Budgeting for fairness? The distributional effects of three Labour Budgets

Herwig Immervoll, Lavinia Mitton, Cathal O'Donoghue and Holly Sutherland

No MU/RN/32, Microsimulation Unit Research Notes from Microsimulation Unit at the Institute for Social and Economic Research

Abstract: One of the Gordon Brown's keywords as Chancellor over the last two years has been fairness. In this paper we examine the impact of the recent budget and the two previous budgets on the distribution of household incomes in the country as a whole. We ask the following questions: - Have Labourís changes to taxes and benefits mainly benefited the rich or the poor? - What has been the effect on middle income households? - How have families with children - the group that the Chancellor aimed to target - fared? We compare the effect of the policy in place when the Labour government came to power in May 1997 with that announced in last Tuesday's Budget. We use the Microsimulation Unit's tax-benefit model POLIMOD to show the effects of Labour's changes in personal tax, social security and the introduction of the minimum wage on the disposable incomes of British households. Traditionally, Budget analysis consists of calculation of the "overnight" effects on particular families. Our analysis departs from this in two respects. Firstly, the use of survey data, representative of the actual population, allows us to assess the overall distributional effects. We capture the diverse range of living situations and individual characteristics in the UK today in the correct proportions. Secondly, we have responded to the recent trend for announcing changes several years in advance of their implementation, by "rolling together" all the announced changes as though they were to come into affect in April 1999. This has the advantage of allowing us to focus on the overall direction of policy, without getting involved in the complexities of the timing of the changes. We compare policy as it existed in May 1997, indexed for increases in prices to 1999/2000 levels, with the full set of changes announced by the Chancellor in the recent Budget and the two previous Budgets.

Date: 1999-03-01
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