Personal tax and benefit reforms

There is currently a range of reforms being undertaken to the personal tax and benefits systems. Some of these changes were announced by the previous government, others introduced by the coalition. The key changes relating to health are:

(a)  Tax changes

January 2011:  Main VAT rate increased from 17.5% to 20%; duties on tobacco, alcohol and fuel increased.

From April 2011:  A range of measures affecting ‘direct taxes’ will be introduced, including:

·       ‘giveaways’ – such as an increase in the earnings thresholds above which National Insurance Contributions (NICs) and Income Tax are payable (which takes the lowest earners out of paying tax altogether)

·        ‘takeaways’ – including an increase in the rate at which NICs are paid, and a freezing of the thresholds above which higher rate tax and inheritance tax are payable (the latter increases the number of people paying these taxes).

(b)  Changes to state benefits and tax credits

A range of measures will be introduced from April 2011, including reforms to Housing Benefit, changes to tax credit entitlements, freezing of Child Benefit payments, and a switch to a different (less generous) system of uprating benefits in line with inflation.  Some of the changes offset each other.

The stated aim of the coalition government is, in the longer-term, to create a simplified benefits system through the introduction of a ‘Universal Credit’ to replace all existing means-tested benefits.

This represents a complex set of policy changes that will benefit some people and negatively impact on others.

Evidence of the possible benefits

The latest figures, presented by the independent Institute for Fiscal Studies (IFS) at their recent post-Budget briefing, point to some possible benefits from the planned tax and benefit changes up to 2014-15.1

For example, changes that take money away from affluent households may act to reduce the gap between the very richest and the rest and, so, reduce inequalities.  Non-working single parents and low- to middle-income families without children are likely to be slightly better off on average.

Looking ahead to the Universal Credit, any move to a more integrated benefit and tax credit system should make things simpler for claimants, improve incentives to work and reduce administrative errors.  In a briefing on the Universal Credit in January 2011, the IFS predicted that this reform would have at least as big an impact as the tax and benefit reforms introduced so far and that low income working families in particular will benefit.2

Evidence of the possible risks

The 2011 IFS ‘Green Budget’ estimated that the January 2011 tax changes (notably the VAT increase) reduced household incomes by an average of £480 per year.  Further tax and benefit changes announced before the recent budget will take another £200 away on average.3

Although the very richest households are the biggest losers from the total package of reforms, overall the changes are regressive – that is, the proportion of income that is taken away increases as incomes fall, such that the poorest ten per cent of households lose a similar share of their income (6.5%) as those with an annual income of £100,000 or more (7%).1

At all levels of income, it is families with children who will be the most adversely affected.

Implications for health and well-being

The association between income and health (physical, mental and social) is well-documented, even if the precise links continue to be debated.  Absolute levels of income affect material wellbeing, the affordability of health-improving (or maintaining) goods and services, as well as access to social activities.

There is growing evidence that relative income, or inequality, is at least as important an influence on health, in developed countries at least.4 As such, any tax and benefit reforms that reduce income levels and/or lead to a widening of inequalities are likely to have damaging consequences for health – and vice versa.

With children in low income families expected to suffer disproportionately from the personal tax and benefit changes, the government’s 2020-21 targets for reducing child poverty are looking extremely challenging.5

Given the established link between early life chances and health in later life, and strong evidence that disadvantage accumulates over the lifecourse, the consequences of the proposed policies are likely to be felt by those children adversely affected for many years to come.

Author: Jayne Taylor MSc MFPH, Public Health Specialty Registrar, London Deanery

UK area affected: UK wide

References

1 Browne J.  Personal tax and benefit changes.  Presentation at the Institute for Fiscal Studies post-budget briefing. 24 March 2011.  (http://www.ifs.org.uk/budgets/budget2011/budget2011_jb.pdf)

2 Presentation delivered at the IFS Briefing, Universal Credit: a preliminary analysis, 12 January 2011.  (http://www.ifs.org.uk/publications/5414)

3 Brewer M., Emmerson C. and Miller H. (ed.) The IFS Green Budget. February 2011. (http://www.ifs.org.uk/publications/5460)

4 Wilkinson R. and Pickett K. The Spirit Level: why more equal societies almost always do better.  2009.  London: Allen Lane

5 Brewer M. and Joyce R. Child and working age poverty from 2010 to 2013.  IFS Briefing note 115.  2010.  (http://www.ifs.org.uk/bns/bn115)