Brexit and low income families

In our recent report here we assessed a potential effect of Brexit on low income families. In particular, the potential changes to welfare payments that might follow after Brexit. We combined projected changes in national income with the spirit of the Government’s Fiscal Charter. Our results suggest that the effect on the incomes of the low income families could be substantial. 

The analysis is carried out in three stages. First, we assess the impact of Brexit on the fiscal deficit from three channels: (i) national income and (ii) expected changes in migration, and (iii) changes in net contributions to the EU. We use three measures (maximum, minimum and median) of the eight widely quoted macroeconomic estimates of the effect of Brexit on GDP (including the pro-Brexit pressure group, ‘Economists for Brexit’). We then use the item by item multipliers from the Office of Budget Responsibility, to find estimates of the fiscal gap – the change in the UK fiscal deficit due to Brexit. We predict that, by 2020, the fiscal deficit will be between 0.78% and 6.14% of GDP larger than in the baseline scenario. Our central estimate is 2.3% of GDP (£44bn in 2014 £).[1]

Second, we use household survey and administrative data to estimate the average annual benefit and tax credit receipts of households. For the purpose of this study, we define a ‘low income household’ as a household of working age in receipt of tax credit or Jobseeker’s allowance. We consider eight types of low income households (see figure 1). We find that tax credit and benefit receipts comprise between 29% and 73% of the total income of different categories of low income households.

Third, we assess the impact of Brexit on low income households’ average annual tax credit and benefit receipts. We simply take existing government policy as given rather than make any second guesses. In practice, we assume that the spirit of the Fiscal Charter holds, that the government seeks to return to a fiscal surplus in the medium term, and that certain items of spending continue to be protected, such as health, schools and pensions. We then apportion any cuts in welfare spending in equally across all items.

Figure 1 summarises our bottom line results using our central estimate of macroeconomic forecasts. We find that, in a scenario where welfare spending bears 100% of the burden of adjustment low income households stand to lose between £1,861 and £5,542 a year in 2020 (in 2014 £) due to benefit and tax credit cuts alone. In a scenario where welfare spending bears 50% of the burden of adjustment, low income households stand to lose between £930 and £2,771 a year in 2020 (in 2014 £). This represents a sizeable portion of income for low income households.

We provide results for a range of macroeconomic and fiscal scenarios. We take no view on which scenario is “correct”. Depending on what you believe the effect of Brexit on GDP will be and which proportion of the fiscal gap government will close through cuts to the welfare budget you can choose one of the discussed options.

The Fiscal Charter requires the government to deliver a surplus in 2019-20 and remain in surplus thereafter in ‘normal times’. It is unlikely that post Brexit adjustment period will fulfil the definition of ‘normal times’. Nevertheless, the Chancellor will be required to deliver a plan to return the budget back into surplus. Our assumption that the ‘spirit’ of the fiscal charter is met is simply that this plan will include an adjustment to return to surplus on a comparable time horizon. Given that large items of public spending are protected, the Chancellor will choose the combination of higher taxation and welfare spending cuts to balance the budget.

There are different ways to interpret results from scenarios with lower proportions of welfare cuts: (1) that government seeks to fill the fiscal gap, but adjusts items other than welfare (either those areas of spending that are protected or taxes), and (2) that the updated rules for getting back to surplus (outside normal times) do not require large adjustments by the government. In effect, we assume nothing more than: the government wants to reduce the debt eventually.

Economists for Brexit forecast is considered as a special case since this group is the only one who project positive effect of Brexit on GDP. However, we take Government policy as it is and as part of the Fiscal Charter there is a cap on welfare spending. Currently, spending is above the cap. Therefore, based on existing policy we do not believe there would be symmetric welfare spending gains. Under the current rules, any additional surplus is more likely to be spent on debt reduction than on increasing welfare spending.

We illustrate the potential impact of Brexit on the welfare and tax credit receipts of low income households under existing policies. We find that low income households could stand to lose disproportionately following an exit from the UK referendum because of the combined effects of GDP growth, migration and net contributions to the EU on the UK fiscal position.

 

Figure 1

 

[1] In our central scenario, GDP is 3.1% lower than baseline in 2020 and 3.5% in 2030. 

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