Budget 2012: George Osborne is hitting families even harder

This post originally appeared on The Guardian website

Although the chancellor will only step up to the despatch box to present his budget later today, we already know about the changes that will have the greatest impact on Britain’s working families. That is because governments are in the habit of announcing changes years in advance, ensuring families are caught unaware when the changes are actually implemented. It was in his 2010 budget rather than today’s that the chancellor announced a £2.4bn cut to tax creditsthat will take effect from this April. According to analysis from the Resolution Foundation, none of the 2 million families on low to middle incomes currently claiming working tax credits will be unaffected, with some standing to lose thousands of pounds.

This year’s cuts follow hard on the heels of last April’s cuts to tax credits. With the price of essentials still high, many families are struggling to see how to tighten their belts further. Heating has already become a luxury, as has the car, and they have already downgraded to value brands at the supermarket. In a survey of nearly 2,000 parents conducted by Netmums, the online parenting organisation, more than half of those surveyed felt they were living on the edge, with only a small increase in spending or a small decrease in income enough to tip them into crisis. Nearly one in five parents reported skipping meals themselves to make sure they could still put food on the table for their children.

Over the last decade, tax credits have been critical in boosting the incomes of families in the low- to middle-income group as wages for ordinary workers have stagnated. Even if the economy recovers strongly, wages for bottom-half workers are not anticipated to be any higher in 2020 than in 2007. Therefore, the need for ongoing support through tax credits will remain pressing, particularly if the cost of living stays high, rents continue to increase and mortgage interest rates move up.

The chancellor’s answer to the problems of hard-pressed families looks likely to be an increase in the personal tax allowance to around £9,000. Personal allowances have one big advantage over tax credits: they free people from the tax system and, in doing so, create strong incentives to work. Tax credits, on the other hand, can create disincentives to progress because people see their tax credits reduce as they earn more. But personal tax allowances also have a critical flaw: they are poorly targeted because they apply to all earners, including the very rich. While 70% of the cut to tax credits falls on the bottom half of households, 75% of the benefits of the increase in the allowance will go to the top half of households. This is hard to justify given the day-to-day struggles currently facing low- to middle-income families.

While the chancellor is presenting his budget as a helping hand to ordinary families, the reality is that families with children are bearing the brunt of the cuts, while older people have been largely protected. In many ways we are seeing the unravelling of much of the previous government’s investment. The Labour government recognised that children are blameless and should be protected, not penalised by the state. Poor income growth for everyone will massage the relative poverty figures over the next few years, but the reality is that after this April more families will be struggling to stay afloat.