Cumulative impacts of austerity measures and the distribution of economic outcomes John Hills Centre for Analysis of Social Exclusion, London School of Economics Equality and Diversity Forum conference on ‘Beyond 2015’ British Academy, 12 February

Background: Three phases of recent poverty and inequality changes First phase to dominated by ‘Coalition’s non-decision’ to continue price protection of working- age benefits (but more for state pensions) alongside some specific cuts, but increased tax allowance. Relative poverty and inequality fell sharply in election year (comparing 2009/10 and 2010/11), then flat Second phase to 2014/15 sees working age benefits cut in real terms alongside series of specific cuts, while pensions protected Modelling suggests regressive effects of combination across most of distribution May 2010 to 2014/15 – greatest losses at the bottom (but also losses for very top) and rising relative poverty as a result Third phase – if current policies continued sees continued regressive and poverty-increasing effects of combination of benefits falling in real terms after 2014/15 while tax allowance increases But significant uncertainties in longer-term reforms: are there more ‘welfare cuts’ to come (“£12 billion”) beyond freeze from April 2016? Will Universal Credit be implemented as currently planned? If so, will it increase take-up at bottom or spread stigma and reduce take-up? Much greater devolution to Scotland of working-age benefits (and some more to Northern Ireland)

Initial changes in poverty and inequality Data on the actual national position are only available until 2012/13. This precedes many of the most important cuts/reforms to benefits and tax credits from April With benefits still price-protected, relative poverty fell in the election year, but the population below a fixed income threshold (60 per cent of 1996/97 median income) has been rising since 2009/10 – especially after housing costs. Inequality fell sharply in 2010/11 and was then flat for the next two years Source: DWP/IFS Households Below Average Income analysis.

Initial changes in incomes by age A notable feature of the last government was the way in which the concentration on families with children and pensioners narrowed age-related differences In the first two full years of the Coalition this continued for pensioners, but was reversed for children The balance of policies suggests this will have continued after 2012/13 (and more to come after 2014/15) Source: CASE/DWP analysis of Households Below Average Income dataset.

Modelled effects of direct tax and benefit changes May 2010 to 2014/15 Starting from May 2010 (makes difference at very top if you include Labour’s income tax payments from April 2010). Covers direct taxes, tax credits and transfers (not eg VAT) Top figure compares with May 2010 CPI-indexed, bottom figure compared to earnings linked base (using EUROMOD) For most of income range effects are regressive – bigger proportionate losses at bottom – to 70-80% of way up distribution, then turns down (IFS and Treasury agree) Treasury analysis suggests biggest percentage loss for top tenth. IFS/EUROMOD suggest loss, but not as large as at bottom.

But the effects have not been felt evenly Direct tax-benefit reforms have hit poorest groups hardest AND by varied by age: Spending on pensioners was protected as share of GDP Families with children hit hardest by changes to benefits (changes compared to earnings-linked base) Pensioners Spending on cash transfers as % GDP Children Other working age Percentage change in household disposable income by age group due to policy change May 2010 to 2014/15

Lone parents and large families were worst hit from direct tax and benefit changes (vs. earnings-linking) Source: De Agostini, Hills and Sutherland (2014)

… as were Londoners (compared to earnings-indexed base) Source: De Agostini, Hills and Sutherland (2014)

Looking at services, health and schools were protected, so the axe fell on unprotected areas Local government in general - down 33 per cent Sure Start - down 32 per cent Adult skills - down 26 per cent Housing and community amenities – down 36 per cent Percentage Change by Function 2009/10 to 2013/14 Although overall public spending was down only 3 per cent……

Contrasting estimates of allowing for changes in services: Landman Economics and HM Treasury

But provision should be thought of in relation to needs: Health spending Health spending has risen in real terms But real spending per head has barely changed And ‘volume’ of spending (adjusted for NHS costs) per head is slightly down Implies need for care on effects of higher NHS spending giving ‘gain’ to bottom

Effects of direct tax and benefit changes from May 2010 to 2019/20 Looking further ahead (compared to earnings-linked 2010 base) Taking account of direct tax changes for 2015/16 and announced working age benefit freeze from April 2016 (alongside triple lock) Over most of income range, regressive effects of further reductions in real value (and more in relative value) of working age benefits alongside more generous tax allowance But if Universal Credit is in place by then, could deliver gains at bottom to people currently only claiming some benefits it replaces Even so, other things equal this implies a 1.8 percentage point rise in relative poverty rate, 2010 to 2019 Allowing for other factors, IFS projects 3.5 point rise in child poverty rate, to (most happening by )

Conclusion Income inequality fell in election year, and steady to 2012/13 But modelling suggests rising inequality and poverty since then Direct tax and benefit changes regressive up to 70-80% of way up Those changes hit families with youngest children and lone parents most, together with Londoners Overall distributional effects of service and cash benefit changes hotly disputed