Benefit and tax credit changes
Andrew Hood
© Institute for Fiscal Studies
The big picture
• Government still planning £12bn cut to annual benefit spending
by end of the parliament
– But less than half delivered by 2017-18
– £4bn from freeze to 2020, £4-5bn additional cuts to universal credit,
£1½bn cuts to housing benefit spending (plus other smaller changes)
• Benefit spending excluding state pensions in 2020-21 forecast to
be at its lowest as a share of national income for 30 years
© Institute for Fiscal Studies
Benefit/tax credit spending excluding state
pensions, as % of national income
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1979
1983
1987
1991
1995
1999
2003
2007
Note: Years are financial years. Data points from 2015-16 are projections, marked with dotted lines.
Author’s calculations using Novermber 2015 EFO and July 2015 DWP benefit expenditure tables
© Institute for Fiscal Studies
2011
2015
2019
Benefit/tax credit spending excluding state
pensions, as % of national income
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1979
1983
1987
1991
1995
1999
2003
2007
Note: Years are financial years. Data points from 2015-16 are projections, marked with dotted lines.
Author’s calculations using Novermber 2015 EFO and July 2015 DWP benefit expenditure tables
© Institute for Fiscal Studies
2011
2015
2019
Benefit/tax credit spending excluding state
pensions, as % of national income
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1979
1983
1987
1991
1995
1999
2003
2007
Note: Years are financial years. Data points from 2015-16 are projections, marked with dotted lines.
Author’s calculations using Novermber 2015 EFO and July 2015 DWP benefit expenditure tables
© Institute for Fiscal Studies
2011
2015
2019
The tax credit U-turn
• July 2015 Budget announced £4.4bn cut to tax credits for lowincome working families in April 2016
– Cut in income threshold from £6,420 to £3,850
– Increase in taper rate from 41% to 48%
• Those two cuts were cancelled yesterday
– Cost: £3.4bn in 2016-17 (not £4.4bn)
– Lower cost is combination of avoidable mistakes in official July
costing and forecast changes
© Institute for Fiscal Studies
Housing benefit cut for social tenants
•
•
Local caps on HB in private sector extended to new social tenancies
–
Applies from April 2018, on tenancies signed from April 2016
–
Cuts HB by £225m in 2020-21
Cut will get bigger. If applied to all social tenants now:
–
HB would be cut by £1.1 bn (from base of around £25bn)
–
800,000 households would lose average of £1,300 per year
•
Long-run effects would be larger still if social rents grow faster than
HB caps (which are CPI-indexed)
•
The caps are increasingly arbitrary and in need of reform
–
© Institute for Fiscal Studies
They depend on 2012-13 level of 30th percentile of private sector rents
(for properties of relevant size in local area)
Short-run impact of tax and benefit changes
Changes in April 2016 only
1%
0%
Change in net income
-1%
-2%
-3%
-4%
-5%
Pre-Autumn Statement
-6%
Post-Autumn Statement
-7%
-8%
-9%
Poorest
2
3
4
5
6
7
Income Decile Group
Note: Assumes full take-up of means-tested benefits and tax credits.
© Institute for Fiscal Studies
8
9
Richest
All
Long-run impact of tax and benefit changes
All changes introduced May 2015-April 2019 fully in place
1%
0%
Change in net income
-1%
-2%
-3%
-4%
-5%
-6%
Pre-Autumn Statement
-7%
Post-Autumn Statement
-8%
-9%
Poorest
2
3
4
5
6
7
Income Decile Group
Note: Assumes full take-up of means-tested benefits and tax credits.
© Institute for Fiscal Studies
8
9
Richest
All
Benefit system still much less generous in long run
1.
Lots of other benefit cuts announced in July that are going ahead
(and more announced yesterday)
– e.g. freeze until 2020, 2-child limit in tax credits & universal credit
2. Reversal of tax credit cuts makes no difference in long run
– Tax credits being replaced by universal credit
• Work incentives strengthened on average in long run
– Cuts to out-of-work benefits as well as in-work benefits
– Those with working partners have less benefit income to lose by
moving into work
© Institute for Fiscal Studies
Universal credit still less generous than preelection plans
• UC replacing tax credits (along with 4 other means-tested benefits)
– Under previous plan, UC roughly as generous as system it replaces
– Though significant gains and losses for different families
• UC unaffected by yesterday’s tax credit U-turn
– Cut to work allowances announced in July still going ahead
– Will affect similar group to abandoned tax credit cuts
© Institute for Fiscal Studies
Example of work allowance cut announced in July
Couple with 2 children, owner-occupiers
Annual universal credit entitlement
£14,000
£12,000
Before work allowance cut
£10,000
After work allowance cut
£8,000
£6,000
£4,000
Loss of £1,080
£2,000
£0
£0
© Institute for Fiscal Studies
£5,000
£10,000
£15,000
£20,000
£25,000
Annual income net of income tax and employee NICs
£30,000
Universal credit vs. the system it is replacing
• UC now represents additional cut on top of other changes
– Cuts benefit entitlements by £3.7bn a year in the long run
– Existing claimants protected in cash terms when moved onto UC
• 4.5m working families affected by introduction of UC
– 2.6m lose an average of £1,600 a year
– 1.9m gain an average of £1,400 a year
– Total cut of £1.5bn a year
• 1.8m non-working families affected by introduction of UC
– 1.2m lose an average of £2,500 a year
– 0.6m gain an average of £1,000 a year
– Total cut of £2.2bn a year
© Institute for Fiscal Studies
Universal credit vs. the system it is replacing
• UC now represents additional cut on top of other changes
– Cuts benefit entitlements by £2.7bn a year in the long run
– Existing claimants protected in cash terms when moved onto UC
• 3.9m working households affected by introduction of UC
– 2.1m lose an average of £1,600 a year
– 1.8m gain an average of £1,500 a year
– Total cut of £0.7bn a year
• 1.5m non-working households affected by introduction of UC
– 1.1m lose an average of £2,300 a year
– 0.5m gain an average of £1,000 a year
– Total cut of £2.0bn a year
© Institute for Fiscal Studies
Timing of universal credit roll-out uncertain...
