Distributional results for the impact of tax and welfare reforms between 2010 and 2017, modelled in the 2021/22 tax year

Interim findings, November 2017

Contents

List of figures3Executive Summary4Introduction6Results by household income distribution8Cash impacts8Impacts as a percentage of household income 10Impact of reforms by the parliament they were legislated in11Results by ethnicity of adults in household13Cash impacts13Impacts as a percentage of household income14Results by household disability16Impacts for the core and wider disability groups under the Equality Act 2010 definition16Impacts by household disability score18Results by household demographic type21Impacts by number of children in household24Impacts by gender and income decile27Impacts by gender and age29Conclusion31Contacts32

Equality and Human Rights Commission www.equalityhumanrights.com

Published: November 201731

List of figures

Figures

Figure 1. Cash impact of each type of reform by household income decile

Figure 2. Impact of each type of reform as a percentage of net income, by household income decile

Figure 3. Cash impacts of reforms made during 2010-15 and 2015-17 Parliaments, by household income decile

Figure 4. Cash impact of each type of reform by ethnicity of adults in household

Figure 5. Impact of each type of reform as a percentage of household net income, by ethnicity of adults in household

Figure 6. Cash impact of each type of reform by disability composition of household

Figure 7. Impacts of reforms as a percentage of household income, by household disability score

Figure 8. Cash impact of each type of reform by household demographic classification

Figure 9. Impacts of reforms as a percentage of household income, by household demographic classification

Figure 10. Cash impact of each type of reform by number of children in household

Figure 11. Cash impacts of reforms made during 2010-15 and 2015-17 Parliaments, by number of children in household

Figure 12. Cash impacts of all reforms at the individual level, by gender and income decile

Figure 13. Cash impacts of all reforms at the individual level, by gender and age group

Executive Summary

This report summarises the first set of results from our research project Tax, welfare, social security and public spending: a cumulative impact assessment, conducted by Landman Economics and Aubergine Analysis. It demonstrates the impact of all modelled reforms to the following parts of the tax and welfare systems:

Income tax

National Insurance Contributions (NICs)

Indirect taxes (VAT and excise duties)

Means-tested and non-means-tested social security benefits

Tax credits

Universal Credit (UC)

National Minimum Wage/National Living Wage (not formally part of the tax-benefit system, but modelled here).

Our findings show that the overall impact of policy decisions taken between 2010 and 2017 is regressive.

In cash terms, those in the bottom half of income distribution, lose more than those in the top 10 per cent. The contrast is even more striking for policy decisions taken in the 2015-17 Parliament (the impacts of which are for the most part, we believe, still to come).

The evidence from our investigation show that the reforms we have examined will actually boost the incomes of the top fifth of those surveyed, while substantially reducing those in the bottom half.

Overall our analysis, while subject to further refinement, shows clearly that a range of people who share certain protected characteristics will be significantly adversely impacted by these reforms:

Ethnic minority households will be more adversely impacted than White households, with average losses for Black households about 5% of net income more than double that for White households.

Households with one or more disabled member will be significantly more adversely impacted than those with no disabled members. On average, tax and benefit changes on families with a disabled adult will reduce their income by about 2,500 per year; if the family also includes a disabled child, the impact will be over 5,500 per year. This compares to a reduction of about 1,000 on non-disabled families.

Lone parents lose around 15% of their net income on average almost 1 in every 6. By contrast, the losses for all other family groups are much smaller, from nothing to 8%, especially for those that are relatively well-off.

Women lose more than men from reforms at every income level. Overall, women lose around 940 per year on average, more than double the losses of around 460 for men.

The biggest average losses by age group, across men and women, are experienced by the 65-74 age group (average losses of around 1,450 per year) and the 35-44 age group (average losses of around 1,250 per year).

Introduction

This report summarises the first set of results from our research project Tax, welfare, social security and public spending: a cumulative impact assessment, conducted by Landman Economics and Aubergine Analysis. It demonstrates the impact of all modelled reforms to the following parts of the tax and welfare systems:

Income tax

National Insurance Contributions (NICs)

Indirect taxes (VAT and excise duties)

Means-tested and non-means-tested social security benefits

Tax credits

Universal Credit (UC)

National Minimum Wage/National Living Wage (not formally part of the tax-benefit system, but modelled here).

All the reforms from the 2010-15 Conservative/Liberal Democrat Government and the 2015-17 Conservative majority Government that can be modelled using data from the UK Family Resources Survey (FRS) and Living Costs and Food Survey (LCF) are modelled. As yet, no reforms from the Conservative minority administration elected in June 2017 are modelled as none had been announced at the time of writing. However, any reforms which are announced in the Budget on 22 November will be included in the analysis of distributional impacts in the final report from this project due to be published in early 2018.

The focus of this work is analysis of results by protected characteristics as defined in the Equality Act 2010 as well as other instructive breakdowns of the results (for example, by household income decile and household type).

Analysis of the impacts of direct taxes, NICs and welfare benefits is produced using FRS, while the indirect taxes analysis is produced using the LCF. The analysis uses three years of pooled data (currently 2012-13 to 2014-15 for FRS, although the final results will include 2015-16 data as well) to increase sample size. The results in this document are presented for Britain as a whole (the final research report will break down the results separately for England, Scotland and Wales, and for regions within England).

We have improved and extended the methodology used in our 2014 report, with more data and a more granular modelling approach.[footnoteRef:1] This means that we can focus on the impact of specific policy changes that are likely to have a large impact on certain groups, for example the change from Disability Living Allowance (DLA) to Personal Independence Payments (PIP) that we could not model before. [1: There are six specific improvements in the methodology for this new research project compared to our 2014 report. They are as follows: (1) use of the more detailed disability information in the FRS dataset introduced for 2012/13 and subsequent years; (2) improvements to the individual-level distributional analysis; (3) improvements to some of the tax-benefit algorithms (for example, modelling dividend taxation; (4) improved modelling of above-inflation increases in minimum wages (for example, the National Living Wage); (5) use of multi-year datasets for the FRS and LCF data to increase sample size and the accuracy of the results; and (6) allowing for partial take-up of means-tested benefits, tax credits, and Universal Credit.]

Results by household income distribution

Figures 1, 2 and 3 show the impact of tax and welfare reforms since 2010 according to where households are located in the income distribution. The analysis is performed by decile: households are ranked according to their estimated disposable income in the 2021/22 tax year (adjusting for household size and composition) and then the income distribution is divided into 10 equally sized segments or deciles, from poorest to richest.

Cash impacts

Figure 1 shows the annual cash impact of all modelled tax and welfare reforms, plus real-term increases in the National Living Wage and National Minimum Wage, legislated between 2010 and 2017, as they are calculated to affect real disposable incomes in the 2021/22 tax year. The impacts are broken down into five different types of reform, with the key results explained below:

There are average gains across all deciles from changes to income tax and NICs (shown in red on the graph), with the largest cash gains (around 800 per year) in deciles 8 and 9, and the smallest gain in the bottom decile. Lower deciles gain less from the income tax and NICs changes because many of the adults in these deciles are either not in work or do not earn enough to pay much tax and National Insurance, if at all.

There are average losses across all deciles from the changes to indirect tax (shown in yellow), with the largest cash losses in the top decile. These effects are largely driven by the increase in VAT from 17.5% to 20% in 2011. Although fuel duty has been cut significantly in real terms between 2010 and 2017, the reductions in fuel duties are not large enough to