Why the budget is regressive rather than progressive (1)

As the dust settles on the budget statement and the implications start to be understood, it is clear that, while this Conservative Chancellor has made more effort that his Tory predecessors to be fairer to the poor (presumably under pressure from his coalition partners), the overall impact of the measures will still be regressive.

In a posting two months ago, I predicted that VAT would rise under any government. The problem with VAT is that, while it raises large sums of money, it is regressive. As this posting on the blog Left Foot Forward explains: “those on lower incomes pay a larger proportion of their income in tax than those on higher incomes. This is in large part because household expenditure takes up a larger proportion of income for lower-income households than for higher-income ones.”

Of course, the Chancellor – and especially the Liberal Democrats – would argue that the increase in income tax allowances mitigates this. That is partly true and it does depend on assumptions about the interplay between the two moves but, as the graph in the Left Foot Forward posting shows, the poorest are still hit harder than the middle income groups.

Furthermore, again as explained by Left Foot Forward: “some groups will be especially badly hit by the VAT increase – especially those that don’t earn enough to pay income tax: pensioners, the unemployed and parents in low-paid part-time work.”


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