Economy and public finances What’s the Damage? A low earner impact assessment of deficit reduction options 18 June 2010 NEWS RELEASE For immediate use: Friday 18 June 2010 New report shows income inequality set to get worse for 7.2 million ‘squeezed middle’ without careful targeting of emergency budget The Resolution Foundation, the low earners think-tank, today publishes a report which shows how the coalition government can share the pain of deficit reduction fairly across society. The report acknowledges that cuts are necessary but highlights how the overall deficit reduction plan in the emergency budget must ensure cuts and tax rises are proportional to ensure everyone shoulders the burden together – and the UK’s 7.2 million low income households do not remain the squeezed middle bearing the brunt. What’s the damage? – A low earner impact assessment of deficit reduction options is a unique analysis of how the different options for raising taxes and reducing public expenditure might impact on low income households. It shows: First, as for everyone else, the best way to protect low earners is with a return to sustainable growth, based on a stable macroeconomic environment and a credible plan for getting to grips with the deficit Next, cuts hurt those on low incomes far more than higher earners therefore every single progressive taxation measure must be exhausted before we turn to cuts. For low earners there are no ‘good’ cuts only ‘least worse’ ones. Finally, cuts must be made intelligently with care taken to ensure the overall deficit reduction package does not affect low earners disproportionately. This means everything must be on the table for the spending axe, with no ring-fencing of big departmental budgets. Any ring-fencing should instead focus on those initiatives that invest in future growth potential. This could include programmes designed to enable people to maintain their economic independence from the state – such as financial advice – and those that provide ladders to help people get on in life – such as retraining programmes. Without these it will be the squeezed middle which once again loses out and the growth potential of the UK will be constrained for years to come. Low earners were only just getting by before the recession but have found themselves closer to crisis since the downturn. For example, low earners’ income decreased more in the recession than any other income group: within the 25-34 year age bracket, low earner household income fell by 66 per cent compared with 50 per cent among benefitdependent households and 33 per cent among higher earners. The IFS has also shown that it in the previous three recessions of the 1970s, 1980s and 1990s, it was those on low and moderate incomes, rather than the very poorest, who were most exposed to the vagaries of economic circumstances. Indeed while those in the middle of the income distribution saw their incomes drop in all three recessions, those at the bottom and the very top experienced a slight growth in income during these periods. What’s the damage? looks at how low earners will fare in the recovery period and conducts an impact assessment of the specific tax and benefit proposals advanced by think tanks, politicians, commentators and others. These include changes to direct and indirect taxes, welfare payments and public services. It’s a resource aimed at policy makers at all levels of government, so that they can understand the impact of a variety of tax rises and spending cuts on low income households. The Foundation is not complete insulation for the low earner group, simply that those measures which disproportionately affect the group should be offset with compensating efforts elsewhere in the package. What is needed is a clear understanding of the effect and trade-offs from each option and a clear package of cuts that understands the overall impact on all income groups – some examples: Alignment of Capital Gains Tax with income tax rates would raise £3bn and would be preferable to a rise in the reduced rate of VAT (on things like fuel – low earners spend a higher proportion on fuel and essential items than higher earners 27% vs 41%) which would raise a similar amount. There is some room for manoeuvre on tax credits at the top end – 14% of higher earners (households with above average income) currently receive tax credits – but they are a vital resource for low earners and must be protected for those households on below average income. Care must also be taken not to create new cliff edges for low earners in the tax system. The increase in the personal allowance should be targeted at basic rate taxpayers by decreasing by the same amount the threshold at which you start paying higher rate tax. Sophia Parker, Acting Director of the Resolution Foundation said: “Low earners can and must be enabled to maintain an economically sustainable position throughout the recovery period we are now in. No one disputes that cuts need to be made but how, when and where are questions that need to be carefully answered. A package that understands the overall impact of the deficit reduction plan on different income groups will stand the best chance of helping low earners stay financially independent. Everyone will have to bear some burden of the pain to come but this should be proportionate and with the goal of keeping as many people in work and off benefit dependency as possible.” Matthew Whittaker, Senior Economist at the Resolution Foundation said: “There has been plenty of talk about ending middle class benefits. While it’s true that there is likely to be scope for reducing awards given to those who don’t need them, the introduction of new means-tests need to be very carefully