Healey is expected to shield low-income pensioners from income tax – but how will it work?
Real-world example for IB, A-Level, AP and IGCSE Economics essays: Fiscal policy, Wages and income inequality, Taxes, subsidies and price controls
What happened
The UK is expected to give low-income retirees a new personal allowance so they do not have to pay tax on their state pension, with full details still to be announced.
The economics
This illustrates fiscal policy used for redistribution through the tax system: raising the allowance is effectively a tax cut that lifts low-income pensioners' disposable income and narrows post-tax income gaps. Students can trace the mechanism from a smaller tax wedge to higher disposable income.
Evaluation
The measure only helps low-income pensioners, and its fiscal cost must be met by other taxpayers or borrowing; tying the allowance to the pension may also make the tax system more complicated and its long-run sustainability uncertain.
Practice question
Using the principles of fiscal policy and income redistribution, evaluate the advantages and disadvantages of raising the personal allowance for low-income pensioners.
Where it fits in the syllabus
- Fiscal policy: The government changes spending and taxation to influence aggregate demand and economic activity.
- Wages and income inequality: How labour markets set wages, and how income and wealth are shared across people.
- Taxes, subsidies and price controls: Indirect taxes, subsidies and maximum or minimum prices that governments use to change market outcomes.
- IB Economics: Fiscal and Monetary Policy, Aggregate Demand and Supply, Government Intervention and Market Failure
- A-Level Economics: Economic Policy, Government Microeconomic Intervention
- AP Macroeconomics: National Income and Price Determination, Long-Run Consequences of Stabilisation Policies
- AP Microeconomics: Factor Markets and Income Distribution, Supply, Demand and Market Equilibrium, Market Failure and the Role of Government
- IGCSE Economics: Government Macroeconomic Policy, The Allocation of Resources, Government Intervention