Wednesday 23 June 2010

Whose fairness is it anyway?

Nick Pearce, who was ippr director before being head of the Downing Street policy unit, makes some telling points for the OurKingdom blog about the budget's distributional impact, arguing that "it is simply incredible to call this “fair”.

In fact, if you look at the widely touted distributional impact tables in the Red Book. (Annex A, page 63), you see that all the heavy lifting on progressive taxation is done by reforms introduced by the previous Labour government, not by yesterday’s Budget (the black bar in chart A2, for the top decile). The poor lose primarily by the increase in VAT. The middle classes lose tax credits and pay more VAT. And the better off lose from direct tax and National Insurance changes inherited from Labour – almost nothing at all from anything agreed by the Coalition. Moreover, as Alex Barker points out in the FT, these tables do not include the full impact of benefit cuts, since these are not felt until after 2012/13.

Pearce anatomises how much and how little of the LibDem tax fairness manifesto has survived:

Tellingly, the central Liberal Democrat election commitment to fairness in taxes and benefits has been abandoned. A few facts illustrate this simply enough. In their Manifesto, the Liberal Democrats promised to raise nearly £2 billion from Capital Gains Tax reform. The Budget secures less than half that (£925 million). In addition, they pledged to raise £5,455 billion by restricting tax relief on pension contributions to the basic rate. This highly progressive measure has now been completely dropped. Ditto the Mansion Tax on properties worth over £2 million, due to have raised £1.7 billion. And there was barely a mention of the green taxes they had pencilled in to raise over £3 billion in the Budget. On almost every score, their pre-election tax package has been stripped of its progressive content ...

He also suggests the most progressive Tory voice has not got his message across to colleagues:

And the overall story of this Budget is one of generational injustice, with cuts falling on working age families and those with children, but not the asset rich pensioner population. David Willetts’ warnings have been not been heeded.

There are some important future policy and political challenges for Labour in the piece - "Retreating to occupy the space of defender of the public sector and its staff is political suicide in the long run" - in staking out the argument for what Pearce calls a "social democratic majoritarianism", which sounds as though it has a familial resemblance to the reciprocity-based universalism set out by Tim Horton and James Gregory in the Solidarity Society.

Read the full piece here.


Cantab83 said...

After watching Faisal Islam on C4 News I now understand why the ConDems have been convinced to cut deep and cut early. Their reasoning is probably to be found in the growth projections.

These are the OBR projections for growth and debt over the next 5 years based on Labour's last budget:

2010/11 - 1.3% - 163bn
2011/12 - 2.6% - 131bn
2012/13 - 2.8% - 110bn
2013/14 - 2.8% - 89bn
2014/15 - 2.6% - 74bn

And here are the revised OBR figures now:

2010/11 - 1.2% - 149bn
2011/12 - 2.3% - 116bn
2012/13 - 2.8% - 89bn
2013/14 - 2.9% - 60bn
2014/15 - 2.7% - 37bn

You see the problem? Cumulatively, there is virtually no difference. True, projected growth is now 0.1% lower in the first year, and 0.3% lower in the second. But the upside is that total borrowing is over £100bn less over five years. So a little bit of extra unemployment (100k) for a year or so would seem to be an acceptable price to pay for higher growth and lower debt in the future, or so the argument goes? The question is, though, how believable are any of these projected figures? Can we really believe that future economic growth is so insensitive to any amount of fiscal tightening now? I am very doubtful of that, not least because it would suggest that all government interventions have little to no effect on the economy.

The second problem is that all this is based on an assumption that the Government CAN cut budgets in most departments by 25%. Yet as Paul Mason pointed out on Newsnight, even after the IMF crisis in 1975-6 and the Howe budget of 1981, neither government ever managed to cut government expenditure in cash terms. So is it really credible to think that this government can?

So which, then, is the more likely scenario? That the ConDem Govt manages to achieve what it claims and cut most departmental budgets by 25% over 5 years and still get over 12% growth in GDP? Or that their growth figures are pure fantasy, the cuts reduce output but also actually result in increased spending, the debt goes up instead of down, and that we end up in a double-dip recession (or worse)?

At best, this all seems like a massive game of Russian roulette, or a massive gamble on favourable interest rates reducing borrowing costs!

sanbikinoraion said...

Of course the Lib Dems didn't get everything they want (far from it) but we are the minority partner in a parliament in which the Tories were pretty close to gaining majority rule. Of course most policies getting through will be pure Tory. The best we can hope for is for the Lib Dems to temper the very worst excesses of the right-wing, and we're going to get pilloried for even managing that.

Imagine a pure Tory budget. Would there have been a CGT hike? No. A personal allowance hike? No. A bank levy? Questionable.

Sunder Katwala said...

The Tories didn't have a majority.

The correct comparison for influence is between Tory-LibDem coalition as junior partner, or supply and confidence deal (leaving aside either alternative outcomes or new electins).

LibDems could claim they got more out of a Coalition than supply or confidence, in the Agreement itself (when they held a veto). It is also clear that this was the high point of their influence, and that the "junior partner" rationale is going to get heard more and more.

For example, even though close to equal CGT rates was in the Agreement itself, that did not prove sacrosanct, and the Tory right won most of the argument there. The Tories were for a banking levy at £1 billion and you at £5 billion: its closer to theirs.

It was also up to the LibDems as to what their red lines were. You are letting the marriage tax through with a symbolic abstention. Clearly, you didn't make VAT a sticking point, though the campaign you had (both) ran could have made that plausible.

sanbikinoraion said...

Well, if you're going to compare it to supply-and-confidence then you have to examine what that deal would have entailed: it blatantly would not have been "Tories do whatever they like" but it would not have been "Lib Dems get to veto anything they feel like" either - so, if you are going to compare it to supply and confidence, then let's hear it: what do you imagine would be different under such circumstances?

Don't get me wrong, I am onside with you on a lot of this, I think VAT is a terrible tax in the first place, that richer people should be taxed harder, there should be more and bigger wealth taxes and so on -- so don't rule me out as a party apparatchik.

I'm just saying that saying that the Lib Dems have gone against a lot of their manifesto is both a trivial and meaningless point to make: the Lib Dems didn't win the election, and in other very similar circumstances, the Lib Dems would be getting *absolutely none* of their campaign pledges enacted, as opposed to the limited quantity now.