate will reach £50,000.

If Mr Hammond continues with these policies, by the end of the decade the government will be providing significantly more ‘cash’ support to rich than poor families. One example of this was discussed in my recent report, For Us All. It showed that, by 2020, a couple who both have reasonable earnings will together access a lot more financial assistance each month – from the tax-free allowances in income tax and national insurance – than they would receive in job seeker’s allowance if they were both out of work (see chart).

The value of basic public support: JSA for people out of work; income tax and NI tax-free allowance for people with reasonable earnings – reproduced from For Us All: Re-designing social security, for the 2020s

Source: Fabian Society calculations based on announced government policy

So what should Philip Hammond do? For the long-term, he should commission the Treasury to embark on a comprehensive review of the whole of social security and personal taxation combined. For as long as policy for the two is made incrementally, in separate silos, fiscal decisions will accelerate inequality.

But he can take immediate action in this Autumn Statement too. The chancellor should set aside the Conservative manifesto and freeze the personal allowance and 40 pence threshold for the rest of the parliament. This would generate plenty of cash, assuming earnings carry on rising, which he should promise to recycle to low and middle income households. And the first way to start using this extra money should be to inflation-proof the value of tax credits and benefits, to prevent Brexit and devaluation hitting low income families hardest.

 Data tables

The calculations compare data for 2010/11 and 2014/15, updating an analysis of the 2013/14 financial year published in the Spring 2016 edition of Fabian Review (All in This Together). The results are based on ONS data published in annual series The Effects of Taxes and Benefits on Household Income. We’ve estimated the additional value of the ‘shadow welfare’ that each quintile receives by comparing the amount of income tax and national insurance that was actually paid with the amount that would have been, if all earnings and other similar income had been charged at the headline rate. We ignored the higher marginal rate paid on high earnings, so the calculation for the top quintile is an under-estimate. The calculation for shadow welfare spending also includes an estimate of the value of VAT exemptions for households in each quintile, drawing on previous IFS research prepared for the 2011 Mirrlees Review.