The EU Referendum and Fiscal Impact On Low Income Households

We assess the impact of the UK leaving the European Union (EU) on benefit and tax credit receipts of low income households using detailed fiscal and population data. First, we quantify the effect of leaving the EU on the UK fiscal position from two major sources: (i) the impact on national income and (ii) possible changes in migration. We also account for changes in net contributions to the EU budget. We use a range of possible national income and migration scenarios as inputs for our model estimates. Based on this range of inputs, we estimate that the fiscal deficit will be 0.78%-6.14% of real GDP larger in 2020 than in the baseline case of remaining in the EU. The corresponding figures for 2030 are 1.03%-7.12%. Second, we calculate the average annual tax credit and benefit receipts of low income households. We find that tax credit and benefit payments comprise at least between 29% and 73% of a low income household’s average annual income. Third, we assess how the projected fiscal changes due to leaving the EU might affect the benefit and tax credit receipts of low income households. We find that our central estimate of the fiscal shortfall due to leaving the EU is 41% of the projected baseline welfare budget in 2020 and 45% in 2030. We assume that the government decides to meet the fiscal targets set out in its Fiscal Charter. In order to recover its fiscal position the government will have to alter its tax and spending policies. In the worst case, where the government places 100% of the burden of adjustment on welfare spending, we calculate that different categories of low income households could receive between £1,861 and £5,542 per year (in 2014 £) less in tax credit and benefit payments in 2020 and between £2,076 and £6,184 per year (in 2014 £) less in welfare payments in 2030.