Mind the Budget income gap

Published on Public Finances and the Economy

If the Chancellor is to be believed, this was yet another Budget for ‘hard working families’. But the reality seems more mixed. Let’s start with the positive: yesterday’s childcare announcement. Leave aside that the majority of new spending on childcare is still going to better off families, including those earning up to £300,000, a little noticed part of the announcement offered good news to the lowest paid parents.

At last year’s Budget, the government announced  that it would offer enhanced childcare support in Universal Credit  – 85 rather than 70 per cent of costs – only to those parents who earned enough to pay income tax.  It has now changed its mind and will extend enhanced support to families in which all parents work regardless of earnings. This change will help make work pay for 900,000 of the lowest paid parents in the country who would otherwise have missed out.

The rise in the personal tax allowance to £10,5000, on the other hand, has less to offer those in the bottom half of the income distribution, despite its near universal presentation as a tax cut for the low paid. First, successive moves to raise the personal tax allowance over this parliament have already lifted millions out of tax. The five million lowest paid workers in Britain do not benefit from any further rise.

Second, the cost of the policy comes from the benefit it offers to the better off not the least well off. It is those in the top half of the income distribution who benefit most from the rise in the personal tax allowance, as they do from raising the 40p tax threshold. Spending the same amount of money to raise the National Insurance threshold would offer greater benefit to those on low to middle incomes. But if you really wanted to support the least well off, raising the work allowance in Universal Credit would be a far more effective way of targeting the same money.

The Budget appears to offer another round of positive news on growth, employment and earnings with the OBR revising upwards its forecasts from the Autumn Statement. But there are question marks over how good the recovery feels for the typical worker. While jobs growth is strong, the number of employees is falling, with an unprecedented growth in self employment – 211,000 in one quarter filling the gap. All the indications are that this is not the self-employment of highly paid freelancers but a low paid, more precarious form of self-employment.

Resolution Foundation projections for median wages also look markedly less rosy than the OBR’s projections for average wages. While the OBR now expects average wages to recover their pre-crisis level slightly earlier in 2017-18 than at the Autumn Statement, our projections suggest that typical wages will continue to fall short of their pre-crisis level.

The question for the Chancellor is whether those on low to middle incomes will give him the benefit of the doubt, despite not feeling the warmth of the recovery he describes or whether the gap between his rhetoric and their reality will start to cost him.

This article originally appeared on the Public Finance website.