Considering income alone is never enough when looking at living standards

Published on Incomes and Inequality

The Independent reported yesterday that ‘middle England’ will be ‘hit hardest’ by upcoming changes to taxes and benefits. Research commissioned by the paper finds that families in the £40k-£50k bracket are set to suffer a four-way hit from:

  • The reduction of the 40p tax threshold;
  • A rise in NICs rates;
  • A sharper taper on tax credits; and
  • The means-testing of Child Benefit.

This kind of story is fairly familiar – here’s the Telegraph and the Mail making the same point – and in one broad respect, they’re right. Any fiscal strategy that’s reluctant to take additional measures that hit the top, and makes some effort to protect those at the bottom – like the one being pursued by the coalition – will end up relying heavily on raising revenue from the people in between. (Though in reality, within this group, it’s people in the ‘lower-middle’ rather than the ‘upper-middle’ that will feel these hits the hardest.)

But, as is often the case, today’s Indy story fails to really get to grips with the impact of these changes on living standards, because it doesn’t fairly compare households of different sizes. As anyone trying to raise children knows, a single person on an income of £40k can afford a lifestyle a world away from a family of four living on the same income.

In fact, in terms of living standards, a single person on £40k sits in the top third of the population, enjoying a standard of living above 71 per cent of people. By contrast, a couple with two children on £40k sit in the bottom half of that distribution, below 52 per cent of the population. Considering raw incomes alone is never enough – and is often misleading

The challenge for the government is that this question of adjusting for household size isn’t just a problem for the way we analyse the impact of upcoming cuts, it’s a fundamental problem at the heart of the coalition’s tax-benefit strategy.

In simple terms, our tax system (as opposed to the system of tax-credits) is blind to the extra costs of children, and yet the government’s landmark policy to relieve Britain’s hard-pressed families – the raising of the personal allowance – is based solely on that system. The result is that relatively well-off couples without children do well, whilst many families in the bottom half of the distribution of living standards do badly.

Over the next few years, as more resources go into increasing the personal allowance, at the expense of child-related supports like tax-credits and Child Benefit, that is a trade-off that will grow in significance.