Around 2.6 million families '£1,600 a year worse off' after benefit changes

Even families without children are £1,000 worse off

Updated: 

Around 2.6 million working families will be an average £1,600 a year worse off as a result of benefit changes confirmed in Chancellor George Osborne's Spending Review, a respected economic thinktank has found.

Despite Mr Osborne's decision to scrap proposed cuts to tax credits due to come in next April, the Institute for Fiscal Studies said that his plans still envisage reducing non-pension benefits to their lowest level as a share of national income for 30 years.

IFS director Paul Johnson said Mr Osborne was "lucky" to receive a £27 billion windfall which allowed him to perform his U-turn on tax credits.

And he said the Chancellor will "need his luck to hold out" if he is to meet his target of a surplus by 2019/20 without raising taxes or imposing further spending reductions.

While Wednesday's Autumn Statement and Spending Review has resulted in cuts "less severe" than envisaged in July's post-election Budget, Mr Johnson cautioned that "this is not the end of austerity".

The Spending Review settlement is "one of the tightest in post-war history" and a swathe of government departments will face real-terms cuts.

Even the NHS, which had its budget protected, will receive only a total increase of 3% over the next five years - close to the annual average over the past half-century - he said.

Mr Johnson said the Chancellor had effectively abandoned his cap on annual spending on welfare, which will be breached in each of the next three years.

And while the ditching of tax credit cuts means no family will take an "immediate cash hit", the long-term generosity of the welfare system "will be cut just as much as was ever intended, as new claimants will receive significantly lower benefits than they would have done before the July changes," said Mr Johnson.

The planned consolidation of a number of benefits into a single Universal Credit "will now involve 2.6 million working families being an average of £1,600 a year worse off than they would have been under the current system, while 1.9 million will be £1,400 a year better-off", he said.

Mr Johnson said it was "almost a 50-50 shot" whether economic forecasts will remain rosy enough for the Chancellor to meet his "completely inflexible" surplus target.

Mr Osborne was "lucky" to be able to bank higher tax revenues and lower debt interest payments this year, he said. With forecasts certain to change again over the next four years, there was a possibility he would be "unlucky" and be forced "either to revisit these spending decisions, raise taxes or abandon the target".

Mr Johnson said that the reversal of tax credit cuts which had been forecast to raise £4.4 billion for the Treasury will have "little effect on the public finances" in the long run, because the benefit was anyway due to be replaced by Universal Credit.

Cuts to UC announced in the July Budget are unaffected by the Chancellor's change of heart on tax credits, he said.

The IFS said that tax hikes announced on Wednesday - including a £3 billion apprenticeships levy on business, an "ill-designed" £1 billion increase in stamp duty on second homes and buy-to-let properties and a potential £1.7 billion rise in council tax to fund social care - meant that the proportion of Mr Osborne's deficit elimination programme being delivered by tax had risen from 14% to 17%.

But the thinktank said that cuts in spending will still "bear the brunt" of the effort to balance the books before the end of the Parliament.

There were "still some very significant cuts ahead", with day-to-day spending in Whitehall departments - with the exception of protected areas like the NHS, aid, defence and schools - falling by 18% by 2019/20.

"This is not the end of austerity," said Mr Johnson. "This spending review is still one of the tightest in post-war history.

"Total managed expenditure is due to fall from 40.9% of national income in 2014/15 to 36.5% in 2019/20. A swathe of departments will see real-terms cuts.

"The 3% cumulative increase in health spending over the next five years is not far off the average annual increase in spending in the last 50 years.

"On the other hand, there is no question that the cuts will be less severe than implied in July. The gap with what one might have expected, based on the Conservative manifesto, is substantially greater."

The IFS said that "genuinely radical" changes to local government financing confirmed on Wednesday could transform the role and funding of councils. Councils in England are facing cuts of over 50% in central government support over the five-year spending review period, but will be able to raise more from business rates.

The change will have major effects on funding patterns across the country, with councils' spending power more dependent on their ability to raise tax locally, said the thinktank.

Mr Johnson also warned of an "urgent need" to find a new framework for taxation and spending across the UK following the devolution of further powers to Scotland, Wales and Northern Ireland.

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