designed to ensure that low earners don’t once again find themselves at the cliff-edge of state support. In-work support provided by tax credits is essential for maintaining the financial independence of the group.” The Resolution Foundation: The Resolution Foundation is an independent research and policy organisation that works to improve outcomes for low earners – those people who are largely independent of state support yet often struggle to remain economically independent on relatively low incomes. There are 14 million low earners in the UK – living on an average household wage of £15,800. Low earners are not the poorest in society and are not in crisis – although many of them live close to the cliff edge, spending all their monthly income, leaving no room for savings or safety nets. Many of them were already in a fragile economic position prior to the recession and our findings point to their vulnerability now and in a future spending squeeze. /Ends For further information please contact Cara Brown on 020 3372 2954 / 07957 536758 Clive Cowdery, Chairman, Sophia Parker, Acting Director, and Matthew Whittaker, Senior Economist and the report’s author, are available for further comment or interviews. All the Foundation’s research, reports, briefings, seminar notes are available on our website www.resolutionfoundation.org Notes to editor: At its broadest, we define the group as including all those with below-median income (from all sources) who are not dependent on state support. For the purposes of analysis, precise definitions depend on the data source being used. However, as a proxy, we consider the low earning group to comprise those households in income deciles 3, 4 and 5: that is, with equivalised[1] gross annual income between £13,500 and £25,800. Around 7.2 million households fall into this category in the UK, accounting for around 14.0 million adults.[2] We define two other income groups in relation to low earners: households with above-median equivalised incomes (income deciles 6-10) are considered higher earners, while those with below £13,500 income (deciles 1 and 2) are considered benefit-dependent. A snapshot of a low earners situation: 1.7 million low earners were in acute financial health prior to the recession. Compared to 3.6 million (26%) with chronic financial health and 5.5 million (39%) with mild financial health problems. Low earners have little or no safety net – over half of low earners have less than a month’s salary in savings Low earners are more glum than any other group about their personal economic fortunes, with their expectations falling almost 20 per cent since 2001 £1.9bn unsecured low earner household debt 32% low earners have secured debt (average £89,000), 53% unsecured (average £5,200) 38% of low earners struggle to keep up with bills and credit commitments (28% from time to time, 10% constantly) 40% LEs not saving for a pension the number of low earner households saying that they have difficulty keeping up with bills because of a fall in income associated with a reduction in working hours has more than doubled, from 220,000 in 2008 (3 per cent of the total) to 470,000 (7 per cent of the total). Closer to Crisis – how low earners are coping in the recessionwas published in November 2009 and is available online. Closer to Crisis showed that low earners had: Been more likely to have experienced a drop in income than other groups – this was most pronounced amongst the 25-34 age group where 66% reported a fall in income compared to 50% in the benefit dependent group and 33% amongst the higher earning group seen a reduction in hours – the proportion of low earners citing a loss of income due to reduced working hours as a factor in difficulty meeting payments doubled from 2008 (rose from 3% in 2008 to 7% in 2009). Underemploymentis as much of a problem as unemployment for low earners experienced higher levels of personal inflation than higher earners – 41% of their income is spent on essential items (food, fuel, which have been the biggest drivers if price increases in recent years) versus only 27% among higher earners The Foundation’s first project in 2005 was on low earners and their financial health. Discovering an ‘advice gap’ for 12 million low earners of working age and a further 3 million low earners in retirement, the Foundation developed proposals for a national generic financial advice service. This proposed service was aimed at low earners in the ‘advice gap’ – people who are not currently attractive to commercial providers of advice, nor receiving support from existing voluntary sector provision. This work fed into the Thoresen Review which recommended in March this year that a Money Guidance service be set up. This is now at Pathfinder stage backed by £12 million from the Treasury and the FSA. A national dividend: The economic impact of financial advice and The advice gain: The impact of generic financial advice on the financial services industry. The Foundation’s work on long-term care includes: ‘Lost: low earners and the elderly care market’, February 2008. An investigation into low earners’ experiences and perceptions of the care market, based on a combination of literature reviews and new polling, focus group and interview data. ‘A to Z: mapping long-term care markets’, May 2008. An analysis of the long term care system to produce an holistic “market map”, identifying weaknesses in the market which can be modelled to take into account future demographic and policy trends. ‘Navigating the way: the future care and well-being of older people’, December 2008. A vision and architecture of a future care system, based on the findings from the four policy development projects (above).
