IN BRITAIN’S real game of
Family Fortunes, played out daily across the country, the Goverment is one of the biggest players — controlling tax and benefits and so deciding how much is left in all of our pockets.
When Gordon Brown takes centre stage in Labour’s election campaign this morning, the task facing him will be to convince voters that he has played his tax and benefit cards to make us all winners.
The challenge for the Chancellor has been made dramatically harder because analysis by the influential Institute for Fiscal Studies, based on the Government’s own figures, revealed yesterday that, for the first time since the recession of the early 1990s, average household incomes have fallen.
At the broadest level, the key driving forces behind living standards are the strength of growth in the economy as a whole, the level of employment and earnings and the rate of inflation. In this sense, Labour can legitimately argue that a successful performance by the economy since 1997 has delivered increased prosperity for the country as a whole.
Even if much of the credit might lie with an independent Bank of England and its deft interest-rate decisions, the economy escaped recession in the global downturn in this decade to see the longest unbroken run of quarterly growth for 200 years. The consequence has been that real incomes, after allowing for inflation, have risen substantially.
Under Labour, the IFS estimates that the real-terms earnings over the period have climbed by some 19 per cent, rising from £343 a week in 1996-97 to £408 by 2003-04. This is equivalent to an average real rise each year of 2.5 per cent after allowing for inflation.
But this rosy big picture conceals significant differences in the fortunes of various types of households. In some cases, the direct impact of tax and benefit changes by Mr Brown has drastically altered how people have fared under Labour.
So how do the Chancellor’s measures, those for which he must now explain himself to the electorate, stack up?
Over the Labour years, the biggest direct gains from tax changes have gone to the least well-off in society. However, because the Chancellor has tailored his complex system of tax credits to favour those in work, it is the second-poorest tenth of people who have gained most since 1997 — with tax and benefit changes adding £23 a week to their incomes on average, according to the IFS’s analysis.
Even within the poorer sections of society, Mr Brown’s measures have had varying impacts on different types of households, with the greatest benefit going to those with children and to pensioners. Although single pensioners and lone parents remain the poorest groups in Britain, the IFS found that they have been catching up in recent years, with incomes rising more sharply than the average.
Lone parents have seen an average annual rise in income of nearly 4 per cent since 1997. For couples with children, the figure is 2.8 per cent. The number of pensioners below the poverty line has dropped by a quarter, or 700,000, since 1997 and, for perhaps the first time in four decades, pensioners are no more likely to be poor than anyone else.
The Government’s goal of eliminating child poverty is more in doubt. The number of children deemed to be in poverty has dropped by 700,000 under Labour. But the IFS says that the Government’s goal of cutting the total by one million is at risk — a problem blamed on the complexity of the tax credit system, as well as a rise in the number of children in workless households.
For those in the highestearning half of the population, the Brown years have seen a steady increase in the amount the Government takes from their pockets. This group has lost out as a result of Labour tax and benefit changes, the IFS estimates. The biggest losses came in the Government’s second term, when Mr Brown pushed through most of the £26 billion in tax increases imposed under his chancellorship. There have been 156 tax-raising measures during this time.
A large part of the increased tax borne by middle Britain has come in the form of what experts call fiscal drag. This happens when the Chancellor fails to raise tax thresholds as earnings rise, so that more and more people are sucked into the net of higher-rate tax. As a result, the number of higher-rate taxpayers has leapt from 2.1 million in 1997 to 3.3 million and is set to hit 4.4 million by the end of the decade.
The middle classes have also borne the brunt of other Brown tax increases, including the £7.3 billion abolition of dividend tax credits which is blamed for depressing share prices and undercutting personal pensions, as well as the 2002 national insurance rise.
The rich, and those who are merely comfortably well-off, have been the biggest losers from Budget measures since 1997. Since then, the IFS calculates that tax and benefit changes have left the richest 10 per cent of the population £54 a week poorer than they would otherwise have been — a loss of about 6 per cent from the average income for this group.
Between 2002-03 and 2003-04, the institute estimates that the very richest in society also suffered a real fall of 4 per cent in their incomes as a consequence of the 2002 Budget’s tax increases.
As Labour sought to control the damage from yesterday’s headlines, one government claim was that if the self-employed were excluded the figures for changes in average income in the past financial year would be positive. While they do seem to have been particularly heavy losers, excluding them from estimates of living standards would make little sense, as about 10 million people derive at least part of their earnings from self-employment.
Suggestions that the self-employed were not affected by increases in national insurance were also misleading. While the self-employed pay contributions at a reduced rate, the 1 per cent “national insurance surcharge” in 2002 applied to them like everyone else.
