Cuts to welfare offset by tax cuts higher up income scale, with no overall contribution to paying down deficit, study finds

The coalition’s changes to benefits and direct taxes have hit families with children under five harder than any other group and hurt the poorest more than the better off, according to the most comprehensive evaluation yet of the government’s social policy record.

While Conservatives and Liberal Democrats each claimed credit for the big increase in personal income tax allowances, the report concludes that the government’s stated aim that the rich should contribute proportionately more to repairing the nation’s finances has “not been realised”.

It finds that the cuts to welfare were offset by the cost of tax cuts higher up the income scale, with no overall contribution to paying down the deficit.

The authors say that the coalition’s tax benefit changes hit families with children under five harder than any other household type.

Although the coalition stressed the importance of the “foundation years”, the report – prepared by a consortium of academics overseen by the LSE and the Universities of Manchester and York and comprising eight separate papers – finds real spending per child on early education, childcare and Sure Start services fell by a quarter between 2009-10 and 2012-13.

It also finds that provision for adult social care users, including residential homes, fell 7% a year during the coalition period to 2013-14, at a time when the population aged 65 and over grew by 10%.

Although total public spending fell only 2.6% between 2009-10 and 2014-15, non-protected services were cut by around one third, with the biggest losers being services provided by local councils.

Some of the figures on which a final assessment of the full coalition record can be made have yet to be published, but the report states that despite the coalition’s insistence that “those with the broadest shoulders should bear the greatest burden”, the poor bore the brunt of changes to direct taxes, tax credits and benefits.

It states: “Up to 2014-15, the poorest twentieth lost nearly 3% of their incomes on average from these changes (not allowing for VAT and other indirect taxes) and people in the next five-twentieths of the income distribution lost almost 2%.”

The report says: “Within those averages there were differences: for example within the poorest tenth, one in four lost more than 5% of their income, but one in 10 gained more than 5 %. With the notable exception of the topmost twentieth, income groups in the top half were net gainers from the changes. The effect was largely regressive because the impact of benefit reductions was greater for those in the bottom half of the income distribution than any gains from lower income tax.”

These figures do not include the impact of indirect tax changes such as the increase in VAT.

The report says bluntly that “the intentions that the rich would contribute proportionately more to debt reduction have not been realised.

“Our analysis shows that it is poorer population groups who have been most affected by direct tax and benefit changes and in fact that savings made from changes to benefits have been offset by expenditure on direct tax reductions further up the income distribution, meaning that in combination, these changes have made no contribution to reducing the deficit or paying down the debt.”

The cost of working-age benefits not related to having children fell from 3.4% in 2009-10 to 3.1% in 2014-15, and spending related to children fell from 2.8% to 2.3% of GDP by 2014-15.

The largest contributors to the overall fall as a percentage of GDP were the reductions in tax credits and income support, with significantly fewer people being eligible, the authors state.

There were also falls both in the number on unemployment benefits and in the relative value of these benefits. The number of people receiving housing benefit offset a fall in the value of awards.

An ageing population and a rise in the value of state pensions per recipient (relative to GDP per adult) contributed to an increase in spending on pensions. But the report highlights how cuts to local council funding have led to a fall in social care spending. From a peak of 1.78 million reached in 2008-09, the number of people receiving adult care services through English local authorities fell each year to 1.27 million in 2013-14 – a fall of 29% in the total caseload. While the decline began under Labour, it accelerated dramatically under the coalition.

The decline was especially steep for residential care, and for community service users aged over 65 with disabilities (down 32%) and mental health service users of working age (down 37%).

While health was protected relative to other areas, real growth rates were extremely low by historical standards, and a number of key indicators suggest increasing pressure on the system. Health inequalities remain deeply embedded.

Professor John Hills, director of the LSE’s Centre for Analysis of Social Exclusion, said: “Protection of some of the core parts of the welfare state from the greatest cuts, and initial protection of the value of benefits, meant that those at the bottom, and important services, were initially shielded from the worst effects of the recession.

“But in the second part of the coalition’s period, selective cuts to benefits and to unprotected services have begun to take their toll, leaving the next government … with much greater social policy challenges than the coalition inherited.”

The Treasury said its own work presented the most rigorous record of the impact of the government’s policies on households.

“Unlike the Treasury’s analysis, the research by LSE Centre for Analysis of Social Exclusion does not take into account the effects of changes to the vital public services on which so many rely.

“That means that it can’t consider the full range of ways the government provides support to the poorest and most vulnerable families across the country: those on lower incomes have been helped by a range of government policies across this parliament in all areas of government spending, from protections to NHS and schools spending to the decision to increase the tax-free personal allowance.”