The wealthiest 20% of Britain’s earners will receive almost as much support from the state through the “shadow welfare” of generous tax-breaks by 2020, as the poorest fifth take home in benefits, according to a new analysis by the Fabian Society.



Iain Duncan Smith used his resignation letter from the cabinet to criticise the March budget as “unfair,” for juxtaposing reductions in benefits for the disabled with tax cuts for some of the wealthiest in society.

But Andrew Harrop, the Fabians’ general secretary, said his research shows the budget was just the latest step in a radical reshaping of the welfare state, which has shifted resources from the poorest in society to the better-off.

“By the end of the decade, if the Conservatives deliver on their manifesto promises, households in the top fifth of the income distribution will be receiving an average of £9,400 a year in tax allowances and welfare payments; while the poorest fifth of households, for whom benefits may be their only source of income, receive an average of £10,200,” he said.

Duncan Smith resigned over unfair choices between tax cuts for the rich and benefit cuts for the poor. But he spent six years in cabinet supporting welfare cuts and tax allowance rises which have together led us to the position where the basic financial help for a two-earner couple is higher than for an unemployed couple,” Harrop said.

Increases to the tax-free personal allowance – a Liberal Democrat policy taken up by the coalition government from 2010 – have been the cornerstone of the Treasury’s approach to supporting lower-paid workers. In last year’s general election manifesto, the Conservatives promised to lift it to £12,000 by the end of this parliament, and Osborne took another step towards that goal in the budget.

But as the allowance has risen, taking more of the lowest-paid out of income tax, the benefits of further steps have gone increasingly to workers in the middle of the income distribution, with the poorest – and the unemployed – missing out altogether.

The Institute for Fiscal Studies thinktank pointed out in the run-up to the election that 43% of adults already earned too little to pay income tax, so would not benefit from further increases in the personal allowance.

During a period when many key benefits have been frozen, Harrop says the scale of tax reliefs now effectively amounts to a system of “shadow welfare”.

The cash value of the basic personal tax allowances will have increased by 80% in the decade to 2020; while out-of-work benefits have increased by just 12%. That means the average two-earner couple will be receiving more in basic tax allowances by 2020 than an unemployed couple would be given in benefits. Tax reliefs are rarely considered as equivalent to cash benefit payments; but Harrop argues that the revenue foregone by the Treasury still amounts to financial support, and politicians should ask themselves whether this represents the best use of taxpayers’ resources.”

From the perspective of disposable income it makes no difference whether the government gives you a tax allowance or a cash payment,” he said. “The government must explain how it can justify giving more money to working couples through the ‘shadow welfare’ of tax reliefs than to the unemployed through benefits.”

The row about Osborne’s tax and spending priorities was reignited by the budget, with critics questioning whether cutting corporation tax, which is already at the lowest rate in the G20, and reducing capital gains tax (CGT), would really boost entrepreneurialism, as he claimed. Labour’s calculations suggested that the CGT cuts were worth an average £3,000 to the richest 0.3% of the population.

The shadow chief secretary to the treasury, Seema Malhotra, recently announced a review of the different tax reliefs offered to businesses, arguing that the government has failed to test their effectiveness, and could be wasting billions of pounds on incentives that fail to achieve their stated objectives.