Pensioners and low-income households set to feel the impact of Budget plans

Pensioners and low-income households set to feel the impact of Budget plans

26 August 2010 / by Paul Dicken

A leading economic think-tank has said reforms announced by the UK government in its June budget will hit low-income households of working age and pensioners with medium to high incomes.

The Institute for Fiscal Studies challenged the government’s claim that the budget was progressive, saying that those who lose least from the budget are ‘households of working age without children in the upper half of the income distribution’.

Pensioners with medium to high incomes will lose the greatest percentage of their income compared to those at the top and bottom end of the income scale.

Following an initial analysis of the Budget, the IFS examined the direct effects of tax and benefit changes announced, including lowering the point at which the higher rate of income tax is paid and restrictions in the tax relief on pension contributions.

The paper compared the loss to households, in percentage terms, between the coalition government’s June budget and announcements made by the previous government that will still be introduced.

Authors James Browne and Peter Levell conclude that the previous Labour government’s reforms can be described as progressive, because the impact of those measures is mainly felt by richer households, while the current coalition government’s plans disproportionately affect poorer households.

Writing in the Financial Times, the deputy prime minister, Nick Clegg, said the report’s methodology had ignored the impact of other measures such as the increase in capital gains tax and made ‘impossible assumptions about the effect of reform to disability living allowance and tax credits’.

Clegg characterised the report’s approach as narrow, adding that the current government’s plans would increase fairness by increasing incentives to work, raising the income tax threshold and targeting investment on children from disadvantaged backgrounds.

© Fair Investment Company Ltd