The Effect of the UK Coalition Government's Tax and Benefit Changes on Household Incomes and Work Incentives

The coalition government that was in office in the UK between May 2010 and May 2015 introduced a sizeable package of tax and benefit reforms to reduce the UK's large budget deficit. We use a microsimulation model that includes a broader range of policy measures than previous studies to estimate how these reforms affected both household incomes and work incentives. We find that lower-income working-age households and the very richest have lost the most, while working-age households without children in the upper-middle of the income distribution actually gained from these reforms. Some results of our analysis are, however, highly sensitive to the choice of ‘no reform’ baseline. This is particularly true of how much pensioners have gained or lost from the reforms, since this depends critically on whether the basic state pension is increased in line with earnings or prices in the ‘no reform’ scenario. When analysing the impact of these reforms on individuals’ work incentives, we find that the coalition's changes have slightly strengthened work incentives. The participation tax rate has, on average, been reduced by 3 percentage points, perhaps a less significant strengthening of incentives than might have been expected given the scale of the coalition's benefit cuts. However, this average effect disguises considerable variation across the population; indeed, the majority of workers have seen the incentive to increase their earnings weaken, not strengthen, as a result of the coalition's reforms.