Chancellor hits benefits again

Most benefits and tax credits for working-age people will be cut in real terms for three years in a row from 2013-14, under plans announced by the Chancellor in his 2012 Autumn Statement on the public finances.

The Chancellor admitted he would fail to meet his pledges on public borrowing as a result of worsening prospects for economic growth. Forecasts of growth from the independent Office for Budget Responsibility were revised down significantly for every year between 2012 and 2016. As a result, the Chancellor said, the government's 'austerity measures' would have to be extended until at least 2017-18 – three years longer than originally promised.

In overall terms, however, the measures outlined in the Autumn Statement were neutral in their effect on the public finances. Instead the Chancellor chose to make significant changes in the way spending cuts will fall on different groups and areas of spending.

Key measures

  • There will be an increase of just 1 per cent in cash terms in most working-age benefits and tax credits in each of the three years 2013-14 to 2015-16, saving £4.5 billion annually by 2017-18. Disability benefits and pensions will be unaffected. Child benefit
    will be frozen completely in 2013-14 (as already planned).
  • Further spending cuts will be imposed on government departments of 1 per cent in 2013-14
    and 2 per cent in 2014-15 (except for health and schools, and excluding local government in 2013-14).
  • There will be a further increase in the
    personal income tax allowance for 2013-14, from £9,205 to £9,440, at an annual cost of around £1 billion. The higher rate threshold for income tax will rise by 1 per cent in cash terms (rather than linked to inflation) in 2014-15 and 2015-16.
  • Cuts will be made in the lifetime and annual tax allowances for pension contributions, raising £1.1 billion by 2017-18 from the wealthiest 1-2 per cent of savers.
  • Corporation tax will  be cut by 1 percentage point from 2014-15, costing £8-900 million each year by 2015-16.

The government's own analysis of the distributional effects of changes to tax, tax credits and benefits (up to 2013-14) shows those in the lowest half of the income distribution suffering a loss of net income, with those in the lowest decile losing most. Those in the seventh and eighth deciles (above the average) would gain slightly, while those in the topmost decile would lose most of all (around 2 per cent).

Some comments on the Chancellor's announcement:

  • 'Snipping at the safety net and reducing the value of benefits at the same time will increase poverty and hardship for the most vulnerable. We’re at risk of consigning the poorest to a decade of destitution.' (Joseph Rowntree Foundation)
  • 'For too long the welfare system in Britain has sent strange signals and undermined the idea that work should always pay. No-one should celebrate further welfare reductions and there are no easy targets left to cut from the working age budget, but when benefits have risen much faster than wages in the last year there is a need rebalance that to an extent.' (Centre for Social Justice)
  • 'Despite all the talk, working families are once again at the front of the queue for spending cuts. With 6 in 10 poor children living with a working parent, real terms cuts to tax credits, housing and child benefits are grim news.' (Child Poverty Action Group)
  • 'The majority of the cuts made to benefits and tax credits announced today will come from working households – it’s completely wrong to say that today was all about helping so-called strivers... George Osborne is right to tighten up on highly generous pension tax-relief for the rich but the revenue should have been put to use in ensuring there is affordable childcare for working families.' (Resolution Foundation)

SourceAutumn Statement 2012, Cm 8480, HM Treasury, TSO
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