The claim
“If you are looking at what we are doing with the personal allowance we are actually raising it in this tax year, so 24 million taxpayers will benefit to the tune of £6.50 per week”
Prime Minister David Cameron, 5 April 2012
The background
Families with children across the country woke up to the news that from tomorrow they’ll be an average of £511 worse off a year.
Brandishing research by The Institute for Fiscal Studies, Shadow Chancellor Ed Balls said the government’s changes to tax, benefits and tax credits was a “bombshell” for families.
The dawn of the new tax year tomorrow has since been duly hailed as Black Friday by some, yet the Conservatives have hit back arguing that Mr Balls was “ignoring” the millions of households that will be better off.
Stepping into the fray this afternoon, the Prime Minister said he did “not accept the figures” from the IFS.
He added: “If you are looking at what we are doing with the personal allowance we are actually raising it in this tax year, so 24 million taxpayers will benefit to the tune of £6.50 per week.”
It was a surprise rebuff for the highly respected IFS, so we asked the think-tank to explain its case.
The analysis
The tax free threshold on income is to rise by £630 to £8,105 from tomorrow. This will benefit almost every tax payer in the country – though many will also lose money from other reforms that are coming in.
The Tories maintain however that 24 million will gain from the move, even after taking into account the changes to tax credits.
IFS economist Robert Joyce, author of the report quoted by Labour, explained that Mr Cameron’s figure includes the effect of inflation – and even if the government had sat back and done nothing, the personal tax allowance would have gone up in line with inflation.
So how much does inflation change things?
“In terms of the reform that’s coming in tomorrow, the personal allowance is going up by £630 in cash terms – it would have gone up by £420 anyway just because of inflation – so the extra is £210.
“That’s the extra that it’s going up by because of the government’s reforms. So that means that people are saving 20 per cent of £210 – that’s the tax they would have paid on that income before.
“That works out at £42 a year or about 80 pence a week.”
The verdict
Raising the tax-free threshold on personal income will benefit 24 million people but not by as much as Mr Cameron claims. Even if the government hadn’t raised the threshold, it would have gone up with inflation.
As Mr Joyce told us: “If the question is ‘what effect have the government’s reforms had on people?’ then the appropriate thing to do is to look is to look at the effect of raising the personal allowance by more than would have happened by default – and that means not including the effect of an inflation increase.”
Strip out inflation, and you’re not looking at £6.50 a week; you’re looking at 81p a week – or 16p per working day.
By Emma Thelwell
Update: Our economics editor Faisal Islam says: “You can just about get to the £6.50 a week number if you include rises in the state pension for 5 million state pensioners, and the inflation rise in other benefits. But classifying a real freeze, i.e. an increase in line with inflation, as a giveaway seems rather heroic. Furthermore do government politicians really believe that they are giving away £8bn tomorrow? If so, can we presume the debt crisis over?”
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