Thursday 24 June 2010

Why the fairness test matters - even when you fail it

"The overall impact of yesterday's measures was regressive", concluded the Institute of Fiscal Studies, in assessing what Robert Chote called George Osborne's "debatable" claim that "it is a progressive budget.”

As Left Foot Forward sets out, the IFS analysis shows that the progressive aspects of the overall fiscal tightening depend overwhelming on decisions inherited from the Labour government, not those made by Osborne (with Alexander, Cameron and Clegg), echoing a point made by Nick Pearce. The IFS also challenged Osborne's claim that his VAT rise was "unavoidable", in noting the range of discretionary tax changes he had made.

Nick Clegg was, as the FT reported, "obsessed with the [distributional] chart" because "The coalition have bet the ranch on “progressive austerity” and they think these statistics vindicate the claim that this is a tough but fair fiscal medicine. The trouble is that this chart showing the spread of pain from the tax rises and benefit cuts is just a snapshot of 2012. It won’t look as fair after that".

The IFS confirms a clear consensus that the budget failed Clegg's own fairness test. The Channel Four fact-check puts the point more colourfully that the IFS "breakdown makes the coalition look less like Robin Hood and more like Marie Antoinette".

That makes, yet also misses, an important point. The budget was not motivated by fairness. Yet that it was also constrained by fairness matters too, and points to the central contradiction in the Coalition's policy agenda and political strategy.

The Chancellor's claim that there was no alternative to the depth and nature of his fiscal tightening does not stand up. There were two central political choices, each very well described by James Graham of the Social Liberal Forum, the increasingly vocal progressive wing of the LibDems, in its budget preview.

# What is the timescale? If George Osborne announces a clear intention to clear the structural deficit over the lifetime of this parliament, that is a definite Tory victory. The Lib Dems’ argument was always for something closer to halving the deficit over five years.

# What is the proportion of cuts to tax rises? Again, the Tories were quite clear on this: £4 cuts for every £1 tax rise. Labour went into the election calling for £2 cuts for every £1 in extra taxes. The Lib Dems, it is fair to say, hedged it, but did include a clear commitment to raise taxes if spending cuts alone would lead to greater unfairness. It is hard to conceive how 80% cuts could possibly pass this fairness test – especially since the government appears to be working towards an even greater deficit reduction than even the Tories were pledging to do during the election.

The answers to these questions were not a function of the fiscal position. They were political choices - and the answers were ideologically driven.

Yes, deficit reduction is required. Labour's plans to halve the deficit over a Parliament would have meant deep cuts. The further depth of George Osborne's cuts - to eliminate the entire structural deficit within the Parliament - have nothing at all to do with the risk of sovereign default. And all of the Treasury and IFS analysis is looking only at the tax side of the equation. As Tim Horton and Howard Reed set out, a distributional analysis of the impact of both tax and spending changes is necessary to judge the Coalition's programme against its progressive aspirations and language.

These choices are built primarily on the ideological belief that the smallest possible state is always best, a rejection of arguments about the risk to economic growth of such a deep and rapid retrenchment. The Cameron-Osborne project began with an acceptance of Labour spending plans as a constraint on tax ambitions; their project now is to expunge any evidence of New Labour's public investment by shrinking the state to pre-1997 levels.

These are the big arguments which the right is winning - both within the Coalition - and perhaps to a large extent, though this is contested, in framing media and public political debate. Yet, at the same time, the right has lost one important 'framing' argument, which is why the Coalition's budget has been constrained by fairness rhetoric and aspirations, even as it fails to live up to the fairness test it has set for itself.

Here we have the paradox and confusion of this would-be progressive coalition. The "there is no alternative" approach to the depth of cuts is not just Thatcherite, it is Thatcher plus. The VAT rise - and commitment to indirect over direct taxes - speaks to David Cameron's public statement that he is basically a disciple of Nigel Lawson when it comes to the tax system.

And yet Osborne and Cameron's clear acknowledgement that inequality matters, the acceptance of relative poverty and child poverty as meaningful concepts, shows that the right at the same time accepts that Lawson-style tax changes, such as those in the 1988 budget, would have no public legitimacy at all.

As George Osborne put it in his budget speech:

Too often when countries undertake major consolidations of this kind, it is the poorest - those who had least to do with the cause of the economic misfortunes - who are hit hardest. Perhaps that has been a mistake that our country has made in the past. This Coalition Government will be different.

And so the government proclaims its commitment to meeting a distributional 'fairness' test, that the Tory governments of the 1980s would have condemned as Marxist mumbo-jumbo.

That is why £2 billion had to be found to invest in child tax credits, because the government wanted to claim it would at least have a neutral impact on child poverty.

That is also why higher rate-payers were excluded from the tax threshold change, to mitigate the regressive distributional impact of the LibDem manifesto proposal. (An argument vociferously rejected by LibDems when pointed out by the Fabians (and then the IFS), yet ironically now tacitly acknowledged by the government). This is not just about the Coalition, but reflects the broader Tory acceptance that inequality matters as part of the brand decontamination process (There are several areas - where to cut tax credits or the Child Trust Fund; whether to means-test child benefit - where the LibDems have been to the right of the Conservatives; the LibDems have much more progressive instincts on inequality at the top, but look increasingly politically neutralised on that within the government, which is why that isn't having much impact on the distributional outcomes chart).

So can this fairness circle be squared? That depends on the belief that Britain can have a much smaller state and signficantly reduce inequality at the same time.

Nick Clegg's increasingly close philosophical, political and personal convergence with David Cameron will now involve committed advocacy of this core proposition of Cameronite optimism. And Orange Bookers of the David Laws school want it to be true: it would enable the restoration of a more classical Gladstonian economic liberalism to be flourished in the name of fairness, escaping what Laws calls the LibDems' "soggy socialism and corporatism".

But LibDem centrists as well as social democrats and social liberals understand why it is a flawed prospectus. Indeed, the case was put most clearly by Clegg's new special adviser Richard Reeves, writing in Prospect last December with his co-author Phil Collins on a big, unequal society

it makes literally no sense to argue that inequality needs to be reduced and then to call for a reduction in state benefits. The issue is not ideology; its not politics; its just arithmetic ... Labour's record shows that cash transfers can work to reduce basic income inequality. It also shows that even a broadly centre-left government did not feel able to transfer money on the scale needed truly to make society more equal. So inequality has been checked, not reversed ...

At present, [Cameron] is signing himself up to Labour-style poverty and inequality measures, even as he rejects Labour-style redistribution. In other words, he is setting his own big trap and trotting gamely towards it"

The budget shows how that still cuts to the heart of the Coalition's contradictions over fairness and inequality.

They are pursuing social democratic ends by Thatcherite means - with their fingers crossed that the results will turn out differently this time around.

They have publicly committed to the primary test of their efforts being a 'fairness test' which they are certainly going to fail without a rethink of their central strategic approach.

That should provide an important opportunity for pressure, from LibDems inside the Coalition and from civic society, media and Labour opposition voices outside it. For example, David Cameron and George Osborne may well feel they must concede to Labour pressure, evident at Prime Minister's Questions yesterday, that every future budget should reduce child poverty. (No doubt IDS has a plan, but note that the Coalition decided it needed to draw on the Gordon Brown playbook to mitigate an increase in child poverty on Tuesday).

"David Cameron talks pleasantly about lowering inequality. But his ideas are a mess", wrote Reeves. The same can certainly now be said of the Cameron-Clegg Coalition, which has staked its progressive credentials very clearly on that proposition, and for whom the fairness dilemma looks if anything sharper.

At least Nick Clegg can not claim that he wasn't warned.

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