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Thursday, 8 March, 2001, 18:04 GMT
Not much of a giveaway
By BBC News Online's Steve Schifferes

The chancellor's fifth Budget was widely seen as a pre-election sweetener for the electorate.

And an analysis by the independent Institute for Fiscal Studies (IFS) shows that, in contrast to previous budgets, groups across the whole income scale benefited from the tax changes announced on Wednesday.

Full year cost of Budget measures
Fuel duties and road tax: 2bn
Expanding 10p rate of income tax: 950m
Increased help to families: 1.6bn
Increased state pension: 2.6bn
source: HM Treasury
However, the government's widely publicised 2bn extra for health and education spending was allocated out of the contingency reserve, leading to no real increase in spending over the next three years.

And the increase in the rate of public spending announced by the chancellor, from 3.4% annually to 3.7% annually, came about by carrying over money that was underspent in the last year.

There has been considerable confusion about just how much the Chancellor spent, and how much was pre-announced.

Officially, the extra money for pensions was accounted for in November's pre-Budget report, but the concessions on fuel duty were put out to consultation and only confirmed when the chancellor got up to speak.

These two concessions were worth 3.6bn next year, and 4.5bn by 2003-4, compared with just under 1bn for the income tax cuts and 1bn for families, rising to 1.6bn by 2003-4.

But overall, the modest tax giveaway did little to upset the City or the Bank of England, because the chancellor collected 10bn more in tax revenue than he planned for last year.

Budget for all families

The IFS figures show that the poorest households gained the most proportionately from the Budget, with the incomes of the poorest 10% of households increasing by around 1.5%, while the incomes of the richest 10% of households increased by just 0.3%.

Budget Gains by Family Type
Lone parents: 3.18 per week
Workless families: 3.31 per week
One-earner families: 3.95 per week
Two-earner families: 2.54 per week
source: IFS

However, the pattern was less progressive than in previous budgets, while in absolute terms richer families received a bigger cash increase in income than the poor.

There is no doubt, however, that families with children gained more than single people or childless couples, with average gains of around 3 per week for families with children, compared with less than 1 per week for the childless.

However, these gains were evenly spread around most family types, reflecting the variety of family measures announced by the Chancellor.

In particular, the new Child Tax Credit redistributes a substantial sum of money to the middle classes

Like most tax credits, this measure (worth 2bn in a full year) benefits those on average incomes the most - as poor families pay no tax, and the richest 10% of families have this benefit withdrawn if they are higher rate taxpayers.

The IFS model only takes into account the increase to the child tax credit, from 8.50 to 10 per week, because the CTC itself was announced in last year's Budget.

That makes the Budget appear more redistributive than it really is.

Public spending plans

The government announced that spending would rise in the next three years by 3.7% annually, rather than 3.4% as previously planned.

However, as Carl Emmerson of the IFS points out, this is because 1bn that was underspent this year has been re-allocated to future spending plans.

The higher spending in future years occurs because this year's spending target was not met, with spending set to rise this year by only 5.6%, compared to the planned 6.9%.

The government has also benefited from lower than expected spending on debt interest and unemployment benefits.

That has allowed it to reduce the size of the contingency reserve it sets aside for unexpected increases in spending that it cannot control.

As a result, despite the 0.8bn increase annually in spending on health, education and crime, total spending is actually reduced by more than 1bn in the next financial year.

Is the Budget expansionary or not?

The government was already planning to increase spending substantially next year, and its modest tax cuts have meant an extra cost of 6bn a year.

By 2003-4 the government forecasts that it will have to borrow 10bn each year, compared to a repayment of 16bn this year.

That it still within its fiscal rules, as it is allowed to borrow against capital spending, which is planned to be 18bn by 2003-4.

However, any further spending increases beyond then will have to be paid for in higher taxes.


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