View from City Road: Budget hits rich harder

Astudy published yesterday by the Institute for Fiscal Studies suggests that the Government's tax- raising efforts are not as unfair to the poor as the Opposition likes to make out. The poor may lose most from the extension of value-added tax, but they get off relatively lightly when this year's March Budget measures are considered as a package.

Extending VAT hits the poor hardest because spending on domestic fuel varies surprisingly little between households of different incomes. The poorest tenth of Britain's households will pay an extra pounds 108 a year in VAT on average in 1995, just over 2 per cent of their income. The richest tenth will pay an extra pounds 135 a year, just 0.5 per cent of their income.

This regressive effect will be partly offset as benefit increases automatically compensate for the rise of 0.8 per cent in the retail price index resulting from higher fuel prices. As most poor households include benefit recipients, this cuts the fall in income suffered by the poorest tenth to 1.3 per cent, although this is larger than the drop for the rich.

But extending VAT raises only pounds 2.3bn of the pounds 10.3bn the Government is budgeting for in 1995/6. Similar sums are raised by the planned increases in income tax and National Insurance contributions.

Both these measures hit wealthier households harder. The poorest fifth tend not to pay income tax because they are retired, sick or unemployed. Similarly, the poor are relatively unaffected by higher National Insurance, because they are not working, are pensioners or earn less than the pounds 56 a week lower earnings limit. So the Budget package, taken as a whole, costs the poorest 30 per cent of households around 1.5 per cent of their income, compared with around 2.5 per cent for the rest of the population. Everyone suffers, but the poor less than most.