£3 billion tax credit cuts in 2nd quarter may have deepened recession

July 25, 2012

The unexpectedly large contraction in the economy of 0.7%, announced by the Office for National Statistics today for the second quarter, is likely to have been contributed to by steep cuts of £3 billion to tax credits that hit households in April 2012.

Imran Hussain, Head of Policy at Child Poverty Action Group, said:

“For many families with children the recovery never got underway. They have endured a miserable few years coping with rising living costs, job losses, wage freezes and cuts in social protection. Ministers have to do more to create jobs, help parents move into work by providing better childcare and reinstate the tax credits taken away this April from many low-paid couples.

“An international study looking at which countries recovered fastest from recession in 2009 found it was those giving the biggest stimulus to the incomes of the poorest households. This is because low income families spend their money straight away in their local shops and services, helping struggling businesses to survive.

“The size of the contraction is perhaps less surprising when you take account of the £3 billion of cuts to tax credits that hit the poorest working families this April. Ministers must urgently reconsider welfare cuts, not just because of the social damage we know they are causing, but because they may be deepening the current recession and impeding economic recovery.”

ENDS

Notes to Editors

  • The table below shows the £3.14 billion of cuts that were implemented in April 2012 to social protection and support – mainly through tax credits, but also through a cut to entitlement to Employment and Support Allowance. £3.14 billion represents 0.2% of annual GDP. However, cuts to social protection also have a fiscal hindrance impact, multiplying their negative impact on the economy. This is because of the domino effect from loss of spending by those families in shops and services and loss of further onward circulation in the economy.

Cuts to tax credits and ESA implemented in April 2012

£ million

C-ESA withdrawn for work related group after 1 year

330

Hours rule change for couples from 16 to 24 hours

550

Backdating cut from 3 months to 1 month

345

£2,500 disregard for in-year falls in income

445

50-plus element scrapped

30

Family element withdrawn immediately after child element

465

Child element will not be increased as previously announced

975

TOTAL

 

3140

Source: HM Treasury

  • An International Monetary Fund analysis of fiscal stimulus options, contributed to by economists from the EU, ECB, Federal Reserve, OECD and Bank of Canada, suggests that transfers to ‘hand-to-mouth’ and’ credit-constrained’ consumers provide higher economic multipliers. This is why many countries made support for low income households a central part of their fiscal stimulus policies in 2008 and 2009. A joint report by the International Labour Organization and the International Institute for Labour Studies reviewing global fiscal stimulus stated:

“During the crisis, social and cash transfers not only assisted those in need, but by putting cash in the hands of those most likely to spend it, helped to shore up household consumption. For this reason, countries that strengthened the policies towards income transfers managed to recover faster than others.”

  • CPAG warned of the potential negative economic consequences of the steep cuts to tax credits in the briefing Bad Friday, which was distributed to journalists at the start of April this year (see the section on ‘What might the economic impact be?’): http://www.cpag.org.uk/sites/default/files/Bad%20Friday.pdf
  • CPAG is the leading charity campaigning for the abolition of child poverty in the UK and for a better deal for low-income families and children.
  • CPAG is the host organisation for the Campaign to End Child Poverty, which has over 150 member organisations and is campaigning for public and political commitment to ensure the goal of ending child poverty by 2020 is met.

For further information please contact:

Tim Nichols

CPAG Press Officer

Tel. 020 7812 5216 or 07816 909302