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Robin Williamson of the Low Incomes Tax Reform Group ( www.litrg.org.uk ) comments on an MPs' report on those who are still going to lose out following the abolition of the 10% rate.

Robin Williamson

Introduction

Even after the raising of personal allowances announced on 13 May 2008, there are still some 1.1 million households on low incomes yet to be compensated for the withdrawal of the 10% starting rate.

An MPs’ report recommends that the remaining losers be identified and compensated. For the longer term, Budget decisions should be taken not in isolation, but having regard to broader Government objectives.

Background

On 22 April 2008, the Treasury Committee of MPs responded to the public furore about the withdrawal of the 10% starting rate of income tax by announcing an inquiry. LITRG was pleased to be able to submit detailed written and oral evidence to the Committee, particularly as we had expressed concerns about the withdrawal of the 10% rate since it was first announced in the 2007 Budget. The Committee’s Report, Budget Measures and Low Income Households, was published on Saturday 28 June.

We welcome the Report, which gives a detailed appraisal of what the Government has so far done to address the problem, and offers a balanced assessment of its options for future reform. Links to the Report, and to our evidence, follow at the end of this article.

The Government’s immediate response

On 13 May, the Chancellor announced his decision to increase the basic personal tax allowance for basic rate taxpayers by £600 from £5,435 to £6,035. The Committee describes this measure as ‘probably the least bad option’ for compensating the losers from the removal of the 10% starting rate. It was ‘a welcome step towards a simpler tax system with fewer low-paid people paying income tax’. Increasing allowances in this way takes more low-income people out of the tax system, thereby increasing their gain from working. Moreover, the problem was with the tax system, and the Chancellor was right to adopt a tax solution.

On the other hand, some 1.1 million low-income households who lost out from the original Budget measure are still not fully compensated even after the raising of the personal allowance. The total cost of the measure was exactly the amount required to meet the Government’s child poverty target, and yet most of it benefits taxpayers who did not lose from the withdrawal of the 10% rate, and who are not in low-income households. To that extent the measure was ‘not substantially well targeted’.

The Committee urges the Government to identify who the 1.1 million households are, and to examine seriously how they can be compensated. At a time of rising prices of fuel and other essentials, and in view of recent unexpected rises in child and pensioner poverty, the need to do so is particularly pressing. This should be done through the tax system; no other reforms are likely to be effective purely as mechanisms for compensating the remaining losers. 

The Committee noted LITRG’s suggested ways out of the ‘10% problem’ which were specifically targeted at the losers and no-one else. They acknowledged that such solutions would have only cost £1 billion instead of £2.7 billion. However the Chancellor ruled these out as ‘complex and expensive to administer’. We are still not convinced, as we still have yet to see the complexity inherent in making a late personal allowance change and the extra measures needed to recompense the other 1.1 million households.

Other reforms to tax and welfare

The Government should use the forthcoming pre-Budget report in the autumn as a means of consulting on proposed changes rather than an opportunity to make announcements in advance of the Budget proper. While information about Budget decisions has improved in recent years, insufficient account is taken of the interaction of Budget measures with each other and with other policy decisions. The Committee recommends that alongside future Budgets and pre-Budget reports, the Government should publish a Household Impact Assessment analysing the impact on individual, family and household finances of Budget measures and other changes to the welfare system.

Future Budget decisions should not be taken in isolation, but with full regard to the fiscal context and to the Government’s broader social objectives. The interactions between the tax, tax credits and benefits systems are complex, and this complexity is underlined by the difficulties which the Chancellor faces in deciding how to compensate losers from the removal of the 10% band.

In the longer term, reforms should be centred on the greater challenges faced by the Government in combating poverty. To this end the Report recommends the establishment of a Poverty Commission to examine the public policy challenges relating to poverty.

Links

Use the link ( http://www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/326/32602.htm )to see the Committee’s Report, with our oral evidence set out at page 123 of the Report. LITRG’s written evidence is published here in a downloadable file. ( http://www.litrg.org.uk/uploadedfiles/document/1_561_TREASCOM_evidence_10prate_LITRG_final.pdf )