Budget 2015: George Osborne's welfare reforms set to make 13 million families 'significantly worse off,' says Institute for Fiscal Studies
A staggering 13 million families will be worse off by an average £260 a year due to the four-year freeze in working-age benefits and tax credits announced by George Osborne, according to an in-depth assessment of yesterday’s Budget by an influential thinktank.
The Institute for Fiscal Studies said the benefit cuts will not be offset by the new compulsory national living wage, which will rise to £9 an hour by 2020.
It described the overall changes to benefits in the Budget as "regressive" and predicted the next five years of austerity would take "much more from poorer households than richer ones".
Paul Johnson, director of the IFS, said households receiving tax credits would be “significantly worse off” by the changes unveiled by the Chancellor, even taking into consideration a boost in wages.
The IFS estimated that the four-year freeze to tax credits will hit around 3 million families, making them worse off by an average of £1,000.
In a damning conclusion of the effects of the Budget overall, Mr Johnson said: "Given the array of benefit cuts it is not surprising that the changes overall are regressive – taking much more from poorer households than richer ones.
"Looking over the period of the consolidation as a whole, poorer households have done worse than those in the middle and upper middle parts of the income distribution though it remains the case that the some of the biggest losers have been those right at the very top of the income distribution."
The analysis contradicts Mr Osborne’s claim that anyone working on the national minimum wage would be overall better off from the changes. "This is a fair deal - because you've got to have a welfare system that's fair to the people who pay for it, as well as the people who need it,” he said this morning.
He denied “targeting” young people with cuts a day after wielding the axe against housing and education assistance for young people on low incomes.
His budget, delivered on Wednesday, excluded under-25s from a flagship living wage policy, banned them from claiming housing benefit, and scrapped grants for low-income students.
But Mr Osborne said his changes would be “good for them”, referring to young people.
“I don’t accept that we’re targeting young people – this is all about investing in apprenticeships and universities,” he told Sky News.
“I am saying – look, I’m sorry, you can’t come out of school, go straight onto benefits, claim housing benefits.
“That’s not what a working young person is able to do in the sense that they often have to stay at home while they build their career.
“We are asking young people to earn or learn rather than live on benefits. I personally think that’s good for them, it’s certainly good for the country.”
Northern Ireland politicians deliver their verdict
Politicians in Northern Ireland delivered mixed reviews on the Chancellor's Budget:
- Secretary of State Theresa Villiers said the spending plan backed the aspirations of working people.
"It is another step on the road away from a low wage, high tax, high welfare economy towards a higher wage, lower tax, lower welfare country, not least through the introduction of our National Living Wage," she said.
"But if Northern Ireland is to realise its full potential it is vital that the Executive is able to make the most of the £2 billion of additional spending power on offer from the Government (as part of the Stormont House deal).
"And we have to move away from the insistence of some parties in Northern Ireland that the best option is to continue to trap working age people in a state of low wages, high tax and welfare dependency.
"The Stormont House Agreement needs to be implemented in full to deliver sustainable finances."
- DUP Finance Minister Arlene Foster said the Budget reinforced the need for the Executive to agree a way forward.
"The Budget clearly reflects the UK Government's policy aspirations and should not come as a surprise," she said. "It is now time for the Executive to face the reality of the financial context and agree a way forward on the local implementation of welfare reform, protecting the most vulnerable without crippling public services.
"We have an unsustainable budget position for 2015-16 and we must press ahead with the implementation of the Stormont House Agreement to ensure the delivery of public services to those who need them most.
"While I welcome the reduction in the pace of welfare reform I have reservations that the changes to working tax credits have the potential to impact negatively on people entering the workplace."
- Sinn Fein's Conor Murphy said the Budget was a further attack on low paid workers and families.
"This Budget will usher in billion of further cuts targeted against the most vulnerable in society," he said.
"George Osborne and his millionaire cabinet colleagues appear intent on driving thousands of families here deeper into poverty and attack those on low and middle incomes.
"This is clearly a budget for the rich from a party which has no mandate here."
- SDLP deputy leader Dolores Kelly said the Budget was the first shot in a class war waged by the Conservatives that will deepen poverty and hurt low income families.
"I watched George Osborne stand at the dispatch box in the House of Commons today acting like some modern day Sheriff of Nottingham, robbing from the poorest to sustain hand-outs to the rich. This is a poverty budget that offers nothing for low income working families and disproportionately targets those already struggling most.
- Ulster Unionist Danny Kinahan welcomed aspects of the Budget but said more detail was needed on how many families would be affected by the lowering of the benefit cap to £20,000.
"Whether you agree with what was outlined in the Budget today or not, at least this is a Government making decisions. Our DUP and Sinn Fein led Executive is incapable," he said.
