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Last Updated: Friday, 22 April, 2005, 09:26 GMT 10:26 UK
Are you better off under Labour?
ANALYSIS
By Steve Schifferes
BBC News economics reporter

Shoppers
Are we all now better off?
There have been big changes in people's standard of living under Labour - but in what direction?

On average, everyone is slightly better off as a result of all the tax and benefit changes made by the government since they came to power in 1997.

But if you add in the effects of council tax increases, the average family is 150 per year worse off.

And the average conceals big changes among different groups, with pensioners and families with children gaining at the expense of single people and childless couples.

The impact of Labour's tax and benefit changes has been counter-balanced by what has been happening in the economy, where average salaries have risen across the board - but more strongly at the top, so overall the income distribution is broadly unchanged.

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During the years when the Conservatives were in power, inequality rose sharply and taxes increased faster for the poor than the rich, according to new research from the independent Institute for Fiscal Studies.

Average earnings

Given the relatively strong economy and declining unemployment, it is not surprising that average earnings have risen steadily.

During the period between 1996/7 and 2003/4, average income has gone up by 19%, and median income by 17%.

The average yearly growth rate of median income under Labour - 2.3% - is higher than that during the Major years (0.8%) or the Thatcher years (2.1%).

However, the most recent figures suggest that between 2002/3 and 2003/4 there was a pause in income growth, with average incomes falling by 0.2% in real terms (and median incomes, which better measure the "typical" family, were up 0.4%).

There is controversy as to why this happened, with some researchers suggesting that it resulted from the increase in National Insurance rates introduced in April 2003, while others point to a fall in self-employed incomes.

Taxes and benefits

During its period in office, Labour has increased a wide range of taxes.

According to researchers at the Institute for Fiscal Studies, income tax changes since 1997 have raised a total of 7bn for the Chancellor in the current financial year (including 3.7bn from abolishing the married couple's allowance).

Increases in national insurance have raised 6.7bn more, while indirect taxes like higher fuel and tobacco taxes have raised another 4.6bn annually.

However, Labour has also made big changes in the tax and benefit system which has redistributed money to pensioners and people with children.

These include measures like the child credit and increase in child benefit for families with children, and the pensioner credit and winter fuel payment for older people.

In all, these additional payments or credits amount to a give-away of just under 20bn - just counterbalancing Labour's tax increases and leaving the government worse off by 2.2bn.

But giving tax concessions in this way has affected rich and poor very differently.

Redistribution

The result of Labour's changes to the tax and benefit system, particularly after 2001, have been strongly redistributive.

On average, people in the bottom 20% of the income distribution have gained over 11% per year more from the government, and are 1,430 per year better off.

Those in the top 10% of the income distribution have received about 4% less from the government, an average loss of 2,243.

The changes are also very significant for different household types.

A lone parent with children is 1,920 per year better off, while the average pensioner is 1,000 better off - but a two-earner couple with no children is over 1,000 worse off.

However, despite the size of these changes, the average level of inequality in Britain has barely changed since Labour came to power, according to Tom Sefton and John Hills of the Centre for Social Exclusion at the London School of Economics.

This is because earnings right at the top of the income scale have continued to grow much faster than average.

Income inequality in 2003/4 was around 40% higher by the commonly used measure (the Gini coefficient) than when Mrs Thatcher came to power.

Poverty

One of the main reasons for Gordon Brown's changes to the tax and benefit system was to fight poverty.

Labour has particularly targeted child poverty, and set a target of reducing it by one quarter by 2005 and halving it by 2010.

However, the most recent government figures have suggested that progress towards this target has not been as fast as Labour had hoped for.

One in four children were in poverty in 1997/8, and more than one in five were still in poverty in 2003/4.

Poverty rates among pensioners have fallen even more slowly, and they have not fallen at all among people of working age without children.

Many experts believe that Labour will have to spend even more to reach its target of reducing child poverty by half by 2010, and much of initial gains from poverty reduction have come as more people returned to the workforce.

Poverty is defined as households whose income is below 60% of the median income (after adjusting for the size of household and not taking into account housing costs).

Some commentators suggest that the poor take-up of some means-tested benefits which the government has focused on to reduce poverty explain the figures.

Both of the other main political parties want to switch the emphasis to non means-tested benefits to fight poverty, particularly for pensioners.





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