Austerity in UK ‘hits high-income households hardest’

High-income households in the UK have lost proportionately more than those in poverty as a result of austerity measures, according to new research published by the European Commission.

Researchers compared the distributional effects of 'fiscal consolidation' measures in nine European Union countries (including the UK) that have experienced large budget deficits following the financial crisis of the late 2000s and subsequent economic downturn.

Key findings

  • There is wide variation in the scale of reductions in household incomes – from under 2 per cent in Italy and the UK, to 9 per cent in Latvia and nearly 12 per cent in Greece.
  • The changes in six countries (UK, Greece, Spain, Latvia, Italy and Romania) are 'progressive on the whole', with richer income groups contributing more in relative terms. In Lithuania and Portugal middle-income groups contribute less compared with low- and high-income groups. Estonia is the only country with a clearly regressive distribution of cuts in income.
  • The effects of austerity for households containing children and older people are similar to those for the population as a whole, with some exceptions. In the UK, low-income households with children are better protected, while at higher income levels the reverse is the case.
  • Adding the effect of VAT increases reduces any progressive effect. The UK is among those countries where the scale of the VAT effect is similar to that of measures affecting household incomes directly. This highlights the importance of including the effect of VAT increases in such comparisons.
  • If public sector pay cuts are excluded from the analysis, the effects of tax-benefit policy changes tend to show a less progressive distribution. This is partly because public sector pay cuts bear rather more heavily on the middle and top of the income distribution.

Source: Silvia Avram, Francesco Figari, Chrysa Leventi, Horacio Levy, Jekaterina Navicke, Manos Matsaganis, Eva Militaru, Alari Paulus, Olga Rastrigina and Holly Sutherland, The Distributional Effects of Fiscal Consolidation in Nine EU Countries, Social Situation Observatory (European Commission)
Link: Report