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Osborne Budget 'hits poor hardest'

Published 09/07/2015

Chancellor George Osborne promised a new
Chancellor George Osborne promised a new "higher wage, lower tax, lower welfare" Britain in his Budget speech

The poor will lose out more than the rich from Chancellor George Osborne's "regressive" Budget, a respected economic thinktank has found.

And the Institute for Fiscal Studies cast doubt on Mr Osborne's claim that the Budget would pave the way to a "higher-wage, lower-tax, lower-welfare" Britain.

While welfare payments will indeed be cut to the tune of £12 billion, the Chancellor's package would in fact increase taxes by £6.5 billion a year by 2020 and it was a "gamble" to rely on a new mandatory "national living wage" (NLW) to increase incomes, the IFS found.

The thinktank found that the average low-paid worker on tax credits would "unequivocally" lose more from benefit cuts announced by the Chancellor than they would gain from the introduction of the NLW, which will be worth £7.20 an hour to workers aged 25 or more - rising to £9 by 2020 - compared to £6.50 on the current national minimum wage.

IFS analysis suggested that the poorest tenth of society will lose around £800 a year as a result of tax and benefit changes in the years up to 2019 - equivalent to almost 7% of their net income - while the hardest-hit group will be the second-poorest tenth, losing around £1,300 a year.

By contrast, the wealthiest tenth lose less than £400, while the second-richest section actually gain almost £200. The changes mean that the poorest third of society are now set to make a larger contribution to deficit reduction between 2010 and 2019, as a proportion of their income, than those at the top, despite David Cameron's insistence that he wants those with the broadest shoulders to bear the greatest burden.

IFS director Paul Johnson said that a four-year freeze on working-age benefits will cost 13 million families an average of £260 a year, while reductions in the earnings threshold above which workers start losing universal credit and tax credit will cost three million households £1,000 a year and reduce incentives for those in jobless households to seek work.

Despite Mr Osborne's claim he had crafted a Budget for "workers", the reduction in these thresholds meant cuts were focused "on families in work much more than those out of work", said Mr Johnson.

"Given the array of benefits, it is not surprising that the changes overall are regressive, taking much more from poorer households than richer ones," he concluded.

At around £4 billion a year, extra income from the NLW "simply cannot provide full compensation for the majority of losses that will be experienced by tax credit recipients - that is just arithmetically impossible", he said. M uch of the benefit from the national living wage will go to people ineligible for tax credits, like single childless workers and those with high-earning spouses.

TUC general secretary Frances O'Grady said the thinktank's findings revealed Mr Osborne's Budget as "a wolf in sheep's clothing" for many working families, especially the young.

"If the Chancellor hadn't wasted so much on giveaways for the richest, tax credit cuts could have been avoided altogether," said Ms O'Grady. "Low-income working households need decent pay and in-work benefits to make ends meet."

And anti-poverty charity Oxfam described the findings as "deeply concerning", with spokesman Nick Bryer warning: "We know from our work with poor communities across the UK that people living close to the poverty line are ill-equipped to adapt to sudden drops in income. In practical terms it means families forced to choose between paying the bills or missing meals."

Asked whether the Budget was "regressive", Mr Cameron's official spokeswoman said: "The point that the Prime Minister would make is this is a Budget that has said to businesses 'you will get lower taxes in return for higher pay', to people out there working 'you will get more at the end of each week, each month in your take-home pay but less from benefits and welfare'.

"Overall, what does it do for this country? It keeps us on the path to stronger economic security with lower spending and an economy which lives within its means."

As the Budget debate began in the House of Commons, shadow chancellor Chris Leslie said the package was "entirely concerned with chasing headlines to further the Chancellor's own well-known political ambitions, rather than putting the working people of Britain first".

The Labour frontbencher said: "It's the working families of Britain on low incomes and trying their hardest to do the right thing who will pay the price for the gap between what the Chancellor said and the truth of what his Budget will actually mean."

But Work and Pensions Secretary Iain Duncan Smith retorted that it was a Budget of "great significance" which "at its heart was a Budget for working people".

He told MPs: "This Government believes if you work hard, you should be rewarded. We believe that in our growing economy, people should be able to expect a decent wage if they move into work and increase their hours.

Speaking on BBC Radio 4's Today programme, the Chancellor said: "It is a part of saying to our country that we have got to have a better contract.

"We can pay this national living wage but we can't have this welfare system that just grows and grows and grows, crowds out the kind of spending that I think we should be making on things like education and infrastructure to provide for the real welfare of the country in the future.

"A family where someone is working full-time at the moment on the current minimum wage is better off and that is the package, that is the deal that is offered in the Budget."

The IFS found that the extension to 2020 of the 1% cap on public sector pay rises will take wages in the sector to their lowest level compared with private sector salaries since at least the early 1990s.

While Mr Osborne had set out a "gentler than planned path" for spending cuts than in his March Budget , the IFS warned that this does not represent "a let-up in the overall scale of cuts". With defence added to the list of priorities protected from savings, unprotected Whitehall departments are facing reductions totalling around £19 billion between 2015 and 2020, with details to be announced in the autumn spending review.

Mr Duncan Smith insisted that the IFS analysis failed to take into account the childcare package included in the Budget or the prospect of people taking on more work.

He told LBC Radio: " Of course people, if you strictly speaking talk about money that they have and they won't have on tax credits, then you are right to say that they will be worse off directly as that.

"But when you start adding some of the other things that we have got, the tax changes and with the childcare for parents, you see that some of them are better off.

"So it's a bit of a balance. We are saving money, so absolutely some people will immediately appear to be worse off, but they are changing their operation, working more hours, the second person in a household taking on more hours, and actually getting better off as a result."

The Work and Pensions Secretary was questioned about his pumped-up response to the Budget announcement on the living wage after LBC host Nick Ferrari jokingly asked if he was "on Viagra".

Mr Duncan Smith said: "No, how can I say ... never needed it ... I'm not making any further comments, certainly not when it comes to fist-pumping."

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