IFS on welfare cuts, living standards, departmental cuts and 2% defence target

Posted On: 
19th March 2015

Full rundown from the Institute for Fiscal Studies' post-Budget briefing.

The poorest have suffered the greatest proportionate losses as a result of the Coalition's changes to tax and benefits, according to the Institute for Fiscal Studies. 

When tax rises at the back-end of the Labour administration are included in 2010 the highest-earners lose out most. But
taking into account only the changes brought about by this Government, the poorest are hit harder proportionally.

At a post-Budget briefing, IFS director Paul Johnson said: "Looking at changes over the period of the consolidation as a whole the richest have been hit hardest. Looking only at changes implemented by the coalition the poorest have seen the biggest proportionate losses."

Middle-to-high earners have been “astonishingly protected”, the IFS added, largely as a result of the increases in the personal tax allowance.

LIVING STANDARDS

George Osborne claimed in yesterday’s Budget that living standards were set to be higher at the end of the Parliament than when the Coalition took office in 2010. In his response, however, Ed Miliband cited different figures that claimed on average, workers were £1,600 worse off.

The IFS explained that Mr Miliband’s statistics were based on average earnings, and therefore ignored changes to tax and benefits, pensioner incomes, and an increase in the number of people in work. Mr Osborne’s preferred index, Mr Johnson said, was “not an ideal measure” but was reasonably consistent with other statistics that estimate living standards are likely to be higher than five years ago. He added that Mr Osborne’s figures included forecasts for the next year (when almost the entire rise is expected to be registered), whereas Mr Miliband’s rely on published statistics.  

However, if one looks only at working-age living standards, it would be a “closer-run thing” because of pensioners – who have been broadly protected from austerity by the Government’s policies – dragging up the average. The IFS added that
recovering to the level of the last election was a “low bar” and reflected a “very slow recovery” overall.

PUBLIC FINANCES

The IFS said the biggest impact on public finances was the Chancellor’s “pretty remarkable” change in policy from the Autumn Statement to say that the Conservatives would increase public spending in line with GDP in the last year of the Parliament, rather than continuing to reduce it. That decision means the surplus forecast for the end of the Parliament now stands at £7bn, rather than the £23bn predicted in the Autumn Statement.

Under Conservative plans, which include protecting funding for the NHS, international development, and per pupil school funding, the IFS said departments would face cuts of £13.6bn (£18.3bn for unprotected departments) over the five-year forecast horizon (the cuts would be deeper in 18/19 for the Tories to meet their goal of eliminating the deficit, but would then increase). Under Labour’s plans, which intend to eliminate the day-to-day budget deficit at some point in the next Parliament,
overall departmental spending could actually increase by £9.2bnby 2019/20. The assumed Coalition policy, to reduce the deficit entirely by spending cuts, would see overall departmental spending down by £26bn. Under all three policies, the IFS said it expected debt to GDP to fall, but the Conservative plan would see that level reduced fastest.

Mr Osborne’s decision to bring forward the sale of some bank assets in order to ensure that debt as a proportion of GDP was falling in the next financial year is “not a genuine reduction in government indebtedeness”, the thinktank added.

2% DEFENCE TARGET

Several Conservative backbenchers have been calling on the party to commit to the Nato target to spend 2% of national income on defence. If the Tories made that pledge, the IFS said, it
would mean £8.3bn extra in cuts to the rest of the unprotected departments.

WELFARE CUTS

The IFS
criticised the Chancellor for not setting out in detail how he would make the Conservatives’ £12bn savings in the welfare budget. Mr Johnson said £10bn of the cuts were still undefined and that the reductions would be “significant” and of the options – including cuts to child benefit and working tax credits – “none of them feel terribly palatable; they’ll all clearly hit people at the bottom of the income distribution”. “It is time we knew more,” Mr Johnson said.

HELP TO BUY ISA

The thinktank warned of potential unintended consequences from the new announcement to introduce ‘Help to Buy ISAs’. The policy will allow people to put up to £200 per month into an ISA and, when they withdraw the money to buy their first home (as long as it is for less than £250,000 or £450,000 in London) the Government will match 25% of the value of the savings, to a maximum subsidy of £3,000. The IFS said that because the Budget contained no measures to increase housebuilding
the effect of the policy would be to push up house prices. The number of first-time buyers could actually fall in the years up to 2020 as savers try to make the most of the tax break, the thinktank added.