Replace personal tax allowance with cash payment, says NEF

By agency reporter
March 12, 2019

If the Government abolished the personal allowance of income tax and replaced it with a weekly cash payment of £48, they could lift 200,000 families out of poverty, according to a new report by the New Economics Foundation (NEF). Overall, the proposed policy swap would shift £8 billion currently spent on tax allowances for the 35 per cent highest income families to the remaining 65 per cent of families.

At the Spring Statement this week the Chancellor will reaffirm the Government’s commitment to the personal tax allowance by raising the threshold to £12,500. In total, the personal allowance is estimated to cost £111.2 billion in 2019/20 alone. The report proposes using this money to fund the Weekly National Allowance, made up of a new weekly payment worth £2500 per year and paid to everyone outside of the richest one per cent, and a restoration of child benefit to its 2010/11 real terms value.

The proposal is entirely cost neutral . But the poorest 10 per cent of households on average would see an increase in disposable income of £1,160 per year or around £20 per week, equal to a 15.8 per cent increase. On average, every major family type among the poorest 25 per cent of households would see their income rise – whether a single or couple adult family, with or without children (including families with four or more children), in or out of work, or above or below the pension age.

The report uses new modelling to compare this with the current personal allowance of income tax, which will reduce tax liabilities for the 10 per cent richest families by almost £6500 in 2019/?20 alone, compared with just £600 for the poorest 10 per cent.

The proposed Weekly National Allowance would be:

  • Highly redistributive: the net distributional effect of the Weekly National Allowance is to shift around £8 billion currently spent on tax allowances for the 35 per cent highest income families and reallocate this to the remaining 65 per cent of families via the Weekly National Allowance.
  •  Fiscally neutral: the Weekly National Allowance repurposes the £111.2 billion (projected figure for 2019/20 based on NEF modelling using HMRC, OBR and ONS data) already spent annually on the personal allowance of income tax and recycles this money into a new weekly payment made to every adult over the age of 18 at a total cost of £126.8 billion, and an increase in child benefit costing £2.1 billion. The cost of means-tested benefits would fall by £20.6 billion since the new weekly payment will boost post tax income for the lowest income families.
  • Improved macroeconomic stabilisation: The Weekly National Allowance would significantly improve the UK’s recession fighting toolkit. Converting the personal allowance into an equivalent weekly payment alone would represent a 66 per cent increase on existing job seeker’s allowance. Because the Weekly National Allowance would be retained by everyone whether in or out of work, a higher proportion of it would be spent during a recession than in normal times, leading to an automatic boost to the economy when it was most needed.

The report includes distributional modelling and sensitivity testing of the policy shows which shows that the average increase in disposable income for the poorest households is comprehensive across all major family types. Some examples of how it will impact different family types include:

  • A single unemployed adult on Universal Credit
    This household would see their net disposable income rise by between £925 and £2500 per year.
     A teacher earning £30,000 and a part-time nurse earning £8000 with one child – receiving no universal credit
  • Overall, this household would see their disposable income rise by £1,118.4 per year, with £900 of this being paid directly to the second earner.
  • An engineer earning £90,000 and receiving no universal credit
    Overall, this household would see their disposable income fall by £2,500 per year. However, this household has already benefitted from reduced tax liabilities worth around £1,500 per year from the conservative government’s increases to the higher rate threshold since 2015.

Alfie Stirling, Head of Economics at the New Economics Foundation, said: “The persistent increases to the personal allowance of income tax seen over the past decade represent one of the most expensive and regressive public spending initiatives of the 21st century so far. Costing more than the whole of defence, local government and the department for transport combined, and enriching the highest income households almost seven times faster than the poorest. It is time for policy makers to put those resources to better use.

“Repurposing the funds from the personal allowance into a new Weekly National Allowance, paid to everyone outside of the richest one per cent, would significantly improve upon the UK’s social security system at a time when the botched rollout of Universal Credit is otherwise causing acute financial hardship and misery.

“With Brexit among a number of recessionary threats on the horizon, the Weekly National Allowance would not only help to shield families from the worst effects of recession, but would also aid future recovery by maintaining a minimum level of income and spending in the economy.”

* Read Nothing Personal: Replacing the personal tax allowance with a Weekly National Allowance here

* New Economics Foundation https://neweconomics.org/

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