Budget analysis and reaction from the Resolution Foundation

On personal tax allowances – Small gains for the great majority of tax payers excluding the very highest and lowest earners. However three-quarters of the £1 billion goes to households in the top half.

On fuel duty – The freeze on fuel duty will disproportionately benefit lower and modest income families.

On childcare – Welcome increase in generosity of childcare support through Universal Credit but only a minority of working low-income families with children will benefit.

On wages – The OBR forecasts show wages have dipped further than previously realised. For the median worker, the downturn has become even more severe.

On housing – Focus on new supply to be welcomed but focus on home ownership is unlikely to benefit those on low and modest incomes

PERSONAL TAX ALLOWANCES

The raising of the personal tax threshold to £10,000 will put small amounts of money into the pockets of all tax payers excluding the very highest and lowest earners.

All tax payers will be £48 a year better off in real terms. Those earning below the threshold won’t gain, nor will individuals earning more than around £118,000.

Resolution Foundation analysis shows that when looked at on a household basis three-quarters of the £1bn tax cut will flow to those in the top half of the income distribution. However, it should be remembered that many of these higher income households will also lose out from other measures from April such as the fall in in the higher-rate threshold over the next three years.

Gavin Kelly, chief executive at the Resolution Foundation, said:

“This is a modest tax cut which gives a little help to most people in work including millions of low-income families. However, the bulk of the benefit goes to higher income households at the same time as families on lower incomes face a reduction in support through the tax credit system.”

FUEL DUTY

The Chancellor’s decision to freeze fuel duty disproportionately benefits families on low and modest incomes (LMIs). Resolution Foundation analysis shows that for every £1 spent by an LMI family, 5p goes on fuel – compared to 3p for a better-off family.

Matthew Whittaker, senior economist at the Resolution Foundation, said:

“The benefits of this freezing of fuel duty will be felt most strongly in the poorest third of households who spend a higher proportion of their income on fuel and so are hit especially hard by rising petrol prices.”

CHILDCARE

The Resolution Foundation is the first to model the details of the new more generous level of childcare support available through universal credit. So far the focus has been on the childcare vouchers which mainly go to better-off families and exclude those in receipt of tax credits.

The analysis shows that at most 4 in 10 working families with children on universal credit will be eligible for the more generous level of support (85%) for the costs of childcare.

Under universal credit about 564,000 families (38 per cent of the total working families who quality for universal credit and have children) will be eligible to claim 85 per cent of childcare costs. The remaining 62 per cent – more than 900,000 working families – will not qualify because one or both parents earn too little to pay income tax. They will instead receive 70 per cent of childcare costs, as under the existing tax credit system, when the new scheme begins in 2015.

For working families receiving universal credit with children under 5 just under a third will qualify for the new support – 164,000 families out of a total of 524,000.

The group most likely to be excluded from the more generous level of support will be the lowest income working families on universal credit with one or more parents working part-time on low pay.  This contrasts with the separate system of tax relief announced for better off families who can claim up to £6,000 against childcare costs as long as a parent does not earn more than £150,000 a year.

However, the Resolution Foundation analysis also shows that some of the 900,000 families excluded from the new more generous support – around 200,000 – will still receive significantly more help than they would have done prior to universal credit as they will become eligible to claim whilst working under 16 hours.

Vidhya Alakeson, deputy chief executive of the Resolution Foundation, said:

“Only a minority of working families in universal credit with children – 40 per cent at most – will be eligible for the new 85 per cent rate of childcare support.  The rest have someone in low-paid, part-time work and so won’t benefit.  It is completely wrong that these working families will be excluded from new support at a time when families on up to £300k will benefit from childcare vouchers.

“The government should be applauded for attempting to help families struggling with the costs of childcare but the truth is that those who are struggling the most are missing out.  We are left with a complex two-tier system of childcare support within universal credit that gives less support to the least well-off.”

WAGE SQUEEZE

Figures from the OBR show average wages continuing to fall, with the dip from pre-recession levels now bigger than previously forecast.   For the typical (median) worker, the situation looks even starker according to the Resolution Foundation’s analysis of the OBR data.

James Plunkett, director of policy at the Resolution Foundation, said: “These new forecasts show the wage squeeze worsening in 2013 and extending longer into the future.  All changes in taxes, benefits and duties announced in the Budget need to be been seen against the backdrop of a historically severe decline in earnings.”

HOUSING

Efforts to boost the number of home owners without simultaneously ensuring adequate growth in the supply of new homes of all kinds is only likely to drive up house prices.

The ‘Help to Buy’ scheme is unlikely to benefit families on low and modest incomes given that the government has extended the original ‘First Buy’ scheme at the same time as removing all income caps.

Families on low and modest incomes are more likely to benefit from the £750 million investment in the Build to Rent fund as well as the £225 million increase in the debt guarantee for affordable housing.

Vidhya Alakeson, deputy chief executive of the Resolution Foundation, said: “There’s a pressing need to increase the supply of new rented homes for those who are unlikely to be able to own their own homes, even with support.”