"Now that the Budget has been announced it is time our efforts were refocused on sorting out Welfare Reform in Northern Ireland. The Stormont House Agreement provided a mitigation package to protect some of the most vulnerable in our society from its sharpest edges. Sinn Fein have to stop stalling."
- Alliance Executive minister Stephen Farry said the Budget reinforced why devolution was important.
"The Budget has been announced and it is now time for the local political parties to get on with governing Northern Ireland, taking the difficult decisions around the implementation of Stormont House, and shaping the future of this region in line with the new financial framework at a UK-level," he said.
- Traditional Unionist Voice leader Jim Allister welcomed the reduction in corporation tax.
"Northern Ireland would be much better served by benefiting from this UK-wide cut in corporation tax than embarking on the folly of having the power devolved," he said.
"The current chaos at Stormont - with the nonsense of fantasy budgets and insufficient money to cut roadside verges - tells us all we need to know about the ability of MLAs to manage this sensitive economic power."
Northern Ireland reaction in-depth - full statements from Northern Ireland business leaders and politicians
At-a-glance: Budget 2015 key points
The main announcements in the July 2015 Budget included:
- A new compulsory National Living Wage for working people aged 25 and over, starting in April 2016 at £7.20 an hour and reaching £9 an hour by 2020.
- The Office for Budget Responsibility downgraded growth forecast for 2015 from 2.5% to 2.4%, then 2.3% in 2016, then revised it up to 2.4% in 2017 and for rest of decade.
- Forecast for paying down the national deficit and running a surplus knocked back by a year from 2017/18 to 2018/19.
- New Fiscal Charter committing the country to running an overall budget surplus in normal economic times - when real GDP growth is lower than 1% a year.
- Corporation tax to be cut from 20% to 19% in 2017 and 18% by 2020.
- Tax-free personal allowance at which 20p income tax rate is payable raised from £10,600 to £11,000 next year. Rates of income tax remain unchanged.
- Higher rate 40p income tax threshold to rise from £42,385 to £43,000 from next year.
- Rises in public sector pay restricted to 1% per year for the next four years.
- Package of welfare reforms cutting £12 billion from the system, including four-year freeze for working-age benefits.
- Reduction from £6,420 to £3,850 in income level at which tax credits begin to be cut, with increase in taper rate at which the benefit is removed.
- Support for children through tax credits and universal credits to be limited to two children, affecting children born after April 2017.
- Benefits cap to be reduced from £26,000 per household to £23,000 in London and £20,000 in the rest of the country.
- Social housing tenants earning more than £40,000 in London and £30,000 elsewhere to pay rent at market rates.
- Abolition of automatic entitlement to housing benefit for 18 to 21-year-olds.
- Rate of Employment and Support Allowance aligned with Jobseekers' Allowance for new claimants deemed able to work.
- Rents in the social housing sector to be reduced by 1% a year for the next four years.
- Permanent non-dom tax status to be abolished.
- Inheritance tax reform to allow estates worth up to £1 million to be tax-free if they include a home.
- Britain committed to meeting Nato target of spending 2% of GDP on defence for rest of this decade, while the Ministry of Defence is guaranteed real-terms increases in its annual budget.
- New bands for vehicle excise duty for brand new cars from 2017 - with most cars paying £140 standard charge. No change to VED for existing cars. All income from VED to go into new Roads Fund to pay for investment in the network.
- Climate Change Levy exemption for renewable electricity to be removed.
View from Scotland: SNP condemns 'con trick'
A "pay rise" for the UK with the surprise announcement of a new national living wage has been branded a "con trick" by Scotland's Deputy First Minister.
In the first Conservative Budget for almost 20 years, Chancellor George Osborne announced that from April next year all workers over the age of 25 will be entitled to £7.20 an hour - rising to £9 by 2020.
As he announced the measure, Mr Osborne told MPs in the House of Commons: "Britain deserves a pay rise and Britain is getting a pay rise."
While around 140,000 low-wage workers in Scotland are expected to benefit from the move, it has been dismissed by campaigners and rival politicians.
First Minister Nicola Sturgeon insisted the move does not amount to the introduction of a living wage, pointing out this is already set at £7.85 everywhere but London.
The SNP leader tweeted: "£7.20ph next year and £9 by 2020 is increase in minimum wage (though offset by cuts in tax credits) but it's not living wage - LW is already £7.85."
And Deputy First Minister John Swinney said: "This Budget is a series of con tricks to try and hide the fact that individual households will now bear the brunt of austerity cuts.
"I support a meaningful living wage paid for by business - one that pays what people need to live, not one that fails to compensate for cuts to valuable tax credits.
"The Chancellor has not even promised to meet the current living wage of £7.85 and under 25s will face the brunt of cuts but receive no increase in wages.
