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IFS says Budget hits the poorest hardest

The Institute of Fiscal Studies has warned the first coalition Government’s Budget will hit the poorest families hardest.

The think tank says the measures announced in June were “regressive” pointing to families with children being set to lose the largest proportion of their income due to benefit cuts announced by Chancellor George Osborne.

The IFS challenges the Government’s own call that the Budget was progressive and says the “main measures which will lead to losses among better-off households were announced by the previous government”.

The report says: “Once all of the benefit cuts are considered, the tax and benefit changes announced in the emergency Budget are clearly regressive as, on average, they hit the poorest households more than those in the upper-middle of the income distribution in cash, let alone percentage, terms.”

It says that cuts to the likes of housing benefits would hit the poorest families by £422 from the Budget to April 2014, meaning only the top 10 per cent of households would be hit more than the bottom 60 per cent (see below table).

The report also questions the Government’s decision in the June 2010 Budget to link benefits to the Consumer Price Index rather than the Retail Price Index from April 2011.

The Government’s argument for the move was that its sees CPI as a better measure of inflation as the way it is calculated allows for the fact consumers are able to protect themselves from price changes by substituting towards relatively cheaper goods, and because the goods and services it covers better reflect the “inflation experience” of households receiving benefits.

However, the report says: “We find the first of these arguments to be sound but the second to be more questionable – only 23 per cent of benefit claimants are unaffected by increases in mortgage interest payments and council tax, which are the main items that are excluded from the CPI but included in the RPI.”

According to the BBC, the Treasury says it does not accept the “selective” findings of the IFS.

A spokesman for the Treasury says: “It is selective, ignoring the pro-growth and employment effects of Budget measures – such as helping households move from benefits into work, and reductions in corporation tax.”


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. Quote : The Government’s argument for the move was that its sees CPI as a better measure of inflation as the way it is calculated allows for the fact …

    …consumers are able to protect themselves from price changes by substituting towards relatively cheaper goods

    “Let them eat cake! … But cheaper cake!!”,

  2. What happens when they get to the lowest price brand and prices still continue to increase by RPI – There’s only so far you can level down a living down.

    Maybe the next step to solve this issue will be to legalise assisted suicide for when the money runs out.

  3. Totally agree. After all, if you’re poor or struggling, it’s your own fault, isn’t it, according to this Government?

    Mrs Thatcher had exactly the same approach – leaving disadvantaged members of society to carry the can. History does repeat itself, after all.

  4. @MA

    There is an alternative!

    Where does a £31 meal cost just £3.45?

    It’s maybe well past time IFA’s stopped writing to their MP, and started joining them for lunch!

  5. A couple of points spring to mind.

    If one is seeking to reduce public expenditure while having the least effect on the economy then benefits should be one of the last area you look at. The lower down the income scale the higher the propensity to consume and the higher the multiplier effect of any state spending. If follows that the reverse is also true – reducing benefits will have a disproportionate effect on the amount of money in the economy. Far better for the economy to increase taxes on the wealthy who, rather than consume in their local community, where it can be used time and again, would be more likely to lock their money up in assets or spend it in the Seychelles. Is anyone still under the illusion that any of these cuts are driven by financial necessity rather than political opportunism?

    The second is that while I don’t entirely disagree with the move to CPI, it should at least be accepted that because it is calculated as a geometric mean rather than an arithmetic mean as with RPI (I think I’ve got that the right way round – haven’t got time to check!) the rate for CPI will always tend to be lower.

  6. @ Mike Fenwick

    And I though we were all supposed to be in the economic ‘trough’??!!

    They do say if you can’t beat them joint them.
    I can’t literally beat them and I don’t think any of us will be allowed to join their ‘trough’.

    On the bright side I hear Switerland is nice at all times of year!!

  7. The nation gave them the power to rob the people to keep the system afloat.

    The furure looks grim.

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