Page last updated at 14:24 GMT, Wednesday, 21 May 2008 15:24 UK

Tax changes to hit '18m families'

By Steve Schifferes
Economics reporter, BBC News

Chancellor Alistair Darling
Mr Darling is under fire for his tax changes

Eighteen million families will be worse off after the April 2009 budget when temporary tax concessions expire, a study suggests.

According to independent think tank the Institute for Fiscal Studies, they will lose on average £150 per year.

Almost 1 million people are still worse off this year, despite government concessions on the 10p rate.

Pressure to maintain the personal tax allowance in future years could put government finances under more strain.

Growing budget hole

If public sector borrowing ends up permanently higher as a result, it will further undermine the credibility of the government management of public finances
Robert Chote, Director, Institute for Fiscal Studies

The government has already forecast that it will borrow a record £43bn next year.

It claims that borrowing will begin to fall after that as the economy recovers, but these plans are optimistic, according to the IFS.

The group believes the government will be under strong political pressure to extend its temporary concession for another year, or face millions of angry voters ahead of an election that must be called by May 2010.

"By announcing a big 'one-off' increase in the personal allowance this year, Alastair Darling has not only created millions of winners this year; he has created millions of potential losers next year," say IFS director Robert Chote.

"The government may well be afraid to take their gains away from them. If public sector borrowing ends up permanently higher as a result, it will further undermine the credibility of the government management of public finances."

Mr Chote was questioned by the Treasury Select Committee on Wednesday as part of its investigation into the effects of budget measures on low income households.

Who are the losers?

The IFS says that 21.3m families will be better off this year as a result of the tax and benefits changes announced on 13 May, which raised the personal allowance to compensate for the abolition of the 10p tax rate.

David Cameron meets voters ahead of the Crewe and Nantwich by-election
The Conservative Party has focused on the 10p tax rate to attack Labour

But it points out that 6m individuals will still pay more income tax this year as a result of the abolition of the 10p rate.

And it says that 0.9m families are still worse off overall, including 500,000 single adults under 25, 140,000 childless couples aged between 25 and 55, and 115,000 single adults aged between 25 and 55.

Looking to the future, it points out that 18m families would be worse off in 2010/11, while only 3.6m families would gain, and 10m would be unaffected, if the temporary one-off tax concessions are reversed.

What can be done?

According to the IFS, making the tax concessions permanent would cost £3.2bn a year (including £2.7bn in relation to the higher personal allowance).

It says that "given the political pressures," it expects the government to borrow more money to finance this change and make it permanent.

This, however, "would leave the taxpayers to pick up the bill in future years" and could mean the government breaches its own debt ceiling of 40% of gross domestic product (GDP).

The concession on personal allowance - worth £2.7bn - is broadly the amount the IFS says would enable the government to meets its child poverty target of halving it by 2010.

But it points out that "increasing the personal allowance is of little benefit to people in poverty" and indeed raising median income makes it harder to meet the poverty target.

The IFS concludes that the measures taken on 13 May were a £5.5bn giveaway, and was the largest such package since the General election year budget of 2001/2.

Political controversy

For the Conservatives, Shadow Chancellor George Osborne said: "Here is independent evidence of Gordon Brown's compensation con on the 10p tax rate.

"His cynical manoeuvre to save his own political skin will leave 18m families facing a tax rise next year," Mr Osborne added.

The increase in the personal allowance will mean that 22 million people will gain an additional £120 this year, including those on middle incomes
Treasury spokesperson

"This is what happens when short-term politics gets in the way of the long-term interests of the country."

But a Treasury spokesperson disputed the IFS's claims.

"The increase in the personal allowance will mean that 22 million people will gain an additional £120 this year, including those on middle incomes," they said.

"And we are providing support at a time when families are facing additional costs.

"As the Chancellor said in his statement to the House of Commons, for future years our aim is to continue the same level of support for those on lower incomes.

"We will set out our plans for future years in the Pre-Budget Report along with our fiscal projections, consistent with the fiscal rules and in line with the requirements of the Code for Fiscal Stability."


SEE ALSO
Q&A: Tax changes
13 May 08 |  Business
Full statement: Tax changes
13 May 08 |  UK Politics
Tax rebel Field apologises to PM
13 May 08 |  UK Politics
Downing St brushes off criticism
12 May 08 |  UK Politics
Brown not prickly, says Miliband
11 May 08 |  UK Politics
Blair 'secretly advising Brown'
10 May 08 |  UK Politics

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