Very welcome relief on tax credits but most losses have been delayed rather than reversed

Published on Fiscal Choices

Pace of spending cuts eased with the state set to be increasingly focused on healthcare and pensions

Reversing tax credits cuts will bring welcome relief for millions of families who were set to lose an average of £1,300 next year. But most of the losses have been delayed rather than scrapped, leaving millions of working families significantly worse off by the end of the parliament, the Resolution Foundation said in response to today’s Spending Review.

The Chancellor used a £27bn fiscal windfall to ease the pace of spending cuts. Combined changes to welfare and departmental budgets mean that a record 42.3 per cent of state spending is set to be directed towards older people and healthcare by the end of the parliament.

Torsten Bell, Director of the Resolution Foundation said:

“On tax credits it is very welcome that the vast majority of families will not see losses next April. The Chancellor has done the right thing by reversing these tax credit cuts entirely, rather than fudging the issue.

“However Universal Credit is the big loser because the cuts to it have not been reversed. Millions of low-income working families are still set to be significantly worse off by the end of the parliament if the Universal Credit roll-out goes ahead as planned. Pain tomorrow is better than pain today – but it is still pain.”

“The Chancellor has toned down his plans to shrink the state. But we will still see large cuts that radically change what that state does. By the end of the parliament, the state will be focused on delivering healthcare and paying pensions, but will do much less to support young people or those on low-incomes.”

On tax and benefit changes

The reversal of cuts to tax credits announced today will provided welcome short-term relief, by avoiding almost all the immediate losses next April which were set to average £1,300 per family.

However by pressing ahead with planned cuts to Universal Credit (UC) the outcomes will be broadly unchanged by 2020. This will lead to losses for millions of households, and permanently reduce the return for working among families on UC.  

RF analysis shows that by 2020 more than 3 million households are still set to lose an average of £1,000 from the £3.5bn cut to UC. But the losses could be significantly larger for some families.

New RF modelling of the combined tax and benefit changes in the Summer Budget and Spending Review shows that by 2020:

  •  a low-earning couple with three children, where one parent works full-time and the other works part-time, are set to lose £3,060 by 2020
  •  a single parent with one child, working part-time on the National Living Wage, is set to lose £2,800 by 2020
  • a single person with no kids, working full time on the National Living Wage, will be £1,280 better off by 2020.

David Finch, Senior Economic Analyst at the Resolution Foundation, said:

“The welcome reversal of planned cuts to tax credits will bring short-term relief to millions of working families. But they could still see major losses later in the parliament.

By 2020, millions working families will lose an average of £1,000 as a result of cuts to Universal Credit, though the losses could rise to £3,000 for some families. The majority will be worse off despite tax cuts and the rising National Living Wage.

“These cuts will also hit work incentives in Universal Credit, which risks undermining the government’s flagship welfare reform programme.”

On the changing shape and size of the state

The Chancellor has announced a softening of cuts to departmental spending over the course of the parliament. Today’s Spending Review cut £10 billion from departments rather than the £18 billion previously planned.

Nonetheless the £10bn cuts to departmental resource spending by 2019-20, combined with protections for health, schools, defence and international aid, will mean cumulative cuts of over 45 per cent for many key departments since 2009-10.

New RF analysis shows that the biggest loser in terms of spending cuts will transport (-75%).  In contrast, spending on the NHS is set to increase by 11 per cent over the decade, while international aid is set to increase by 52 per cent.

Matthew Whittaker, Chief Economist at the Resolution Foundation, said:

“The Chancellor today eased the pace of cuts substantially and set the direction for the future of the state.

“This easing is based on an expected £27bn boost in the public finance projections. Given the uncertainty of such forecasts, he may yet find that his planned surplus will be reduced.

“Despite scaling back his cuts, the reductions in spending mean that the size of the state is still set to fall to around to 36.5 per cent of GDP, a figure that has only been lower three times since 1948.

“Britain’s shrinking state is also being radically transformed. By 2020, public service provision will be dominated by health. The shift has profound implications for what young people receive from the state, as well as the viability of non-protected public services, such as social care and research grants, in their current form.”

On the economic outlook

The OBR earnings projection has been downgraded slightly over the parliament. Household income projections have also been revised down. By 2020 average disposable income is forecast to be 4.3 per cent higher than in 2009, relative to a July projection of 6.2 per cent.

New RF analysis shows that typical pay, which is currently £1 an hour below its peak, is set to return to its 2009 level by 2019 – meaning a decade of lost pay growth.

Laura Gardiner, Senior Polict Analyst at the Resolution Foundation, said:

“Pay growth finally bounced back last year, though it has been revised down slightly over the course of the parliament.

“Nonetheless typical earnings are finally set to return to pre-crash levels at the end of the parliament – meaning a decade of lost pay growth.

“The big question is whether the tentative signs of stronger productivity growth will boost wages by enough to offset rising inflation and sustain our pay recovery into next year.”

Impact of Summer Budget and Autumn Statement on incomes for different family types in 2020

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Cumulative cuts to resource departmental spending since 2010

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Resolution Forecast median wage projection

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Share of total state spending by 2020

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