Tuesday 22 June 2010

Fair cuts? How could we know?

This guest post from Tim Horton and Howard Reed identify an urgent gap in public knowledge which we need to know whether the Coalition is meeting its own "fairness test".


George Osborne's emergency budget statement is based on the argument - must stressed by deputy Prime Minister Nick Clegg and other coalition ministers - that the deep cuts in public spending that lie ahead will be ‘fair’ and ‘progressive’.

But the question is: how we will know?

George Osborne’s aides tell today’s Guardian that the Treasury will be publishing graphs alongside the budget to show that the ‘distributional impact’ of tax and benefit changes – how they affect households at different points in the income spectrum – claiming this shows that the budget will meet the fairness test of hitting those on higher incomes more than lower incomes.

But the Treasury analysis published today will ignore the impact of cuts in public spending on households. What really counts for fairness is not how families are affected by tax and benefit changes in isolation, but how they are affected by the whole package – spending cuts included.

The trouble is, while organisations like the Treasury and Institute for Fiscal Studies have long had the capability to calculate the distributional impact of tax and benefit changes, up until now we haven’t really been able to do this for spending on public services, not least because it’s much harder to work out who uses different services and how much they use them.

So there’s a gap in our understanding here: often we just don’t know what the impact of spending reductions will be.

This gap is reflected in public attitudes too. There is currently little public understanding of how households benefit from spending on public services. While people are well aware of the scale of their tax burden (some of which they see directly on their pay-slips), research shows they are relatively unaware of the scale of the benefits they get from public services in return for the taxes they pay.

Indeed, people tend to underestimate the value of public services.

In focus groups last year, when we showed people the thousands of pounds spent on their NHS treatment each year, it had a transformative effect. They reacted with surprise and amazement.

For progressives, this ‘knowledge gap’ is an urgent political problem. For surely a common understanding of how households benefit from spending on public services – and how they would be affected by cuts in spending – is central to any vision of collective welfare provision.

And an ignorance of this certainly jeopardises popular support for public services.

You can see it reflected in our depressingly shallow tax and spending debates in the UK. The Tories, the tabloids and the Taxpayers Alliance all talk about tax revenues as if they were taken and thrown into the sea. Anti-tax campaigners are able to tout tax cuts as if they have no consequences for public services (knowing those consequences won’t become apparent until further down the line). This is one reason why narratives about ‘waste’ are so important for right-wing critics of public services – helping to break the connection between taxes paid and services received, and making it harder for people to weigh up the overall effects of tax and spending cuts.

The importance of understanding the value of public spending to households is why the Fabian Society and Landman Economics are producing a model – to be launched later this summer, ahead of this Autumn's spending review – of how public spending falls across different households in the population.

By looking at surveys from the Office for National Statistics of who actually uses services and how much they use them, and by matching this up with government spending data, we can work out who benefits from public services, and how they would be hit by cuts.

Crucially, our model will also allow us to weigh up the real impact of tax changes. At the moment, when, say, income tax is cut, we hear a lot about who ‘gains’ from this, while conveniently ignoring the fact that cutting taxes means reducing public spending by the corresponding amount.

Our analysis will look at who really wins from tax cuts, by balancing any gains against the losses from the fall in public spending. The reality is that the numbers who gain from most tax cuts are far fewer and richer than current analyses suggest. A significant majority of the population are ‘net losers’ from many tax cuts when the corresponding reductions in public spending are taken into account.

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