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Home > Investments > Economic Indicators

By Michael Ben-Gad | Published Apr 16, 2014

What you didn’t hear in the Budget

By that criterion, the chancellor’s new Budget, in which he introduced little that was new beyond liberalising people’s access to their pension pots and a sizable increase in Isa limits, was certainly admirable.

Of course he lowered the tax on bingo and beer (the readers of tabloids pay taxes too, and their journalists need something to write about). Beyond that, the change in tax he focused on in his speech was yet another increase in the personal allowance (this time by £500), designed to help the so-called ‘squeezed middle’.

The idea of a squeezed middle may be little more than a clever myth concocted by Opposition leader Ed Miliband and his advisers, but never mind. What is certainly true is that a general election is looming, and the middle is where one goes looking for votes. In the meantime, the drop in incomes at the very top is what until very recently has most hampered efforts to bring the deficit under control.

Between fiscal years 2009/10 and 2012/13, the share of income captured by the top 5 per cent of all taxpayers – those with incomes initially of £63,200 per annum and above – dropped from 26.4 per cent of the total to 23.9 per cent. Indeed, for those with incomes above £149,000, the hated ‘one per cent’, the drop was even steeper, from 13.9 per cent to 11.2 per cent.

Government policy only reinforced these changes. The after-tax share of income for the top 5 per cent dropped from 22.4 per cent to 19.4 per cent, and for the top 1 per cent dropped from 11.2 per cent to 8.2 per cent – a reduction of more than a quarter of their share of after-tax income. By contrast, the half of all taxpayers that populate the middle of the income distribution saw their share of after-tax income rise from 38 per cent to 39.4 per cent.

So although as the economy contracted everyone lost ground, it was those at the top, rather than in the middle, who lost the most. Data on income, net of all direct taxes and inclusive of state benefits, compiled by the Institute for Fiscal Studies, though it only covers the period to 2011/12, paints a similar picture.

According to the IFS, the top 5 per cent saw their net incomes drop by 8.3 per cent, median income dropped by 5.8 per cent, and the drop for the lowest 5 per cent was only 0.7 per cent.

One unheralded effect of the recent downturn, its immediate aftermath, and the government’s efforts to stabilise its own finances, has been the narrowing of income distribution (at least if you ignore differences in price inflation). From 2009-10 to 2011/12, the Gini coefficient dropped from 0.357 to 0.341.

Here you see the reason why the chancellor’s plans to reduce the deficit initially missed their targets. In June 2010, a month after taking office, he introduced his plan under which public debt was meant to top out at 70.3 per cent of GDP in 2012/13, and then begin to decline.

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