BUDGET 2006: IMPACT ON INCOME DISTRIBUTION AND RELATIVE INCOME POVERTY

1. Introduction

The package of income tax changes and cash transfers in Budget 2006 provided the greatest boost to household incomes in many years. How did the impact on incomes vary across income groups? And what net effect on relative income poverty can be expected from the measures contained

in Budget 2006? These questions are addressed here, drawing on analysis using SWITCH, the ESRI taxbenefit model. As governments often stress that the achievement of their plans requires more than a single budget, we consider the impact of Budget 2006 in the context of the overall impact of the past five budgets.

2. Measuring Distributive Impact

A tax-benefit model, based on a large scale survey, provides the most comprehensive picture of the impact of budgetary policy across the income distribution. SWITCH, the ESRI tax-benefit model, simulates the social welfare entitlements and direct tax liabilities of a large-scale sample of households ( see Appendix). The fact that the model is based on a nationally representative survey ensures that it takes account of the wide variation across families in circumstances relevant to their tax and welfare situation.1