"As the Resolution Foundation - cited by the Chancellor - make clear, the real living wage is based on people receiving tax credits and housing benefit so any new living wage must be far higher to compensate for it.
"The Chancellor's con trick does not come close to meeting those costs.
"The Chancellor is cutting from the poor whilst paying out to the rich, he is short changing those on low incomes whilst giving tax breaks to the better off.
"The reality is that in delivering his emergency Budget the Chancellor has simply exacerbated the emergency situation faced by many on low pay and low incomes."
The Budget included £12 billion of cuts in welfare spending. Mr Osborne took an axe to tax credits, declaring that families will only receive the handouts and Universal Credit payments for the first two children.
People under the age of 21 will no longer be automatically entitled to housing benefit, and all working age benefits will be frozen for four years. The Chancellor also confirmed the benefits cap is being reduced from £26,000 to £23,000 in London and £20,000 in the rest of the country.
Mr Osborne conceded that "difficult but necessary decisions" had been required, but added: "'This is a one-nation Government that does the best thing for the economy and the right thing for the country.''
Susan McPhee, of Citizens Advice Scotland, said for most people the national living wage "will not be enough to offset the impact of the wider cuts".
Grahame Smith, general secretary of the Scottish Trades Union Congress (STUC), was also critical, saying: "The Chancellor's so-called national living wage, pitched at £7.20 next year, will be nothing of the kind and is simply a cheap gimmick aimed at undermining the successful work we have undertaken to promote a meaningful living wage that genuinely helps people out of in-work poverty."
But Scottish Secretary David Mundell said the "national living wage is an essential part of the move from a low-wage, high-tax, high-welfare society to a higher-wage, lower-tax, lower-welfare society".
He added: "It ensures that work pays and reduces reliance on the State topping up wages through the benefits system."
In the run-up to May's general election, the SNP backed an increase in the minimum wage to £8.70 an hour by 2020.
Scottish Tory finance spokesman Murdo Fraser said: "Here we have a Conservative Government going much further to help working people in Scotland than the SNP ever would have.
"It's humiliating for the Scottish Government to demand devolution of the minimum wage, only to set it at a lower rate than the rest of the UK.
"That would have penalised low-paid workers north of the border, and provides more evidence of why Scotland is so much better off as part of the UK."
Key Quotes from Osborne
Here are some of Chancellor George Osborne's key quotes from the Budget:
"A Budget that puts security first ... a Budget for working people."
"The Budget will take Britain from a low-wage, high-tax, high-welfare economy, to the higher-wage, lower-tax, lower-welfare country we intend to create."
"Britain still spends too much, borrows too much and our weak productivity shows we don't train enough or build enough or invest enough."
"This is a big Budget for a country with big ambitions."
"You only have to look at the crisis unfolding in Greece as I speak to realise that if a country's not in control of its borrowing, the borrowing takes control of the country."
"We should cut the deficit at the same pace as we did in the last parliament. We shouldn't go faster. We shouldn't go slower. At this pace the national debt is lower as a share of our national income in every future year than when I presented the Budget in March. And it is achieved without a rollercoaster ride in public spending."
"We can make faster progress in returning our banks, including RBS, to where they belong - the private sector. Indeed the sale of government assets this year will deliver the largest privatisation proceeds of all time, higher than the previous record in 1987."
"Britain deserves a pay rise" - introducing the "living wage".
Acting Labour leader Harriet Harman responded:
"The Chancellor is said to be liberated without the ties of coalition holding him back but what we have heard today suggests his rhetoric is liberated from reality. A Budget for working people? How can you make that claim when you are making working people worse off?"
"When you're in Opposition the temptation is to oppose everything the Government does, and believe me I feel that temptation. But we best serve this country by being a grown-up and constructive Opposition. So we will fiercely oppose policies that hit working people and we will expose policies that are unworkable."
"This Chancellor is renowned for his political traps, games and tactics, but that's not what he should be doing. Normally it's government that governs while the Opposition plays politics, but this Government is playing politics with this Budget."
"You can't empower local government if you impoverish it."
"The hopes of working people are more important than your hopes of being the future Tory leader. We know you are personally ambitious but when the economic recovery is still fragile you should be ambitious not just for yourself but for the country."
And the response from the trade unions:
"A beautifully crafted con trick" - Paul Kenny, leader of the GMB.
"Cutting social security support from the unemployed, the low paid, and sick and disabled people must rank among the lowest and most despicable acts of any government in recent times" - Mark Serwotka, general secretary of the Public and Commercial Services Union.
"The Chancellor is giving with one hand and taking away with the other. Massive cuts in support for working people will hit families with children hardest" - TUC general secretary Frances O'Grady.
George Osborne's surprise 'pay rise'
George Osborne has used the first Tory-only Budget for nearly 20 years to introduce a "living wage", dramatically declaring that "Britain deserves a pay rise".
