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The distributional effects of tax and benefit reforms since 1997

This report analyzes the distributional effects of tax and benefit reforms implemented by the Labour government since 1997. It assesses whether the reforms took money from households or provided a net gain, identifies the winners and losers, compares the impact of Labour's first and second terms, and evaluates government revenue gains. The study adopts Treasury baseline assumptions and estimates a net give-away of £1.1bn in 2005-06. Data limitations are acknowledged, and the report models distributional effects on individual households where possible, ensuring a proportional allocation based on income. Council tax changes are also considered, with an examination of their impact on households. Conclusions indicate that the reforms are overall progressive, Labour's second term is less generous but more beneficial for low-income individuals, and the average impact is relatively small.

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The distributional effects of tax and benefit reforms since 1997

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  1. The distributional effects of tax and benefit reforms since 1997 Stuart Adam Matthew Wakefield

  2. Some questions to answer • Have Labour’s reforms since 1997 taken money from households or returned money to them? • Who have been the winners and losers from the reforms? • How does Labour’s second term compare with its first?

  3. “Reforms since 1997” • Taxes and benefits only – not public services • Estimate effects on government revenues and household incomes in 2005-06 • Adopt Treasury ‘no change’ assumptions as baseline • Reforms since 1997 imply net give-away of £1.1bn in 2005-06

  4. Reforms since 1997Government revenue gain in 2005-06, £bn

  5. Reforms since 1997Government revenue gain in 2005-06, £bn

  6. Allocating payments to households • Model effect on individual households where possible • Data limitations mean we cannot model all reforms • Allocate the remainder proportionately to income • We do not model non-take-up of benefits and tax credits • Direction and size of resulting bias unclear

  7. A progressive packageDistributional effect in 2005-06 of reforms since 1997

  8. Change by parliamentDistributional effect in 2005-06 of reforms since 1997

  9. Change by parliamentDistributional effect in 2005-06 of reforms since 1997

  10. Change by parliamentDistributional effect in 2005-06 of reforms since 1997

  11. Change by household typeDistributional effect in 2005-06 of reforms since 1997

  12. Council tax changes • Excluded so far as not directly set by central government • But are affected by central government decisions • And are tax changes that affects households • What is ‘no change’ in council tax? • Use inflation increases as baseline • Actual annual rises so far average 5.2% above inflation • If no further change, this will raise £5.8bn in 2005-06

  13. Adding in council tax risesDistributional effect of reforms since 1997

  14. Adding in council tax risesDistributional effect of reforms since 1997

  15. Adding in council tax risesDistributional effect of reforms since 1997

  16. Conclusions • The overall average impact of tax and benefit reforms since 1997 is small • The combined set of reforms is highly progressive • Labour’s second term has been less generous overall than its first, but better for those on low incomes

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