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Moving from the Treasury, which reigns in spending, to the Department for Work and Pensions, which spends more than any other department, is...

Saturday, 19 March 2016

THE EQUATION THAT SANK IAIN DUNCAN SMITH

The Secretary of State for Work and Pensions Iain Duncan Smith resigned on 18 March, two days after the Chancellor delivered his Budget which included another major cut in the benefits paid to disabled people.

In his resignation letter Duncan Smith said

"I have for some time and rather reluctantly come to believe that the latest changes to benefits to the disabled and the context in which they've been made are, a compromise too far. While they are defensible in narrow terms, given the continuing deficit, they are not defensible in the way they were placed within a Budget that benefits higher earning taxpayers."

The cut in the Budget was specifically set out in para. 2.76

  • "changing the way that entitlement to Personal Independence Payment is determined – a reduction in the number of assessment points awarded for needing to use an aid or appliance to carry out two of the ‘daily living’ activities assessed. This will take effect for new cases and re-assessments from January 2017."

And the Prime Minister's reply to Iain Duncan Smith's letter of resignation says that the change was agreed by all.

"That is why we collectively agreed – you, No 10 and the Treasury – proposals which you and your Department then announced a week ago."

The equation
The savings from this change were around £1.3 billion a year. They were matched almost pound for pound by two items of spending. 1. raising the threshold at which higher rate tax began from April 2017 by £2000 to £45,000. 2. Cutting the rate of tax on capital gains made from selling shares, businesses and other items.

In 2019/20 the savings from cutting PIP were given as £1.3 billion and the cost of cutting those two taxes was estimated to be £1.235 billion. It was this use of the PIP savings to which Iain Duncan Smith objected. The table below sets out the annual costs and savings and the total over the five year period 2016/17 to 2020/21. They match closely.



2016/17
2017/18
2018/19
2019/20
2020/21
2016/17 to 2020/21
SAVINGS






Cuts to PIP
£15m
£590m
£1,190m
£1,300m
£1,280m
£4,375m
SPENDING






Raise higher rate threshold
£0
£365m
£595m
£565m
£600m
£2,125m
Cut Capital Gains Tax rates
£105m
£630m
£605m
£670m
£735m
£2,745
Total SPEND
£105m
£995m
£1,600m
£1,235m
£1,335m
£4,870m

Source: Budget March 2016 Red Book Table 2.1, lines 5, 28, 73. pp.84-85.

The cancellation of the cut in the Personal Independence Payment leaves the Budget with this tax cut spend of nearly £4.9 billion but no offsetting saving of £nearly £4.4 billion. How this gap will be filled remains to be seen. Iain Duncan Smith's successor as Secretary of State, Stephen Crabb, will be asked to find a way. 

Higher rate threshold
Raising the income at which higher rate tax is paid will benefit people with a taxable income of more than £43,000 from 2017/18. That is about one in seven income taxpayers. The gain from the Budget change will be £200 in the year. The total gain from changes to the threshold between 2015/16 and 2017/18 will be £441.50. About 4.7 million people will benefit. Additional rate taxpayers, with an income of more than £150,000, will also gain, paying £80 less tax as a result of the Budget change and paying £81.50 less tax in 2017/18 than in 2015/16. About 335,000 people will benefit from that.

These figures assume that the limit for paying the lower 2% rate of NICs will also rise with the higher rate threshold. The lower earnings limit where NICs begin has not been announced for 2017/18 or beyond and it is assumed it stays the same. It will rise with inflation but that will make very little difference to the totals.

Capital Gains Tax
The rate of tax charged on gains from Budget day is cut from 28% to 20% for higher and additional rate taxpayers and from 18% to 10% for basic rate taxpayers. Sales of residential property are exempt so the gains will mainly be made from the sales of shares and businesses. The number of people who pay CGT is in the region of 200,000. Not all of them will benefit. 

The total gains on which CGT is charged were £30 billion in 2013/14. About a fifth of that (18%) is from residential property which the new rates will not apply to. If the new rates apply to the whole of the rest then the tax loss would be about £1.9 billion. But the Treasury says it will be only £630 million implying that it will only apply to around £8 billion of gains. At the moment I cannot reconcile those numbers. Perhaps you can do better with these latest CGT figures.

Personal Independence Payment
This benefit replaces what was called Disability Living Allowance. It pays between £21.80 and £139.75 a week depending on the degree of disability. The qualifying conditions for Personal Independence Payment (PIP) are much tougher than those for Disability Living Allowance (DLA). As people are reassessed many of them lose their payment or get a lower one. 

The planned change was announced on 11 March and would tighten the conditions further by halving the number of points allocated for needing aids for cooking, eating, and using the toilet. Halving the points would reduce the PIP paid, in some cases to nothing. Around 640,000 people would be affected. The Institute for Fiscal Studies estimates that 370,000 would get less money, costing them on average £3500 a year each. It would affect new claimants, existing claimants of DLA as they are moved to PIP, and existing PIP claimants who are reassessed or whose circumstances change. 

The change was due to start on 1 January 2017 but now will not do so. 

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19 March 2016