Monday, April 07, 2008

Brown's Losers

Actively encouraged by Brown

As has been widely reported, Brown's abolition of the 10p starting rate of income tax has created 5.3 million losers. More specifically, the Institute of Fiscal Studies has calculated that 5.4 million households will lose at least £1 per week.

So who are these losers?

The majority of them - 3.1m - are childless non-pensioner households. These are the people who have lost through higher income tax, but do not qualify for the increases in Brown's hideously complex tax credits. As Janet Daley points out, in Labour's eyes, the childless poor are the undeserving poor.

There is of course a much bigger picture here.

First, even those who have been compensated for the increase in tax by being given higher tax credits have in reality lost: they've been forced to become even more dependent on state benefits. Instead of working their own way, keeping what they earn, they now lose even more to tax, and must go cap in hand to to the commissars for relief. Fiscal churn, with all its attendant costs, has been given yet another boost (see this blog where we estimated the deadweight cost of churn at £5-6bn pa).

Second, the financial incentive for the poor to have children has been further increased. As the following IFS chart shows, Brown's changes to the tax and benefit system since 1997 have had massively different impacts on households with and without children.

Whereas, for example, he's cut the income of a single person in employment by around 5%, he's increased that of an unemployed lone parent by 15% - that's a 20% relative income swing incentivising having children and giving up paid employment.

And remember, this is on top of a benefits regime for lone parents that is very undemanding. In the words of a widely cited OECD comparative study:

“The United Kingdom is the only country in this review that has no tradition of work-testing sole parents on income support and it is no coincidence that it has a much lower employment rate and a relatively high incidence of poverty among this group.”

Brown has increased the rewards to a career in child-bearing, and the consequences are all too clear. Perhaps most appalling, Britain has the highest teenage pregnancy rate in Europe: every year, some 80,000 under-18 year olds conceive of whom half go through to maternity (see this blog).

The real losers from Brown's tinkering go way beyond those who've merely lost a few quid from his 2007 Budget. The real losers will be with us for decades to come.

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