Hailing a new "higher wage, lower tax, lower welfare" Britain, the Chancellor said from next April everyone over 25 would be entitled to £7.20 an hour - and the figure would rise to £9 by 2020.
Some six million people will see their pay increase as a result - and those currently earning the minimum wage of £6.50 an hour will be £5,000 better off by 2020, he claimed.
Mr Osborne said he was following the Conservative tradition as the party that brought in protections for mill workers during the industrial revolution.
"Taken together with all the welfare savings and the tax cuts in this Budget, it means that a typical family where someone is working full-time on the minimum wage will be better off," Mr Osborne told MPs.
But acting Labour leader Harriet Harman responded by claiming the Budget was "making working people worse off" by cutting tax credits for the low paid and grants for students from poorer backgrounds.
The announcement was the final flourish in an audacious package of reforms which amounted to the biggest shake-up in welfare for decades.
Mr Osborne took an axe to tax credits, declaring that families will only receive the handouts and Universal Credit payments for the first two children.
People under the age of 21 will no longer be automatically entitled to housing benefit, all working age benefits will be frozen for four years, and social rent payments will be cut 1% every year until 2019.
He also confirmed that the benefits cap is being reduced from £26,000 to £23,000 in London and £20,000 in the rest of the country.
Student grants are being scrapped and replaced by loans to save £1.6 billion.
But the Chancellor also took advantage of a windfall from higher-than expected tax revenues to slow the pace of the £12 billion welfare reductions - saying the annual cut will not be fully implemented until 2019-20, two years later than previously planned.
Austerity cuts have also been slowed in response to concerns from international bodies such as the OECD, and the Government is not now due to meet Mr Osborne's target of an absolute surplus until 2018-19 rather than 2017-18.
Mr Osborne pointed to the crisis in Greece to argue that spending cuts and a "new settlement" were essential.
"Britain still spends too much, borrows too much, and our weak productivity shows we don't train enough or build enough or invest enough," he said.
"This is the new settlement. From a one-nation Government, this is a one-nation Budget that takes the necessary steps and follows a sensible path for the benefit of the whole of the United Kingdom."
The OBR has forecast that the new living wage - Mr Osborne's retort to critics who have suggested he is not helping working people - will result in 60,000 fewer jobs, but the impact will be reduced because of corporation tax being cut to 18% by 2020.
The Low Pay Commission will be given responsibility for recommending future rises to the National Living Wage, with the remit that it should reach 60% of median earnings by 2020.
Mr Osborne said the Office for Budget Responsibility (OBR) believed that even with the NLW there will still be one million more jobs in total by 2020.
"They also estimate that the cost to business will amount to just 1% of corporate profits. To offset that I have cut corporation tax to 18%," he said.
"To help small firms I will go further now and cut their national insurance contributions."
The move had been kept a closely guarded secret by the Treasury's core team, and was greeted warily by business figures.
John Allan, chairman of the Federation of Small Businesses, said: "Even though offset by a welcome increase in the employment allowance, some will find the new National Living Wage challenging."
Arguing that the "best way to help working people is to let them keep more of the money they earn", the Chancellor said tax thresholds would also go up.
The personal allowance will rise from £10,600 to £11,000 next year, and the higher rate threshold from £42,380 to £43,000. Mr Osborne said the increases were a "downpayment" on pledges for them to hit £12,500 and £50,000 respectively by 2020.
Critics immediately highlighted that the NLW was significantly below the existing non-compulsory living wage rate of £7.85.
In a step that will intensify fury over plans to give MPs an 11% pay rise this year, public sector employees now face four more years with increases capped at 1%.
Promising a full plan later this week to address UK plc's dire productivity levels, Mr Osborne said a new levy on big businesses would help to fund three million more apprenticeships.
The Chancellor said £37 billion of fiscal consolidation was needed during this parliament, but delighted Tory backbenchers by announcing the Government is committed to maintaining the Nato target for spending 2% of GDP on defence.
Ministers have previously avoided saying they will stick to the rule.
He confirmed that alongside £12 billion of welfare savings by 2019-20, the Exchequer was relying on bringing in £5 billion from a crackdown on tax avoidance.
Acknowledging a well-received Labour policy from the election campaign, Mr Osborne announced that permanent non-dom tax status was being abolished from April 2017 to raise £1.5 billion.
"British people should pay British taxes in Britain, and now they will," he said.
Details of £20 billion of cuts to departmental budgets will be hammered out in the forthcoming spending review.
As an anti-austerity protest took place outside parliament, Mr Osborne told MPs: "Many difficult but necessary decisions are required to save money and this will be done with moderation but determination.
"This is a one-nation Government that does the best thing for the economy and the right thing for the country."
Independent News Service