The first Conservative-only Budget for almost 20 years was “regressive”, taking “much more” from the poor than the rich, a respected economic thinktank has found.
The Institute for Fiscal Studies found that “unequivocally”, low-paid workers will be left worse off by the Budget measures announced by Chancellor George Osborne on Wednesday, as the impact of cuts to tax credits and other benefits outweighed the boost to incomes from the introduction of a new “national living wage”.
In its response to the Budget package, the IFS also cast doubts on Mr Osborne’s claim to be delivering a “lower-tax” society, pointing out that the Treasury’s own documents show tax increases totalling £6.5 billion a year by 2020.
IFS director Paul Johnson said: “Given the array of benefits, it is not surprising that the changes overall are regressive, taking much more from poorer households than richer ones.”
Income increases resulting in a move from the current minimum wage of £6.50 an hour to £7.20 under the national living wage for over-25s - due to rise to £9 by 2020 - “simply cannot provide full compensation for the majority of losses that will be experience by tax credit recipients - that is just arithmetically impossible”.
Total additional income as a result of the new living wage level will be around £4bn a year - far less than the £12bn being cut from welfare - and many of those benefiting from the higher minimum wage level will anyway not be tax credit claimants, said Mr Johnson.
“Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average,” he said.
Mr Johnson said the Chancellor’s package continued the trend seen since the Government embarked on its programme of “consolidation” following the financial crash of 2008: “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 some of the biggest losers have been those right at the very top of the income distribution.”
Mr Osborne has denied Labour claims that his package was “pulling the rug” from underneath thousands of families, insisting it was vital both to continue reducing the “simply unsustainable” welfare bill and to tackle the UK’s “low pay problem”.
Labour, which promised a higher minimum wage in its own election manifesto, said it was “delighted” by the wage hike but warned it would be outweighed by the drop in state support and would act as a “disincentive to work”.
Small businesses have warned it would lead to reduced hours and staff lay-offs as many firms would not benefit from the corporation tax drop and other tax incentives offered to offset the extra costs.
Defending the package, Mr Osborne told the BBC Radio 4 Today programme: “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.”
Mr Johnson cast doubt on Mr Osborne’s claim that his Budget represented a major step forward in the Government’s drive to create a “higher wage, lower tax, lower welfare” Britain.