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Assessing the unequal impact of tax and welfare reform in London

Today, GLA City Intelligence published the first cumulative impact assessment (CIA) of welfare and tax reform in London. The UK tax-benefit system has undergone wide-reaching changes since 2010, including the gradual rollout of Universal Credit, above-inflation increases in the tax-free personal tax allowance and the introduction of the National Living Wage, alongside a host of other changes.

The CIA compares what we expect the net income of London households to be in 2020/21 with what they would have been had none of the policy changes since April 2010 taken place. This allows us to tell which households have benefitted and by how much, and which have lost out.

Overall, the picture is clear. London households located in the bottom half of the UK income distribution will lose on average, whereas those in the top half will gain. While low-income households in London are expected to receive a boost to income from tax cuts, the introduction of the National Living Wage and Universal Credit, these are outweighed by the reduction in income they will experience from changes to the wider benefit system, especially the working-age benefit freeze. Conversely, better-off households are affected less by the cuts to benefits but have higher taxable incomes and so stand to gain more from tax cuts.

The chart below shows the impact of these changes in cash terms for different types of reform, as well as the total net loss from all reforms together, illustrated by the black dots.

The CIA also allows us to analyse the impact of changes to the tax-benefit system by other characteristics of households. For example, households with children will lose the most of all household types – particularly those households headed by lone parents. This is a result of real-terms cuts to benefits received by parents such as child tax credits and child benefit. On average, lone parent households will receive £2,400 a year less by 2021-22.

Disabled households will lose out substantially. Households where someone is disabled will receive £1,910 a year less on average. Again, this is due to a combination of cuts to benefits that are directly targeted at disabled households, cuts to non-disability benefits, and the fact that disabled households are more likely to be lower on the income distribution.

People from London’s black ethnic groups lose more than Asian or white groups. The poorest black Londoners will receive an average of £870 a year less by 2021-22 – a 5.3 per cent loss – largely as a result of their position on the income distribution.

These findings highlight the importance of understanding the cumulative impact of policy and fiscal changes on the incomes of different household types and groups sharing different characteristics. The analysis also supports findings from the recent Survey of Londoners, which found similar groups of Londoners are the most affected by Economic Fairness issues such as debt, insecure work and food insecurity.

Transparent analysis of the cumulative impact of future Budget and spending review decisions will enable a more informed and constructive debate on the impact of tax and benefit changes on people with protected characteristics.