Autumn statement: who pays most, rich or poor?
Following on from the bleak news that austerity Britain is here for longer than the government had planned for, the Chancellor tried to soften the blow by saying that the rich were going to have to do their bit to help get us out of it.
Rich pensioners, he said, were also going to suffer.
“We’re going to raise more money from the rich,” he told MPs. “The richest will pay a greater share of income tax revenues in every single year of this coalition government than in any one of the last 13 years of the last Labour government.”
At the same time, he announced changes to benefits and welfare payments for millions of claimants.
So who is going to pay more, FactCheck asks?
We won’t rehearse all the changes announced by Mr Osborne today, but in a nutshell, the key announcements related to income were:
- a 1 per cent cap on increases of most working age benefits and tax credits for three years from April 2013, plus housing benefit and Universal Credit. Child benefit will rise by one per cent for two years from April 2014 (the Treasury says the entirety of benefits changes will earn £3.2bn by 2017-18)
- increasing the personal allowance by £235 in April 2013, taking it to £9440
- reducing the annual pension allowance from £50,000 to £40,000 for 2014-15 (the Treasury hopes this will bring in £2.15bn by 2017-18)
- raising the threshold for paying the top 40 per cent of income tax by one per cent from 2014 (the Treasury says this will bring in £3.36bn by 2017-18)
In effect the “one per cent cap on increases on benefits” actually amounts to a real-terms squeeze for three years.
Last month, the Governor of the Bank of England said that CPI inflation in October was 2.7 per cent. Which means that benefits won’t rise at the same rate of inflation, meaning it amounts, in practical terms, to a cut.
Which wouldn’t inevitably mean that the poor paid more than the rich. It’s just that even the Treasury thinks this might end up being the case.
Since 2010, as the government announced each budget, it published an “impact assessment” on households.
It takes into account the cumulative impact of the changes in taxes, tax credit and benefit changes on household incomes.
According to the latest assessment, which considers today’s changes as well as previous ones announced by the government, it shows that the top tenth of earners will lose around 2.1 per cent of their income after tax.
The top tenth [the penultimate bar in the chart above] are those who earn, after tax:
one adult – £32,900; an adult with one child – £42,800; two adults with no children – £49,400; two adults with a child – £59,300.
For this lot, direct taxes, in this case changes to pension tax relief, will account for around half of the cut.
Indirect taxes – such as VAT and duties – will eat away at a slightly smaller sum, and the changes to tax credits, namely removing child benefit, will take away less still as a proportion of their income.
The bottom tenth hasn’t been defined as carefully as the others, but the one above it – the second tenth – is. The second tenth [represented by the second bar in the chart above] includes earnings, after tax, of: one adult – £9,600; an adult and a child – £12,500; two adults – £14,300; or two adults with a child – £17,300 after tax.
Self-evidently, the bottom tenth earn less than that. And for them, the overall effect will be a decline in income of around 1.7 per cent.
That is because although the poorest people are expected to earn around 1.1 per cent more from the changes to income tax, that’s mitigated by the other changes. The amount they’re going to lose from the changes to welfare and tax credits alone will cut their net income by around 1.8 per cent. And the amount they pay in indirect taxes is just over 1.1 per cent.
Where does that leave us? It means that while the people who earn the most will also pay the most as a percentage of their income, they’re closely followed by the very poorest people.
The second tenth, the group who earn just more than the bottom decile, can expect a cut of 1.5 per cent in their income; the third decile will get a cut of 1.2 per cent; the fourth will see their net incomes fall by 0.7 per cent.
Continuing on, it’s actually those who earn more who will gain from the changes: two adults and a child earning anything between £33,600 to £46,300 after tax are likely to gain by between 0.05 per cent to around 0.25 per cent.
All of this is, of course, only taking into account how much people will earn, or lose, after tax.
What it doesn’t tell us is how personal assets may affect things, or how a family or household’s use of public services may affect things.
For example, it’s fair to assume that higher earners are more likely to send their children to private schools, or use private healthcare – while contributing far greater amounts (in cash terms) to the public purse to fund state schools and the NHS.
Lower earners are much more likely to use public services. The Trades Union Congress has done research into this, and they say that public spending cuts amount to a decline in income of nearly 32 per cent for the poorest income group, without taking income earned through benefits into account.
In addition, it’s worth remembering that the closer a family is to the breadline, the harsher any pay cut will seem.
We asked the Treasury what their position is. A spokeswoman directed us towards another chart which showed that in cash terms, rich people lost more than the poorest.
But that’s no great surprise.
She also directed us towards this chart which shows how tax contributions (shown in pale green) increase as net income rises :
We’re going to have to leave the FactCheckometre on the middle needle for this one.
The difficulty is that Mr Osborne hasn’t drawn any boundaries around who he considers to be those “with the most”.
If he stops at the top 10 per cent of earners, then yes, they will pay the most.
But the poorest 10 per cent of earners will be the next biggest losers as a result of today’s Autumn Statement.
So while he’s taking the most from the very rich, he hasn’t done the poor any great favours either.
By Fariha Karim