The distributional effects of tax and benefit reforms since 1997

- Tax and benefit changes under Labour to date will have a net cost to the exchequer of around £1.1 billion in 2005–06. This is the difference between a large set of changes raising around £57.2 billion and a slightly larger set of changes costing £58.3 billion. Tax and benefit reforms implemented in Labour’s first term cost a net £4.8 billion, while those since 2001 have raised a net £3.7 billion. The average impact of the £1.1 billion tax and benefit giveaway since 1997 is to raise household disposable incomes by £0.84 a week or 0.2%. The biggest proportionate gains are in the second-poorest tenth of the population, whose disposable incomes are increased by 10.8%, while the richest tenth fare worst, with a cut in income of 5.1%. Tax and benefit reforms since 1997 have clearly been progressive, benefiting the less-well-off relative to the better-off. Reforms in the second term – while less generous on average – were more progressive than those in the first, with the poorest faring better. Increases in council tax above inflation since 1997 will raise a net £5.8 billion for local government in 2005–06, net of council tax benefit. This outweighs the £0.84 a week net giveaway per household by central government and leaves households overall £3.62 a week worse off on average. The increase in council tax is regressive, except for the poorest fifth of the population (thanks to council tax benefit). But the impact of council tax on the relative distribution of income is modest, leaving the overall progressive pattern of tax and benefit changes since 1997 intact.