Poor families hit hardest by 'regressive' changes

Institute for Fiscal Studies challenges Coalition claims of fairness

The Government's cuts to public spending will hit the poor harder than the Treasury has so far admitted, say the independent Institute for Fiscal Studies (IFS) – and families with children will suffer the most.

The Chancellor's claim that the NHS will enjoy a real-terms increase in spending, as promised in the election, is also exposed as being only marginally true; a rise of 0.1 per cent year is insufficient to keep up with the demands of an ageing population or new drugs, medical technology and treatments. It is also dangerously vulnerable to even the slightest mishap.

A two-thirds cut in the investment budget of Eric Pickles' Department for Communities and Local Government implies a radical reduction in new social housing, says the IFS, again liable to have a highly regressive impact in the future.

In a review of the £81bn in cuts to public spending planned over the next four years, the IFS also say that reforms to council tax benefit will create a new "post code lottery", and cause potential hardship to thousands of existing claimants.

Under the Chancellor's plans, more than 100 local councils have now been granted the authority to set the eligibility criteria themselves at the same time as funding for the benefit is being reduced by 10 per cent. The benefit is typically claimed by the "near poor", those with savings of up to £16,000.

The Government has specified that councils must protect the very poorest, but those who with very modest savings who were previously able to claim a substantial discount may see painful cuts – depending on where they live.

Unlike other benefit reforms, this will apply to existing claimants as well as new ones, as the old council tax benefit is effectively being abolished. As with the original poll tax or community charge, introduced in the late 1980s, the arbitrary and almost random nature of the new bills may cause considerable resentment and political unrest.

The acting director of the IFS, Carl Emmerson, disputed the Treasury's figures on how the reduction in the budget deficit will affects different sections of society. He said that the measures were "regressive", explaining: "The impact of all tax and benefit measures yet to come in reduces the incomes of lower-income households by more than that of higher-income households – with the notable exception of the richest 2 per cent of the population, who are the hardest hit.

"When we add in the new measures announced in the spending review this finding is, unsurprisingly, reinforced. So our analysis continues to show that, with the notable exception of the richest 2 per cent, the tax and benefit components of the fiscal consolidation are, overall, being implemented in a regressive way."

Taking broader slices of society, the richest, with an average household income of £48,400 – lose about 7.8 per cent of their income, or roughly £3,800, taking into account the value of the cuts to public services. The poorest fifth would typically lose about £1,100 – 8.3 per cent of their income – proportionately more than the better off.

Most of the detrimental impact on the very rich, however, derives from tax hikes announced by Labour and retained by the Coalition Government, especially the new 50p rate of income tax for earnings above £150,000 a year and restrictions on pension pots for the wealthy. He added: "But this is not to say that it is unfair – fairness will always be in the eye of the beholder".

Mr Emmerson also said that Mr Osborne's claim that he would cut departmental spending by a little less than Labour was only correct if the £6bn in cuts being made this year were discounted: "By 2015, departmental spending is forecast to be below the level implied by the plans set out in Labour s last Budget."

But it is the new council tax benefit regime that the IFS highlights as an especially "undesirable" move, "reducing transparency and adding complexity": "The radical reform to council tax benefit is probably the one that raises the most concerns. It will make the benefits system more complex and less transparent. It will also make it harder to make the benefit system fit together better as a whole. The incentive it provides to local authorities to encourage low-income people to move elsewhere is undesirable."

While pensioners continue to be shielded from the worst of the cuts, the abolition of the educational maintenance allowance for 16- to 18-year-olds, the removal of child benefit from the better off and cuts to housing benefit are set to hit families with children hardest at every income level, but especially the poor.

Imran Hussain of the Child Poverty Action Group said: "The Government's reputation on fairness is now shot to pieces. The claim that child poverty will not increase from the spending review is clearly wrong."

But the Deputy Prime Minister Nick Clegg accused the Government's critics of "frightening people" with claims that they were "doing unfair things when we are not".

"People who are trying to take only one bit of the equation and say 'Ah, that shows it is all very unfair' – they are not being very straight with people and frankly they are frightening people, and that is not right – claiming we are doing unfair things when we are not," he said.