Speaking on the first day of the new tax year, Shadow Chancellor Ed Balls has claimed tax and welfare changes represent a ‘dangerous cocktail’ for the economy.
Working families face losing up to £1,560 a year under the coalition’s new tax and benefit regime, the shadow chancellor, Ed Balls, has claimed, triggering a row with the Treasury, which said that only the richest 20% will lose out. The shadow chancellor also warned that a combination of high prices, spending cuts and the VAT rise presented a “dangerous cocktail” that would hit women and children particularly hard.
Balls made his comments on the first day of the new tax year, when a raft of tax and benefit measures kick in, as tax thresholds are increased, child benefit and working tax credits are frozen and the rate of childcare element of the working tax credit is reduced from 80% to 70% of total costs. The Shadow CFhancellor claimed the reforms amounted to a “black Wednesday” for families but Danny Alexander, chief secretary to the Treasury, insisted that the increase in the personal tax allowance and other changes meant that only the richest would be significantly worse off.
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The official Treasury analysis – which it said included all tax and benefit changes bar the increase in VAT from earlier this year – showed that the majority of households will be better off, with the bottom 80% gaining on average small amounts over the year and only the top 20% losing significantly.
Balls cited figures that suggest that the childcare cuts alone would cost families with two or more children up to £1,560 a year while the freezing of the basic and 30-hour element of the working tax credit would cost some families £391.
Talking to BBC Radio 4’s Today programme and quoted in the Guardian, he said the VAT rise had “massively swamped” all the other changes.
“I think you’ll find that government ministers will not be willing to say that the effect of these budgets is progressive because they know it is regressive, because of the VAT rise, which outweighs by far the personal allowance rise,” said Balls.
“However, even on today’s figures, if you are a family with children, if you are a woman rather than a man, in particular if you are a woman in part-time work, you lose very substantially. The IFS have said that a family with two kids on £18,000 plus will lose… up to £1,500.”
He added: “I think the thing today is not only the fact that it is unfair, or that it is hitting women and children harder. This is quite a dangerous cocktail. The reason is that if you’ve got simultaneously high food and oil prices and petrol prices, and spending cuts on this scale bigger than any other economy in the world, and these hits to people’s living standards, the danger is – as we are now seeing – that it hits the economy really hard.”
Alexander said he did not want to “belittle” the impact of the spending cuts already coming through the system, but insisted that on average 80% of people would be better off as a result of the changes coming in on Wednesday.
“Obviously the big picture is that we’re trying to clean up the mess that Labour left in the economy, and that means taking some very difficult decisions that mean that we can reduce the deficit, which means reducing public spending in some areas, and of course some tax increases like the VAT rise that came in at the beginning of the year.
“But in terms of what happens today, which is what we’re talking about, the start of the new financial year, the changes that we’re making today are ones that are designed to help people, particularly those on lower or middle incomes to cope with some of the financial pressures they are facing.”
The independent Institute for Fiscal Studies said the poorest 10% of households would lose 2% of their income as a result of changes coming into force on Wednesday, the increase in VAT in January and the budget decisions made by George Osborne last month.
It said that within 90% of households the amount lost as a result of the tax and benefit changes decreased as income rose. But the richest 10% of households are the biggest losers from the changes overall, seeing their incomes fall by more than 3.5% on average.
