Sunday 27 June 2010

So, what happens to fairness when you look at the spending cuts too?

Robert Chote of the Institute of Fiscal Studies speaking after the Budget:

The budget looks less progressive – indeed somewhat regressive – when you take out the effect of measures that were inherited from the previous government, when you look further into the future than 2012–13 and when you include some other measures that the Treasury has chosen not to model ... Perhaps the most important omission in any distributional analysis of this sort is the impact of the looming cuts to public services, which are likely to hit poorer households significantly harder than richer households.

Even before considering the spending cuts, the IFS concluded that the new measures announced in George Osborne's budget hit the poor harder than the rich.

But that is still only one half of the picture.

So what happens to the fairness claim when you analyse the spending cuts too?

The Observer today reports on Fabian Society research which does that, and which projects that spending cuts are likely to affect the poorest 10% six times as badly as the richest 10%.

And the TUC Touchstone blog has the graphic demonstrating the impact, and the Don't forget the spending cuts paper setting out the model's initial findings.

As The Observer summarises:

Now economists working in conjunction with the left-leaning Fabian Society have created a model that gives a quantitative account of cuts for the first time. The study assumes that health spending and international development spending will be protected, as stated in the budget, and that spending cuts will be equally distributed across the other government departments. It concludes that the poorest will be by far the biggest losers in the drive to move Britain back into a budget surplus by the end of this parliament.

According to the study the poorest 10% of households, earning under £14,200, will see a cut equivalent to more than one fifth of their income. By contrast the richest, those earning over £49,700, will suffer a cut of just 3.6%. The second poorest group in the country – households earning £14,200 to £16,900 – face cuts of 13.6%, with about 7% for those in the middle of the spectrum.

Howard Reed, the director of Landman Economics who co-designed the model, said: "A lot of public spending is 'pro-poor', with poorer households receiving a greater value of services to meet their extra welfare needs. Because of this, cuts in public spending tend to hit the poorest hardest."

Tim Horton and Howard Reed wrote for Next Left on the day of the budget about why it is important to model the distributional impact of public spending, and about the new model which they have developed to do this. Reed worked for the Institute of Fiscal Studies for a decade, including having primary responsibility for the IFS TAXBEN microsimulation model for several years, later being chief economist at ippr.

This research project is supported by the TUC and Unison. A full report will be published this summer, and we plan to produce more analysis of the distributional impact of public spending in particular areas of policy this Autumn and across the Parliament.

How should the Coalition government - and particularly Liberal Democrat or progressive Conservative supporters who want it to meet its "fairness test" - respond?

One option would be to say that the desire to have a progressive impact properly relies only to direct taxation and benefit changes - and not to the impact of the public spending cuts too. But there could little rationale for an attempt at "half a fairness test"; indeed perhaps that would be to proclaim an attempt at "fairness about one fifth of the time" as the government says its deficit reduction programme is 80% about changes to public spending.

The other would be to say that the government should try to ensure it does meet the fairness test it has set for itself. There are three or four major issues to consider about whether and how the government can attempt to do this.

(i) How far is the proposed scale of public spending cuts "unavoidable"?

That there is a need to reduce the budget deficit is widely agreed. The government's strategy is to therefore claim "there is no alternative" to its specific proposals as to what is needed how to do this.

The Coalition is right that Labour did not identify the specific cuts for its budget. It is a different argument to claim the deeper reduction programme is unavoidable, rather than a policy and political choice. As Left Foot Forward has summarised well:

In the March Budget, Labour set out plans to “halve the deficit over four years.” They announced costed plans to increase taxes by £18 billion by 2013-14 and set out a desire to cut spending by £39 billion over the same period. But they failed to detail where the money would come from allowing George Osborne to say in his Budget speech, “What we have not inherited from our predecessor is a credible plan to reduce their record deficit.” Osborne is right and yet this does not necessitate the additional £32 billion in pain by 2013-14, rising to £40 billion by 2104-15, and up to £55 billion in 2015-16.

(ii) Is the 80-20 ratio of spending cuts to tax rises sacrosanct? George Osborne is committed to an 80-20 ratio, where he seeks £4 of spending cuts for every £1 of tax rises. He told the Commons this would mean 25% cuts for most government departments which were not specifically protected. The budget measures suggested as 77-23 division. Labour has proposed this should be 2-1 (66-33) while previous Tory fiscal tightenings were on a 50-50 basis.

(iii) Given that spending cuts are very likely to impact the poorest more, how progressive do taxation changes need to be to make the overall impact progressive and not regressive?

The government could even stick to the scale of deficit reduction and spending/cuts ratio, but would then need to be proposing tax changes which provided a fair balance overall. Contributory proposals would mean, for example, putting ditched LibDem policies for higher taxation at the top, like the mansion tax, back on the table. It is indisputably a political choice as to which taxes to raise, and where the burden falls. (The VAT rise was "necessary" because of a range of discretionary tax cuts were introduced, and because it was preferred to other possible tax rises).

(iv) Which spending cuts? How should the fairness aspiration affect the way in which individual departments and the Treasury make spending cuts this Autumn? Will the government be show how and where that the distributional impact of spending cuts was a central driver in decisions about what spending to protect and what not to spend?

The political and policy choices on each of these areas will be contested. What we should all be able to agree on at the outset is that we will have an informed debate about these issues if the government itself is as transparent as possible about the distributional impact of its changes, and how these have influenced its decision-making process about public spending this Autumn.

Given the overall distributional pattern of public spending, it may be very difficult to stick to the timescale of deficit elimination, and the cuts/tax ratio, and still claim the "fairness test" is the central driver of deficit reduction thinking.

You could call that the "Clegg trilemma". Something's got to give at the level of political and economic strategy. Some on the right may think it is time to ditch the "fairness test", and will not trade-off the cuts/taxation ratio for it; Liberal Democrats would be expected to argue the opposite.

However, were the Coalition sticks to its approach on all three fronts, one would still expect it to acknowledge the importance of internal and external scrutiny of the overall spending review - and measures within it - on distributional grounds.


Newmania said...

The Observer today reports on Fabian Society research ...... uhuh

Of course the poor are hurt more by hard times they rely more on the state . If New Labour and its fellow travellers cared about the poor they would not have bankrupted the country , inflicted dependence and slithered in a policy of redistribution that no-one wanted in the first place.
This is your fault and it would be nice to see a little less sanctimnony from those who are directly responsible for tip[ing hard working families onto the Street whose efforts have paid for a the cosy non jobs your supporters have enjoyed

It is common ton regard the left as well meaning but stupid but at times like this I really wonder if it is not something worse

PaulCassidy said...

I actually think in times like these spread betting becomes more and more attractive - it's free from CGT and stamp duty.

Offpiste_man said...

Robert Chote may well be right when he says that the budget would be regressive but for the measures already baked in by the previous administration. Does Mr Osborne get no credit for NOT taking these measures out ? And does this mean that the budget as a whole is not progressive ?
Or does it mean that the IFS is no less biased than any other think tank ?