The government's controversial decision to cut tax credits has come under renewed fire after it emerged that its analysis of the distributional effects of measures in the July Budget, including changes to tax credits and the national living wage, has been largely absent.
In July the Treasury select committee was surprised not to receive the distributional analysis of the July Budget that it had come to expect from chancellor George Osborne in previous years.
As such, in August the committee wrote to him to request that he send the appropriate analysis of the impact of measures.
And when the analysis was received by the committee, it was not what they expected: it did not contain the distributional analysis of measures from the July Budget alone, but all measures since 2010, moreover "not allowing for an analysis of the distributional effects of tax credit cuts and rises in the national living wage", treasury select committee member Helen Goodman told City A.M.
The Treasury had previously said that while it is cutting tax credits, other proposals in the July Budget, including increases in the minimum wage, would lead to net benefits for most households.
But Matthew Whittaker, chief economist at the Resolution Foundation commented on the report reiterated that the Treasury's analysis did not look at the overall distributional impact of the July Budget to show the impact on across different income deciles:
Government analysis of how the July Budget will affect households was conspicuously absent in July. This may, in part, be due to the eye-watering cash losses that millions of working households will experience due tax credit cuts – despite the welcome introduction of the National Living Wage.
The Government’s latest analysis still fails to show the full distributional impact of its welfare changes. They should focus instead on easing the losses that working families will face in April.
Documents provided to the Treasury select committee from the Institute of Fiscal Studies (IFS) and Office of Budget Responsibility, meanwhile, show the situation quite differently to Osborne's narrative. The IFS report reads:
A package of changes to the tax, tax credit and benefit system has been announced for implementation in the current parliament as part of the government’s deficit reduction programme. These will reduce household incomes significantly, particularly for those towards the bottom of the income distribution.
The IFS reports also shows that those who claim tax credit are not the same as those who will receive the national living wage, casting doubt on Osborne's claims that eight out of 10 working households will be better off.
The Resolution Foundation's own distributional analysis also shows that the national living wage only partially offsets the losses low income households face after the July Budget.
This, as well as the fact tax credit cuts start next April, while changes to the minimum wage won't come into effect until the end of this parliament, led Goodman to add: "The evidence we took in the Treasury Select Committee conclusively proves that those who have tax credits cut will not be fully compensated by increasing the national living wage. Osborne's rhetoric on tax credit cuts is just empty words."
Osborne had previously come under fire from MPs, including from his own party, who were frustrated over the changes, which mean 3m families will lose on average £1,000 a year, according to research from the IFS.