Eighteen million families will be worse off by an average of more than £150 a year from tax and benefit changes over the next two years, unless the Government finds the money to extend last week’s one-off income tax cut and to continue topping up the winter fuel allowance, said the Institute of Fiscal Studies (IFS) this morning.

IFS said that recent changes to personal allowances announced earlier this month, and the tax giveaway announced in the recent Budget, will tally £5.5bn.

Of this, around £2.6 billion is being financed through increases in other taxes (including green taxes, capital gains tax, business rates on empty properties and anti-avoidance measures), and around £2.9 billion by increased borrowing.

In fact, if it is maintained, the May 13 mini-Budget was the biggest Budget or pre-Budget giveaway since 2001, when the outlook for the public finances appeared much stronger.

Some 21.3 million families will be better off this year than they would  have been without the personal tax and benefit changes announced in Budget 2007, and subsequently. But 0.9 million families will still be worse off than they would have been in the absence of these changes.

In fact, 6 million individuals will still pay more income tax this year as a result of the abolition of the 10 per cent tax band, despite the increase in the personal allowance. But most of these 6 million individuals either live with a spouse or partner who gains more than they lose, or are fully compensated by increased benefits and tax credits.

The 0.9 million families who are still worse off overall this year as a result of the reforms in Budget 2007, and subsequently, include: 500,000 childless single adults under 25 (almost all living in a household with other adults); 140,000 childless couples both aged 25 to 55; and 115,000 childless single adults aged 25 to 55.

Apparently, the losing families have an average income after taxes and benefits of £11,800. More than two-thirds are in the poorest third of the  population. These families lose around £83 a year on average, with the  poorer among them losing a larger proportion of their income than the richer ones.

But here is the rub; unless the government maintains the recently announced tax giveaway in future years, then by 2010/11 some 18 million families would be worse off in 2010/11 than in 2008/09.

Chancellor Alistair Darling said in the House of Commons on 13 May that, “Our aim is to continue the same level of support for those on lower incomes,” which suggests that he will try to ensure that at least as many of this group are compensated in future as are being compensated this year by the increase in the personal allowance. Retaining the higher personal allowance would require the Government to find around an extra £2.7 billion a year, while keeping the winter fuel payment at its winter 2008 level would require another £575 million a year.

The IFS then rattled off the Government’s options:  increasing personal allowances even further, for example, but as a result benefiting the better paid too.   Or it could extend eligibility for Working Tax Credit to those aged 21 or over and working at least 16 hours a week.  Another option would be to taper away personal allowances to those on higher incomes.  The IFS list of alternatives goes on and on.

But of course the Government could have done something else back in 2007 when the then chancellor revealed his last budget.   You will recall back then he lowered the 22 pence tax rate to 20 pence, but abolished the 10 pence rate.  Instead, he could have simply left the 22p rate unchanged, removed the 10p rate, but upped personal allowances. 

That would have been nice and simple, and transparent also.  But maybe that was the problem, the last thing Gordon Brown wanted was for his tax changes to be transparent – much better to earn some good headlines with a sleight of hand, a bit of mystery dust, and a good deal of wool flung over our eyes.

© Investment & Business News 2013