Impact of welfare reform on Wales*

Poverty A man woman and two children
ViewsFebruary 19th, 2014

The latest in the series of Welsh Government’s reports on the impact of welfare reform on Wales estimates that the changes to various working age benefits will reduce household incomes in Wales by a total of £900 million, equivalent to £500 a year for every working age adult. Hardly surprisingly, the local authorities with the largest percentage of the population claiming a benefit lose the highest amount per head, while those with the largest numbers of claimants lose the most in gross terms.

In an discussion between myself and Guto Bebb MP for Aberconwy on BBC Radio Wales on Monday 17th February 2014, Mr Bebb made a number of allegations about the Welsh Government’s report, accusing it of being ‘political posturing’ as well as claiming that the report was only partial in its coverage of the issues. It wasn’t my place to defend the Welsh Government’s report – Jeff Cuthbert AM, the Minister responsible, was on later in the morning to do precisely that – so I didn’t respond to these claims.  You can listen to all three of us here.  

However Mr Bebb raised some important points. If they are correct, at the very least they weaken some of the Welsh Government’s conclusions. So I decided to dig a bit deeper.

Benefits for high earners

Mr Bebb’s first criticism of the Welsh Government’s analysis was that it included the impact of the ‘taper’ on child benefit and the withdrawal of child tax credit from high income earners. He said that these were changes that everyone would agree with. The report does indeed include the changes in benefits for high earners, as befits a comprehensive analysis of the overall impact of reform. The fact is that, whether people support them or not, there has been a loss of household income as a result. Ironically, the sums involved are small – the £41 million lost as a result of the Child Benefit taper and £24 million lost from changes to Child Tax Credit are only 7% of the total loss of benefit income to Wales.

Impact of tax allowance increases

Mr Bebb’s second criticism was that the Welsh Government’s analysis did not take account of the impact of increases in personal tax allowances, which he claimed meant that 2 million taxpayers in Wales were £700 better off. Mr Bebb is right but only partly. It is estimated that basic rate tax payers have benefited from tax changes by £700 – but this is the cumulative benefit over the life of the government and only takes effect from 2014/15.  On top of this, there are not 2 million taxpayers in Wales but only 1.37 million according to HMRC. A back-of-an-envelope calculation puts the gain from tax changes to the Welsh economy as a whole from 2014/15 at about £900 million a year  compared with a loss from welfare reform in 2015/16 of the same sum. For individuals, the gain from tax changes is equivalent to £700 a year per tax payer from 2014/15 (although if averaged out over the total population of working age in the same way as is done with welfare reform the sum would be smaller), compared with an average loss of £5-600 a year per person from welfare reform.

Council tax rises

The third issue raised by Mr Bebb was that the report didn’t take account of council tax, in particular the Welsh Government’s decision not to freeze it unlike the UK Government’s decision in respect of England. It’s a moot point whether the Welsh Government should have included council tax, along with, for consistency, VAT, free prescriptions and much else, but let’s look at it anyway.

Here too, it’s not quite as simple as Mr Bebb suggests. The Welsh Government is no more obliged to use the money it received as a consequence of the UK government’s decision on council tax than it is to replicate any other UK government decision. On top if this, it is local authorities which set council tax, and in England about 40 per cent have opted not to freeze it despite Westminster’s exhortations. The Welsh Government did include £50 million in the Welsh local government settlement for 2013/14 for councils to use to freeze their council tax if they wished, although only Cardiff and Monmouthshire did so. Even if it is accepted that council tax should be taken into account, then Welsh Government statistics show that the change in the average band D tax between 2011/12 and 2013/14 was £63.91 – equivalent to £31.96 increase a year.

Pensioner poverty

The fourth claim by Mr Bebb is that pensioner poverty has declined as a result of the current UK government’s actions. It is correct that pensioner poverty (after housing costs) has fallen dramatically, but this part of a long-term downward trend which began in 1995/96-1997/8 when it stood at 27 per cent, falling to 17 per cent by 2007/8-2009/10 and then to 14 per cent by 2009/10-2011/12. So, yes, pensioner poverty has fallen but not only under the current government’s watch. But how this relevant to a report about working age adults isn’t clear.

The verdict?

Well, if you accept that the Welsh Government’s report should be considered in light of changes to taxation, then their estimate of an average loss of £500 per person needs to be set against a gain of about £700 per tax payer from 2014/15. Indeed, the UK Treasury’s own figures, in its Autumn Statement for 2013 take account of direct and indirect taxation as well as welfare reform.  These show an average loss, per household not per individual, of around £175 a year.

The focus on averages only tells part of the story however.  The graph below, taken from the statement, shows the impact on each tenth of households ordered by income (with the bottom decile being the poorest tenth).  What is very clear is that it is the least well off third of the population and best off tenth which lose the largest amount in cash terms (and also in percentage terms).  

Whether you use the Welsh Government’s figures, the Treasury’s or Mr Bebb’s own analysis the conclusion is that the net impact of benefit changes, whether or not they are set against changes in taxation, is that the average individual and household in Wales loses out, albeit less than the headlines suggest.  The loss is, however, much greater for those who can least afford it 

Chart1

Victoria Winckler is Director of the Bevan Foundation

 * This post has been revised and corrected following very helpful comments from Peter Black AM (see below).

 

 

 

 

One Response

  1. Peter Black says:

    I have blogged on this here: http://www.peterblack.blogspot.co.uk/2014/02/damned-statistics.html

    Three points though: 1. The £700 gain from the increase in personal tax allowances is not over the period of a Parliament. It will benefit 1.1 million taxpayers in Wales. 130,000 have been taken out of tax altogether. In 2013-14, it was a £600 gain which is a benefit to Wales of more than £660m. From April 2014, taxpayers will pay £700 less in tax than they did in 2010. That is a £770m plus gain for Wales in the next financial year and the in the one after it.

    2. Labour Ministers are claiming “total loss of income of around £930m a year” by 2015-16 so their figures are not for a single year.

    3. There is clearly a net impact here. I would argue that it is narrowly positive neither the Labour government nor I can say for certain as to do so we would have to evaluate differences in GVA for Wales. I do not believe that these figures are available.

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