Budget hits the poorest hardest, says IFS

Protesters demonstrate against the Budget on 22 June The June Budget prompted angry protests

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The coalition government's first Budget has hit the poorest families hardest, a leading economic think tank has said.

The Institute for Fiscal Studies (IFS) said the measures announced in the Budget in June were "regressive".

Its analysis suggests that low income families with children are set to lose the most - about 5% of net income - due to benefit cuts announced in the Budget.

The Treasury said it did not accept the "selective" findings of the IFS.

The IFS had already challenged the government's claim that the Budget was "progressive".

Its report was commissioned and part-funded by the End Child Poverty campaign.

The analysis suggests that cuts to areas such as housing benefit and disability allowance would hit the poorest to the tune of £422 between the Budget and April 2014.

Other income groups are forecast to lose larger amounts in cash terms, but as a percentage of take-home pay, the poorest 10% will be hardest hit, the report says.

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'Regressive'

The report concluded: "Once all of the benefit cuts are considered, the tax and benefit changes announced in the emergency Budget are clearly regressive as, on average, they hit the poorest households more than those in the upper middle of the income distribution in cash, let alone percentage, terms."

James Browne from the IFS also told Radio 4's Today programme: "However, when you also include the measures that were pre-announced by Alistair Darling in previous Budgets and pre-Budget reports, the overall package does seem somewhat regressive, particularly within the bottom nine-tenths of the income distribution."

The report also questioned the government's decision to use the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI) when calculating certain benefits.

The Treasury said the IFS's analysis ignored the pro-growth and employment effects of Budget measures, such as helping households move from benefits into work, and reductions in corporation tax.

"We went much further than any previous government has gone in explaining how our measures would impact on people, why it's a progressive budget. We stand by that robust analysis," Financial Secretary to the Treasury Mark Hoban told the BBC.

But shadow education secretary Ed Balls said that independent analysts "tend to get things right".

Analysis

Nick Clegg reassured his Lib Dem colleagues in June that fairness was "hard-wired" into the Budget. This report from the IFS casts doubt on his claim and has already been seized on by Labour, who accuse the Lib Dems of providing cover for an old-fashioned Tory Budget.

The argument goes to the heart of the political debate as the country braces itself for huge cuts in public spending. That is because the coalition government has insisted that the deficit can be cut and fairness won't be sacrificed.

The Treasury is challenging the IFS report, saying it only looks at the impact of tax and benefit changes announced in June. Ministers argue that the bigger picture is important - for example, how might cuts in corporation tax stimulate growth and create jobs?

Lib Dem MPs in particular will be looking closely to make sure Nick Clegg sticks to his word. Some have already voiced concern about cuts in housing benefit and the rise in VAT.

"The fact is that on Budget day George Osborne and then David Cameron said this was a progressive Budget, there would not be a single child put into poverty as a result," he said.

"And what we now find out, when the detailed analysis has been done, is that the Treasury excluded certain things from that analysis. They excluded the impact of cuts in tax credits, in disability living allowance.

"And when you look at the facts, the fact is that a family with children on the lowest incomes gets hit the hardest by this Budget."

Timescales

The BBC's chief economics correspondent Hugh Pym says the disagreement between the Treasury and the IFS over their forecasts was about timescales.

When George Osborne said in the Budget the measures were progressive he was referring to changes taking effect by 2012. The IFS argues that we should look at a longer period, up to 2014, taking in a fuller range of measures including cuts to housing benefit.

On that basis the IFS stands by its analysis that the full package of measures, taking in Alistair Darling's last Budget and Mr Osborne's changes, is regressive, our correspondent says.

The report said that more than three-quarters of benefit claimants were affected by increases in housing costs, which are included in the RPI.

The report said: "Low-income households of working age lose the most as a proportion of income from the tax and benefit reforms announced in the emergency Budget.

"Those who lose the least are households of working age without children in the upper half of the income distribution.

"They do not lose out from cuts in welfare spending, and they are the biggest beneficiaries from the increase in the income tax personal allowance."

In George Osborne's June Budget, the chancellor increased VAT from 17.5% to 20% and cut welfare spending.

Child benefit and public sector pay were frozen and 25% cut from public service spending.

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