Treasury Committee Press Notice

Treasury Committee reports on consequences of the abolition of the starting rate of income tax

The Government must do more to compensate the 1.1 million households who, even after the 13 May measures, will continue to lose out from the abolition of the starting rate of income tax, the Treasury Committee states in a report published today (28 June ).

The Report, Budget Measures and Low-Income Households, looks at the impact of the abolition of the 10p starting rate of income tax, considering separately the effects of the initial abolition as well as the impact of the changes to personal allowances announced on 13 May 2008.

Compensating the remaining losers

The Report welcomes the Government’s attempts to compensate those who have lost out through the abolition of the starting rate of income tax through raising the personal allowance for basic rate taxpayers, but concludes that there remains a pressing need for the Government to seriously examine ways in which the 1.1 million households who will continue to lose can be fully compensated. Furthermore, the Committee recommends that for future years, the Government must ensure that the original 5.3 million losing households do not suffer losses from the abolition of the starting rate and calls on the Government to set out proposals to achieve both these objectives by the time of the 2008 Pre-Budget Report. 

Committee Chairman John McFall stressed:

“The 13 May measures whilst welcome, do not go far enough. There are still 1.1 million losing households, many of whom are on low-incomes and who are being  hit hard by rising food and fuel prices and the slowdown in the economy. The Government’s short-term priority must be to make every effort to compensate these people in full. The Government must not let this issue slide into the background and will need to produce fresh proposals to fully compensate these 1.1 million households by the time of the 2008 Pre-Budget Report. ”  

The abolition of the starting rate of income tax

The Committee concludes that the losers from the measures as initially implemented were people whose taxable income was small, and for whom the loss might be significant when required to manage a personal or household budget at a time of sharply rising prices for many essential goods and services.

The 13 May measures

The Report welcomes the Government’s attempts to compensate those who have lost out through the abolition of the starting rate of income tax. The Committee observes that the Government’s chosen approach was probably the least bad option, but adds that £2 billion of the £2.7 billion committed to that measure in the current financial year is not devoted to compensating losers from abolition, and as such is not substantially well-targeted. The Committee does, however, welcome the fact that the 13 May measures have the benefits of simplicity, transparency and greater incentives to work, with fewer low paid people paying income tax. The Report stresses that further complications to the tax system should now be resisted with every effort made to avoid returning low-paid people into the income tax system.

John McFall said:    

“Raising personal allowances was clearly not a well-targeted way to compensate the losers from abolition, but had the merit of offering a quick solution. That said, raising personal allowances is a welcome first step towards creating a simpler tax system with large number of low-income people taken out of the tax system. The Government must now ensure that there is no backsliding and that future reforms to the tax and benefit system do not reverse this very positive development.”  

The broader context and longer-term priorities

The Report argues that the case for action to meet the Government’s target to halve child poverty by 2010-11 is more pressing than ever given the recent announcement of a further rise in child poverty by 100,000 children in 2006-07. The Report draws attention to the fact that pensioner poverty rose significantly in 2006-07, by 300,000 to 2.6 million before housing costs, whilst progress on fuel poverty is threatened by rising fuel prices. The Committee also expresses concern that advances made in tackling poverty among those out of work in the last decade has not been matched by comparable progress in tackling poverty among those in work. The Report stresses that the problems over the abolition of the starting rate of income tax must not distract the Government from the longer-term challenges faced by the Government in combating poverty in all its guises and recommends the establishment of a Poverty Commission to examine the public policy challenges relating to poverty. 

John McFall said:

“The recent rise in both child and pensioner poverty demonstrates the need for concerted action by the Government. This is why we have called for the establishment of a Poverty Commission which can take the lead in analysing the root causes of poverty in the UK, the scale of the problem and develop innovative ideas and approaches to make real and sustained progress on slashing poverty in the UK.”

Getting the process right

The Report states that there are important lessons that the Government must learn from the abolition of the starting rate relating to budgetary processes. The Committee calls on the Government to publish a Household Impact Assessment alongside future Budgets and Pre-Budget Reports. This would analyse the impact on individual, family and household finances of Budget measures and other changes to the welfare system. The Committee also recommends that the Government to re-establish the consultative nature of the Pre-Budget Report, stating that for personal tax decisions, the sudden and final nature of Budget decisions has been less about the need to prevent forestalling activity than it has been about the perceived benefit of seeming to pull rabbits from the hat. Recent experiences suggest that such short-term benefits are outweighed by the longer term benefits from proper consultation.

John McFall said:

“Getting the process right is key to avoiding similar problems arising in the future. As a first step, the Government must commit to publishing a Household Impact Assessment alongside the Budget and Pre-Budget Report to ensure better analysis of how such measures will  impact on households. It must also commit  to proper consultation and debate on future changes to the tax and benefit system rather than presenting us all with a fait accompli.”