“Wednesday of woe as the taxman bites: Changes could leave you £600 worse off” Daily Mail, 6 April 2011
“Credit Action, a financial education charity, has calculated they will leave households £200 a year worse off.” BBC News, 6 April 2011
“Labour last night claimed the average family would be £1,500 a year worse off” Express, 6 April 2011
“The decisions that are coming into effect today mean that, on average, 80 per cent of people – particularly those on low and middle incomes – will be better off.” Danny Alexander, BBC News, 6 April 2011
Today has been dubbed “Black Wednesday”, “Worse Off Wednesday” and the “Wednesday of Woe” as changes to the tax and benefit system announced by the Government come into force.
But are the changes as painful for British households as these prefixes suggest? Not according to the Treasury, which today claimed that 80 per cent of us would actually benefit from the new measures. So are such apocalyptic headlines nothing more than a storm in a teacup?
The Government doesn’t actually dispute that the ‘average’ household will be worse off. Last month’s Budget makes clear that – once January’s VAT rise is taken out of the equation – the ‘average’ household would be around £200 worse off.
The claim that the ‘average’ family would see £1,500 decrease in spending power that the Express attributes to the Labour party seems to be a misunderstanding on the part of the paper.
As Shadow Chancellor Ed Balls told the Today programme this morning, this only applies to specific families, namely those claiming child tax credit. As Mr Balls said: “If you are dependent on the child care tax credit you would be losing up to £1,500.”
Under the changes that come into force today, the maximum amount that higher and top rate taxpayers can claim in child care tax allowance has been cut from £55 per week to £28 and £22 per week respectively. This equates to a maximum annual cut of £1,404 for higher rate taxpayers and £1,716 for those on the top rate, or an average drop in the maximum allowance of £1,560.
The Mail’s headline claim that households could be left £600 worse off as a result of the changes likewise focuses on one particular scenario.
As the paper explains further down, the figure of £600 – or more precisely £590 – was arrived at by accountants Grant Thornton, when they considered the hypothetical case of “a couple with one earner on £43,000 and two young children, aged four and six.”
So is the Treasury wrong to claim that the majority of taxpayers will see more cash in their pockets because of the changes?
Actually no, they are not. As analysis by the Institute for Fiscal Studies has confirmed, the way in which the changes are structured mean that the majority of taxpayers on the lower and basic rates, with most of the pain being felt by those higher up the income scale.
The mean average is therefore skewed upward by the large decreases in entitlements for those on incomes above £40,000 per year. However as 80 per cent of people do not fall in to this income bracket, as the distributional analysis produced by HM Revenues and Customs below shows, a median average will show a slight benefit as a result of the changes.
So whilst there may be some confusion about what may appear to be contradictory reports on this morning’s tax and benefit changes, the claims tackled here are mainly supported by the facts.
Only the Express seems to have slipped up, by confusing a specific example given by the Shadow Chancellor with the ‘average’ household.
However what is clear is that in circumstances such as these, it is important that catch-all terms such as ‘average’ need to be more precisely defined, so that we can distinguish between mean and median analyses.