The wrath of the squeezed middle will soon be heard

April 26, 2011 - 0:0

Much of the credibility of the (UK) Coalition's case for economic austerity rests on the assertion of the Chancellor, George Osborne, that the rich will shoulder the greatest share of the harsh measures needed to bring down the deficit. The Government's corresponding promise to shield the least well-off and the so-called “squeezed middle” from the worst rigors of the cuts is also the political glue holding this Coalition together. Without delivery on this pledge, it is hard to see on what basis Nick Clegg's Liberal Democrats could defend their remaining in harness with David Cameron's Tories.

This is why new analysis on the impact of cuts conducted by the Resolution Foundation could be politically explosive. According to this independent think-tank, the abolition of child benefit for families with a taxpayer on the higher rate of 40p in the pound will hit tens of thousands of families at the bottom end of the low-to-middle income scale – defined as £12,000 to £30,000 for a couple with no children and as £30,000 to £48,000 for a couple with up to three children.
The financial cost that these families can expect to incur as a result of changes to child benefit rules will, the Resolution Foundation says, be worth an average of £2,016 a year from 2013, when the change comes into effect. Nor will this loss be compensated for by the decision of the Chancellor in the last budget to raise tax allowances. This will take some of the poorest families out of the tax net entirely, but those low-to-middle earners who stand to lose about £2,000 a year from the abolition of child benefit will receive back only an average of £28 from the change to personal tax allowances.
The Government will probably respond to criticism on this front by maintaining that even the most progressive changes to the tax system tend to throw up anomalies in the form of undeserving victims -- usually people at the bottom end of the middle-income range who, alas for them, are deemed just prosperous enough to shoulder the burden of cuts but who are not eligible for any of the provisions put in place to support the poor.
Ministers will find it more difficult to parry charges that, as high inflation and low wage rises eat into the disposable incomes of a much bigger slice of middle-income earners than those hit by the changes to child benefit, they are failing in a broader sense to defend the hard-pressed middle classes.
Largely as a result of sharp rises in world commodity prices, inflation is surging at around twice the level of pay rises. Whether this adds up to the sharpest fall in disposable incomes since the 1930s, as some maintain, the pain will certainly be felt across the board, especially outside the relatively buoyant economy of South-east England.
To an extent, the Government is lucky in that it faces its first electoral test since the general election in a few weeks' time, well before the impact of this broad squeeze on incomes is fully felt. The Coalition parties may get their oft-predicted “hammering” on 5 May, with Liberal Democrats bearing the brunt of voters' fury, but if the polls were to take place later this year, middle-class voters might be more vindictive.
Mr. Osborne's strategy will be to repeat his mantra, that things must get worse for them to get better -- and that by 2015, the benefits of earlier economic rigor will show through and voters will forget the anger they felt in 2011-12. This is a big gamble, presuming even that the Chancellor stays the course, because he is bound to face growing pressure, not least from within his own party, to do more to help Britain's “squeezed middle” survive the coming pain