/ UK

Universal payments would be more progressive than Liz Truss’ tax cuts

See the head-to-head in PolicyEngine

On Friday, the UK Chancellor Kwasi Kwarteng announced a series of tax cuts to National Insurance, Income Tax, and stamp duty, reaffirming key campaign pledges by UK Prime Minister Liz Truss. The most prominent of these cuts is the reversal of an earlier tax rise by the previous Chancellor, Rishi Sunak: cutting all National Insurance rates by 1.25 percentage points.

As described on the PolicyEngine blog, this is a regressive tax cut: households in higher income deciles see higher increases to their net income, both in absolute terms and as a percentage of their income. As a combined set of policies, they will reduce tax revenues by £16.2bn per year (see the full PolicyEngine results here).

There is an alternative. Distributing that same £16.2bn among the UK population as a universal payment would amount to around £250 per person. It would be progressive: the bottom decile would see its income increase by 5.0%, compared to the 0.4% increase it will see under the NI rate cut. All deciles below the eighth come out ahead on average.

Under Truss’ tax cut, the poverty rate falls slightly (around 1.4%). This is expected: the tax cut is of little financial value to those at or near the poverty line, let alone those far below it. For the same net cost, a universal transfer would have a poverty reduction over 7 times greater - causing a fall of 10.0%. Senior poverty falls the most: by over 12%.

In addition to greater poverty impacts, trading the tax cuts for universal payments would reduce inequality (for example, cutting the Gini index by 2%) and benefit 65% of the population, as the full PolicyEngine model shows.

The tax cut benefits lower-income households than cash for a simple reason: the tax base (earned income) is a smaller part of their gross income. At the lowest end, households source the majority of their income from benefits or pensions.

For a married couple with two children, the UBI policy outperforms the tax cuts until employment income reaches £62,000. The tax cuts are designed to phase in with income, but the gains increase at haphazard intervals: starting slowly with the rate cuts to National Insurance and Income Tax, through a sudden jump as claimants move off Universal Credit earlier, and with a substantial increase in work incentives after £150,000. The UBI policy is far simpler by comparison.

You can see how the payment affects your household vis-a-vis the tax cuts in PolicyEngine here.

CPI inflation, by which absolute poverty thresholds are uprated, is projected to remain above 10% for the rest of the year. As the widest-reaching tax-benefit policy, universal cash payments are the most effective way to prevent further rises in absolute poverty. The previous Chancellor Rishi Sunak’s support measures leaned on flat cash transfers for wide sectors of the population, enabling gains to reach families often left out: those not on benefits or tax databases. Many of the tax reforms announced today mark a complete reversal of policy only introduced this year. Whether or not this is repeated, future policymakers have a much more effective tool for reducing poverty at their disposal in the universal dividend.