9
March 2013 assumption
December 2014 DWP
July 2015 assumption
November 2015 OBR
UC claimants (millions)
8
7
December 2013 assumption
December 2014 OBR
November 2015 DWP
6
5
4
3
2
1
0
2014-15
© Institute for Fiscal Studies
2015-16
2016-17
2017-18
Source: Chart 4.8 in OBR Economic and Fiscal Outlook, November 2015.
2018-19
2019-20
2020-21
Summary
• Big decision yesterday was to scrap two planned cuts to tax credits
• But in fact, tax credit U-turn has no long run effect
– Tax credits being replaced by universal credit
– UC unaffected by yesterday’s announcement
• Government still planning deep cuts to working-age benefits
– Including for low-income working families
– Though overall package will strengthen work incentives on average
© Institute for Fiscal Studies
ADDITIONAL DISTRIBUTIONAL ANALYSIS
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Short-run impact of tax and benefit changes
Changes in April 2016 only
1.0%
Change in net income
0.5%
0.0%
-0.5%
-1.0%
Pre-Autumn Statement
-1.5%
Post-Autumn Statement
-2.0%
Gains from National Living Wage
-2.5%
Poorest
2
3
4
5
6
7
Income Decile Group
Assumes full take-up of means-tested benefits and tax credits.
© Institute for Fiscal Studies
8
9
Richest
All
Long-run impact of tax and benefit changes
All changes introduced April 2015-April 2019 fully in place
2%
1%
Change in net income
0%
-1%
-2%
-3%
-4%
-5%
Pre-Autumn Statement
-6%
Post-Autumn Statement
-7%
Gains from National Living Wage
-8%
-9%
Poorest
2
3
4
5
6
7
Income Decile Group
Assumes full take-up of means-tested benefits and tax credits.
© Institute for Fiscal Studies
8
9
Richest
All
Short-run impact of tax and benefit changes
Changes in April 2016 only
£300
Change in annual net income
£200
£100
£0
-£100
Pre-Autumn Statement
-£200
Post-Autumn Statement
-£300
Average gain from National Living Wage
-£400
Poorest 2
3
4
5
6
7
Income Decile Group
Assumes full take-up of means-tested benefits and tax credits.
© Institute for Fiscal Studies
8
9
Richest
All
Long-run impact of tax and benefit changes
All changes introduced May 2015-April 2019 fully in place
£400
£200
Change in annual net income
£0
-£200
-£400
-£600
-£800
Pre-Autumn Statement
-£1,000
Post-Autumn Statement
-£1,200
Average gain from National Living Wage
-£1,400
-£1,600
Poorest 2
3
4
5
6
7
Income Decile Group
Assumes full take-up of means-tested benefits and tax credits.
© Institute for Fiscal Studies
8
9
Richest
All
Long-run impact of tax and benefit changes
All changes introduced May 2015-April 2019 fully in place
4%
2%
Change in net income
0%
-2%
-4%
-6%
Working-age with children
-8%
Working-age without children
-10%
Pensioner households
-12%
-14%
Poorest
2
3
4
5
6
7
Income Decile Group
Assumes full take-up of means-tested benefits and tax credits.
© Institute for Fiscal Studies
8
9
Richest
All
Long-run impact of tax and benefit changes
All changes introduced May 2015-April 2019 fully in place
£500
Change in annual net income
£0
-£500
-£1,000
-£1,500
Working-age with children
-£2,000
Working-age without children
-£2,500
Pensioner households
-£3,000
Poorest 2
3
4
5
6
7
Income Decile Group
Assumes full take-up of means-tested benefits and tax credits.
© Institute for Fiscal Studies
8
9
Richest
All
Long-run impact of tax and benefit changes
All changes introduced May 2015-April 2019 fully in place
Single, no work
Single, in work
Lone parent, no work
Lone parent, in work
Couple, no children, no work
Couple with children, no work
Couple, no children, one earner
Couple with children, one earner
Couple, no children, two earners
Couple with children, two earners
Single pensioner
Couple pensioner
Multi-family household, no children
Multi-family household with children
All
-20%
-15%
Assumes full take-up of means-tested benefits and tax credits.
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-10%
-5%
Change in net income
0%
5%
Long-run impact of tax and benefit changes
All changes introduced May 2015-April 2019 fully in place
Single, no work
Single, in work
Lone parent, no work
Lone parent, in work
Couple, no children, no work
Couple with children, no work
Couple, no children, one earner
Couple with children, one earner
Couple, no children, two earners
Couple with children, two earners
Single pensioner
Couple pensioner
Multi-family household, no children
Multi-family household with children
All
-£4,000
-£3,000
Assumes full take-up of means-tested benefits and tax credits.
© Institute for Fiscal Studies
-£2,000 -£1,000
Change in net income
£0
£1,000