IFS
PRESS RELEASE
THE INSTITUTE FOR FISCAL STUDIES
7 Ridgmount Street, London WC1E 7AE
020 7291 4800, mailbox@ifs.org.uk, www.ifs.org.uk
For immediate release:
Monday 21st February 2005
Contact: Emma Hyman on
020 7291 4800
Note: This version was revised on 9th March to correct errors in the Tables.
Analysis of the Conservatives’ proposed age-related council tax
discount
The Conservative Party today proposed a reform of council tax in England. Their policy is to give a 50% discount, up to a
maximum of £500 per year, on council tax bills (net of council tax benefit) for households in England in which all
household members are aged 65 or over.
We estimate that, if all council tax rates rise only in line with inflation1 in 2005–06 and 2006–07, then the reform would
cost £1.3 billion in 2006–07.2 The Conservatives have stated that their first Budget immediately after a general election
would cut taxes by £4 billion,3 so this reform would leave them with scope for a further £2.7 billion in cuts. Extending the
council tax discount to the rest of Great Britain would cost a further £0.2 billion.
Assuming that council tax rates rise in line with inflation, we estimate that approximately 3.8 million households,
comprising 5.3 million individuals, would gain from the reform, each household gaining £341 per year (£6.56 per week)
on average. This represents 89% of eligible households (ie households in England in which all household members are
aged 65 or over), or 90% of individuals in such households. The remainder are households whose council tax bill is fully
covered by council tax benefit (CTB); they would be unaffected by the reform since they already pay no council tax. 68%
of English households containing a pensioner – 58% of British households containing a pensioner, since the policy only
applies to England, or 15% of all British households – would gain from the reform. 73% of individuals aged 65 or over in
England (62% of those in Britain) are in households that would gain.
Among the eligible population, the largest cash gains from the reform would accrue to households with the highest council
tax bills. However, these larger cash gains would generally represent a smaller proportion of income, since council tax
bills rise less quickly (on average) than income as we move up the income distribution. The main exception to this pattern
is among families receiving council tax benefit. As mentioned above, households whose CTB covers the whole of their
council tax bill would be unaffected by the reform, since they pay no council tax anyway. Similarly, households whose
CTB covers part of their council tax bill would benefit from the policy only to a limited degree. Families entitled to CTB
but not claiming it, however, would be amongst the largest gainers as a proportion of their income. The tables below show
how the effect of the reform varies across the income distribution of families eligible for the discount, across the income
distribution of all pensioner families in Great Britain, and across whole Great Britain income distribution.
It should be noted that the precise cost and distributional impact of this reform would depend on council tax rates, which
are not known for future years. The analysis above assumes that council tax rates rise only in line with inflation. If,
however, council tax rates were to rise by 5.2% above inflation in each of 2005–06 and 2006–07 – in line with the average
annual increase between 1997–98 and 2004–05 – then the reform would cost nearer £1.4 billion, not the £1.3 billion
mentioned above.
The cost and distributional impact of the Conservatives’ policy would also depend on the take-up rate of CTB: the
Department for Work and Pensions estimates that between 1.46 and 1.82 million pensioner families failed to claim CTB to
which they were entitled in 2002–03, leaving between £660 and £870 million unclaimed.4 The analysis in this document
assumes that take-up in 2006–07 is 59.0% of caseload and 63.5% of total entitlements among the population eligible for
the discount. These are the mid-points of Department for Work and Pensions estimates of CTB take-up among pensioners
for the latest year available, 2002–03.5 However, take-up rates may change between 2002–03 and 2006–07. Furthermore,
the Conservatives’ proposed reform would reduce the financial incentive to claim CTB. If, say, take-up were to be lower
than we assume, then more households would gain from the reform and the cost would be higher than the estimates given
above (roughly speaking, a 10 percentage point difference in expenditure take-up would translate into a £0.1 billion
difference in cost). We also assume that take-up of CTB is unrelated to income and to the size of entitlement. In practice,
take-up of CTB is likely to be higher among those with higher entitlements and lower incomes, in which case the reform
would be slightly less progressive than the tables below suggest, and there would be slightly fewer gainers than indicated
above. However, the differences are likely to be small.
We assume that take-up of the proposed council tax discount would be complete. We cannot be sure what the take-up rate
would be, since the discount does not yet exist. However, take-up of other non-means-tested programmes is extremely
high.
Table 1. Gains from the reform across the income distribution of families in households in England in which
all household members are aged 65 or over
Income decile group
Average change in net
weekly income
% change in net income
Poorest
£3.56
2.48
2nd
£4.19
2.49
rd
£5.08
2.65
4th
£4.87
2.46
5th
£5.16
2.39
6th
£5.92
2.46
7th
£6.41
2.25
8th
£6.40
2.03
9th
£6.68
1.90
Richest
£9.06
1.39
Overall
£5.73
2.08
(eligible pensioner population)
3
Note: income decile groups are derived by dividing all families in households in England in which all members are aged 65 or over into ten
equal-sized groups according to disposable income adjusted for family size using the McClements equivalence scale.
Table 2. Gains from the reform across the income distribution of pensioner families in Great Britain
Income decile group
Average change in net
weekly income
% change in net income
Poorest
£2.02
1.40
2nd
£2.67
1.58
3rd
£3.16
1.64
4th
£3.16
1.57
th
£3.69
1.67
6th
£3.80
1.49
7th
£4.06
1.38
8th
£3.90
1.21
9th
£4.39
1.18
Richest
£5.24
0.75
Overall
£3.61
1.26
(whole pensioner population)
5
Note: income decile groups are derived by dividing all pensioner families in Britain into ten equal-sized groups according to
disposable income adjusted for family size using the McClements equivalence scale.
Table 3. Gains from the reform across the whole Great Britain income distribution
Income decile group
Average change in net
weekly income
% change in net income
Poorest
£0.04
0.06
2nd
£0.88
0.50
3rd
£1.12
0.49
th
£1.18
0.47
5th
£1.14
0.38
th
£0.96
0.28
7th
£0.93
0.23
8th
£0.78
0.16
9th
£0.61
0.10
Richest
£0.47
0.05
Overall
£0.81
0.21
(whole population)
4
6
Note: income decile groups are derived by dividing all families in Britain into ten equal-sized groups according to disposable income adjusted
for family size using the McClements equivalence scale.
ENDS
Notes to editors:
1.
Increase in the retail prices index for the year to the preceding September. This is the assumption made by the Conservatives in
formulating their policy.
2.
This figure and all other quantitative analysis in this document are based on calculations from the IFS tax and benefit model,
TAXBEN, run using uprated data from the 2002–03 Family Resources Survey. The private incomes of the population eligible for the
discount are assumed to grow by 2 per cent per year in real terms.
3.
Better Public Services, Better Value: Conservative Spending Plans 2005–2008
(www.conservatives.com/getfile.cfm?file=valueformoneyplans&ref=POLICYDOCUMENT/1664&type=pdf)
4.
Department for Work and Pensions, Income Related Benefits Estimates of Take-Up in 2002/2003, Tables 3.1 and 3.2
(www.dwp.gov.uk/asd/income_analysis/final0203btense.pdf).
5.
Ibid.