Tax cuts will not relieve poverty, say researchers

 

Amid all the hype about budgetary tax cuts, the latest research from the Economic and Social Research Institute (ESRI) points clearly to one conclusion. No matter how tax reductions are structured, the overall Budget package will only really help the less well-off if it allocates more funds to increasing social welfare rates.

All the talk about Budget 1999 is that it will focus on tax reductions for the lower-paid. However, according to ESRI economists Tim Callan and Brian Nolan, aiming cuts at lower-income earners is only part of the answer, if the goal is an even-handed distribution of the budgetary largesse.

The two economists used the sampling model developed by the ESRI to estimate the impact of recent Budgets. They argue that simply totting up who got what in gross terms does not give an accurate picture.

Instead, they calculate gains and losses from recent Budgets relative to a simple benchmark, where social welfare rates, tax bands and tax allowances are linked to the growth in average earnings.

The economists first calculated how much social welfare recipients would have needed to see their incomes rising in tandem with the average working wage. For taxpayers, they measured what gains would have been necessary to index personal allowances and the standard rate income tax band for wage inflation.

Once these calculations were completed, they worked out what further impact the Budgets of 1994 to 1998 made on the different income groups.

The results are striking. They show that the richest 10 per cent of families have gained about four per cent in income from budget-day changes, over and above the gains from indexation of bands and allowances for income growth.

However, the poorest 30 per cent of the population gained two per cent less from the changes introduced. Broadly, this is because welfare rates have been increased to keep pace with inflation rather than with the rise in average earnings among those at work. Social welfare rates have risen by 16 per cent over the past four Budgets, while average incomes for all households have increased by some 22 per cent. If welfare rates continue to rise more slowly than other incomes, more people will become poor in relative terms, the researchers calculate.

Increasing social welfare rates in line with, or ahead of, general income growth is the answer, they argue. This would require more resources to be devoted to welfare in future and relatively less to tax reductions.

The economists argue that the proposed direction of tax and social welfare policies indicated in the Programme for Government will further increase the gap between rich and poor. They compare a tax package over the next three Budgets involving cuts in the two income rates, an increase in personal tax allowances and a widening of the standard rate income tax band with a policy focusing exclusively on major increases in personal income tax allowances. Low and middle income earners would benefit from a policy concentrating on allowances, they conclude.

Again using the Programme for Government, and basing forecasts on past policy, the economists looked at the likely increase in social welfare payments. They calculated that if policy continues along the lines expected - and significant resources remain devoted to tax reductions - then the numbers earning less than half the average income will continue to rise.

The economists then looked at what might happen if more resources were applied to increasing social welfare rates. Their earlier calculations were based on £750 million in tax cuts over the next three years and welfare increases costing £250 million in excess of inflation.

If, instead, £500 million was devoted to welfare rises and the same amount to tax reductions, social welfare payments could increase by some 19 per cent.