Sunday, 4 July 2010

Danny Alexander responds

Chief Secretary to the Treasury Danny Alexander has a letter in The Observer responding to last week's news report of the Fabian Society's analysis, showing that the impact of spending cuts would make the budget's overall impact considerably more regressive.

Here is his letter:



The rich will bear the burden

The Fabian Society report on the impact of spending cuts ("Osborne's budget cuts 'will hit Britain's poorest families six times harder than the richest'", News) failed to take into account both our stated priorities for the spending review and our record from only a short time in office.

This budget is progressive because the burden falls most heavily on the wealthier in our society. We will lift almost a million of the lowest-paid workers out of income tax, relink the state pension to earnings, increase child tax credits for the most vulnerable and we have ensured child poverty will not increase. The next stage in the process is the spending review. We have already promised to increase health spending in real terms every year of the parliament. We will pay particular attention to the services relied on by the most vulnerable in our society and on those regions heavily dependent on the public sector.

Danny Alexander

The Treasury London SW1


I would contest several of the claims which Alexander makes:


(1)
"The Fabian Society report on the impact of spending cuts failed to take into account both our stated priorities for the spending review and our record from only a short time in office".


Both of these points are erroneous.

The research does begin from the modelling of the distributional analysis of the budget's tax and benefits changes, and then includes in the model the decision taken on the scale of additional spending cuts overall which was set out in the budget. (This is precisely the "record from only a short time in office").

It does so by including in the analysis the firm commitments the government has made, specifically the ring-fencing of health and international development (which are the specific "stated priorities for the spending review" we have to date in sufficient detail to model).

The Fabian Society will produce further distributional analysis of the decisions which the government takes. The initial analysis offers a "baseline" taking account of ring-fenced areas, showing the impact of cuts if shared across other areas.

(2)
"This budget is progressive because the burden falls most heavily on the wealthier in our society".


That is certainly contested, and the broad consensus of non-aligned opinion appears to be against Alexander's continued claim this was a "progressive" budget. The new decisions taken by the Coalition were regressive, as the Institute of Fiscal Studies has shown: the burden falling more heavily on the poorest than the affluent. Alexander's claim relies on policies inherited from Alastair Darling, but the Coalition's further choices did not then emulate that progressivity but were, in fact, regressive.

The £3.7 billion income tax cut was outweighed for poorer households by the VAT rise: the poorest 40% lose much more on VAT than they gain on the income tax threshold change.

The decision on child poverty is welcome, and was needed to avoid a net regressive effect of all measures (including Darling's), though leaves the Coalition needing to do more given it has said it is committed to meeting targets to halve and end child poverty.

(3)
"The next process is the spending review ... We have already promised to increase health spending in real terms every year of the parliament. We will pay particular attention to the services relied on by the most vulnerable in our society and on those regions heavily dependent on the public sector".


The Fabian Society will produce analysis of the spending round decisions.
The decision to go for much deeper and faster spending cuts than the Liberal Democrats envisaged will make the distributional pledge much harder to keep. (Nick Clegg has previously (rather risibly) complained that the IFS do not include decisions the government has not taken. However, in this case, the government is also advantaged because briefings about much deeper spending cuts are not yet shown in the analysis either).

If the government disagrees with our analysis, the best way to respond would be to report transparently on the distributional impact of its public spending changes, both across the board and by department, at the time of the spending review. With the government having made so much of its willingness to produce such analysis of the taxation changes in the budget, Alexander should surely be willing to do this. It would be essential to prove that his promise - repeated again in today's letter - that "progressive austerity" and cuts will not hit the poor harder has been met.

2 comments:

ProgressiveMajority said...

Just a heads up, your link to the letter actually links to another article: "Oil firms must compensate the people of Nigeria".

Sunder Katwala said...

Thanks. His is the second letter below that on the same link.

They don't seem to publish them separately. That's why I ran the whole text here.