‘Households will see incomes fall’

Published: Tuesday 28th April 2015 by The News Editor

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Average incomes are set to fall over the next five years regardless of whether the Conservatives or Labour lead the new government, the Institute for Fiscal Studies has concluded.

After studying the parties’ manifestos, as well as Liberal Democrat plans, the economic think-tank said the Tories would cut taxes but also cut benefits.

By contrast, Labour would protect benefit spending but increase taxes to pay for it.

The Liberal Democrats would plot a middle course.

The IFS said: “With significant deficit reduction still to come, households can expect the tax and benefit changes implemented over the next Parliament to reduce their incomes, on average.

“There are large differences between the Conservatives, Labour and the Liberal Democrats in how they propose to do this.

“But they share a lack of willingness to be clear about the details and an inability to resist the urge for piecemeal changes which would make the overall system less efficient and coherent.”

Looking in detail at the party plans, the promise from both the Tories and Lib Dems to increase the personal allowance to £12,500 is of “most value to those in the middle and and upper-middle of the income distribution”.

The IFS said 44% of adults already earned too little to pay income tax, while two-earner households would gain most of all.

Labour’s proposed tax cut, via a new 10p starter rate, is criticised as lacking “any economic justification” as it “would be worth only 50p a week to most taxpayers”.

The think-tank reached this conclusion on the basis of the Labour pledge to fund the starter rate by scrapping the marriage tax allowance.

It said: “Virtually identical effects could be achieved by simply raising the personal allowance.”

The IFS added: “None of the parties is suggesting sorting out real problems in the income tax system.”

On benefits, the IFS said there was “remarkable cross-party agreement” on protecting pensioner benefits.

It added: “Despite being used as examples of ‘tough choices’, Labour proposals to remove winter fuel payments from higher-rate taxpaying pensioners and limit cash increases in child benefit to 1% this year and next would save next to nothing.

“More than two years after first announcing a desire to cut £12 billion from the social security budget in 2017/18, the Conservatives have provided details of just a tenth of this.

“It is hard to see how such savings could be achieved without sharp reductions in the generosity of, or eligibility to, one or more or child benefit, disability benefit, housing benefit and tax credits.”

The IFS said Labour’s announced plans on a mansion tax implied an average charge of more than £16,000 a year on homes worth more than £3 million.

It based this on the plan to charge £3,000 a year on homes in the £2-3 million bracket and goal to raise a total of £1.2 billion in revenue.

On the Tory inheritance tax plans, the IFS added: “It is hard to see a good economic or social rationale for such a policy.”

Senior research economist James Browne said: “We have seen little coherent reform to the tax system for many years and the parties’ manifestos promise little going forward.

“Damage has been done, and more is being proposed, to pension taxation while proposals on the taxation of housing lack coherence.

“There is a limit to the extent that we can continue to pretend tax revenues can rise while protecting the vast majority of people.

“Just because a tax rise hits ‘the rich’ or is labelled ‘anti avoidance’ does not necessarily mean it is harmless.”

Robert Joyce, also a senior research economist, added: “The Conservatives have continued to fail to explain how they would achieve the substantial cuts to social security they say they would deliver in the first half of the coming Parliament.

“These will be neither easy nor painless to deliver.

“Meanwhile Labour claims to be taking tough decisions by removing either fuel payments from a small fraction of pensioners and limiting child benefit increase to 1%.

“The former will save almost nothing – about one pound in a thousand spent on pensioner benefits.

“The latter is likely to save literally nothing.

“The manifestos have not helped us towards a sensible debate on the future generosity or structure of the benefits system.”

Published: Tuesday 28th April 2015 by The News Editor

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