Benefit and tax credit changes - Institute for Fiscal Studies

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


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


2% 1% 0% 1979

1983

1987

1991

1995

1999

2003

2007


2011

2015

2019


2% 1% 0% 1979

1983

1987

1991

1995

1999

2003

2007


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


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 –


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%


-1% -2% -3% -4%

-5% -6% Pre-Autumn Statement

-7%


-8% -9% Poorest

2

3

4


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


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


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


£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


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


ADDITIONAL DISTRIBUTIONAL ANALYSIS


Short-run impact of tax and benefit changes Changes in April 2016 only 1.0%


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


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%


0% -1% -2% -3% -4%

-5%


-6%


-7%

Gains from National Living Wage

-8% -9% Poorest

2

3

4



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


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


-£1,000


-£1,200

Average gain from National Living Wage

-£1,400 -£1,600 Poorest 2

3



8

9

Richest

All

Long-run impact of tax and benefit changes All changes introduced May 2015-April 2019 fully in place 4% 2%


0% -2% -4% -6% Working-age with children -8% Working-age without children

-10% Pensioner households -12% -14% Poorest

2

3

4



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



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%


-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


-£2,000 -£1,000 Change in net income

£0

£1,000