Direct taxes and benefits
James Browne
Overview
• Pre announced tax changes
• Child poverty package
• One-off rise in winter allowance for 60+
• Distributional impact of all changes
Pre announced tax changes
• Budget 2007 announced several changes to
come into effect from April 2008:
• Abolition of 10% starting rate of income tax
• Basic rate of income tax cut from 22% to
20%
• Increase in Upper Earnings Limit in
National Insurance
• Increase in Working Tax Credit threshold
• Increase in Pensioner Tax Allowances
• Increase in child element of Child Tax
Credit
Child poverty targets
• Pledge to abolish child poverty by 2020,
intermediate targets on the way
• 2004-05 Target
• Cut number of children in poverty (<60% of
median income) by ¼ compared with
1998/99
• Missed, and child poverty increased in
2005-06
• 2010-11 Target
• Cut child poverty by ½ compared with
1998/99
Child poverty package
• Confirmed work search requirements for lone parents
on benefit whose youngest child aged 7+ by 2010-11
• Child benefit to reach £20/wk for 1st child in April
2009
• 57p/wk real rise. Costs £170m in 2010-11.
• Child element of child tax credit will rise by £50/yr in
April 2009.
• Costs £350m in 2010-11.
• Child benefit disregarded in housing benefit/council
tax benefit
• Costs £350m in 2010-11
Child benefit disregard
• Child benefit disregarded in housing benefit/council
tax benefit
• HB and CTB means tests reduce benefit by 85p
for each pound of income
• Beneficiaries gain up to 85% of child benefit
received (£17 in 2009 for 1 child family)
• Families on full HB/CTB unaffected
• Increases gain to work for lone parents/one earner
families
• Similar measure recommended in IFS/OPFGingerbread research
• Also “fundamental review of the working age
Housing Benefits system”
Impact of disregarding child benefit in
HB/CTB
£410
£390
Net income
£370
£350
£330
£310
After disregard
£290
Before disregard
£270
£250
£0
£50
£100
£150
£200
£250
£300
£350
£400
Gross weekly earnings
Assumes: 2 children aged 7 and 5, no childcare, minimum wage, rent of £80/wk, CT of £17.22/wk
Prospects for 2010-11
• After PBR 2007, we estimated government would
miss target by 700,000 without any new policies, and
closing the gap could cost £3.4bn
• Treasury say measures in Budget 2008 cost £870m
in 2010/11 and are estimated to lift 250,000 out of
poverty. We broadly agree with this assessment
• Significant step forward, but still 450,000 away
• Welfare reforms due to affect lone parents may help,
but without even larger child poverty package in
Budget 2009, hitting target looks extremely unlikely
million children
Prospects for 2010-11
3.5
3.3
3.1
2.9
2.7
2.5
2.3
2.1
1.9
1.7
1.5
Child poverty to date
Projected path before Budget 2008
Projected path after Budget 2008
Required path
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Winter fuel allowance: a brief history
1997 – 1998
£20 (£50 if on means-tested benefits)
1999
£100
2000 – 2002
£200
2003
£200 for 60-79, £300 for 80+
2004
£200 for 60-79, £300 for 80+
Plus “one-off” £100 for 70+
2005
£200 for 60-79, £300 for 80+
Plus “one-off” £200 if 65+ and don’t receive pension credit
guarantee
Plus “one-off” £50 if 70+ and receive pension credit
guarantee
2006 – 2007
£200 for 60-79, £300 for 80+
2008
£200 for 60-79, £300 for 80+
Plus “one-off” £50 for 60-79, £100 for 80+
2009
£200 for 60-79, £300 for 80+
Distributional impact of budget
measures
Change in net income
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2%
-0.4%
Poorest
2
3
4
Pre announced for 2008
Budget 08, in place in 2010
5
6
7
8
9
Richest
Budget 08, in place in 2008
Distributional impact of budget
measures by family type
Average
Single, working
Single, not working
Couple pensioner
Single pensioner
2-earner couple kids
2-earner couple w/o kids
1-earner couple kids
1-earner couple w/o kids
0-earner couple kids
0-earner couple w/o kids
Lone parent, working
Lone parent, not working
Other with kids
Other w/o kids
-0.5%
Budget 08, in place
in 2010
Budget 08, in place
in 2008
Pre announced for
2008
0.0%
0.5%
1.0%
1.5%
2.0%
Percentage change in net income
2.5%
2007–08
2008–09
Win/loss (RH axis)
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
£350
£250
£150
£50
-£50
-£150
-£250
£0
£10,000
£20,000
£30,000
Annual earnings
£40,000
-£350
£50,000
Annual gain/loss
Marginal rate
Income tax & National Insurance
changes
Effect of pre-announced changes on a
lone parent with 2 children
£800
Marginal rate
70%
60%
50%
2007–08
£700
2008–09
£600
Win/Loss
£500
£400
40%
£300
30%
£200
20%
£100
10%
£0
0%
£0
£10,000
£20,000
£30,000
Annual earnings
£40,000
-£100
£50,000
Annual gain/loss
80%