Friday, 5 December 2008

Pre-Budget; Labour's smoke and mirrors

. h Interesting report by the Institute for Fiscal Studies into the PBR. It looks into the 'distributional effect' of Darling's plans. It is easy to see from this that the claim that this was a 'redistribution' budget is based on no more than smoke and mirrors. Turning first to the change in VAT which was heralded as a boon for lower and middle incomes we can see that in terms of proportion of income it does indeed return the most (2.85%) to the lowest incomes but in actual, cold hard cash terms, it returns the least (£5.43) compared to £17.94 for the richest.

The report comments on the cut in VAT;

"this has the appearance of a progressive reform: the gain for any given household is broadly determined by the amount that a household spends, but households in the Expenditure and Food Survey who report a low income tend to report a level of spending which is higher relative to their income than households reporting a high income"

On the various measures introduced changing the tax and benefits system the government scores rather better on the redistributionist scale. Increases to means-tested benefits mean an additional 3.23% to the poorest household compared to the richest who get just 1.58%. Unsurprisingly, given the beneficial changes to Child Benefit it says that the main winners are low income families with children.

The other headline that will come out from the report is the less than minimal impact of the new 45p tax band. It even says that the government may end up losing revenue on the measure;

"There are also considerable uncertainties in forecasting the underlying pre-tax incomes of the very rich in 2011/12 given that the latest micro-data available on the incomes of the very rich dates from 2005/06, and given that recent analysis showed a close relationship between income growth amongst the very rich and the performance of the stock market, which has been extremelyvolatile in recent months.

These issues, combined with the uncertainty over how very rich adults will respond to higher marginal tax rates, must surely mean that the HM Treasury’s estimated revenue yield of £1.6bn a year is subject to an extremely wide margin of error, and the possibility must exist that the measure could lose the Government income tax revenue."

It lists various 'behavioural' changes which can be used to evade the measures. So, in other words the taxation system remains open to exploitation. It also shows the disparity in our taxation system saying that "workers in low-income households will face marginal effective tax rates of 70%" while calculating that the richest will face an average marginal tax rate of 56.8%.

On child poverty; the report looks at the lack of impact. It says the rise in child benefit will have 'negligible' impact. So, as we can see...the Pre-Budget report was really all about smoke and mirrors, not substantive 'fairness' or redistribution.

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