Category: Politics

Spending review cuts hit poor hardest, says Institute of Fiscal Studies Respected thinktank says most secondary pupils will lose out as families with children take brunt of cut

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Britain’s leading tax and spending experts today flatly contradicted the key claims made by George Osborne and the coalition over the fairness of its £81bn austerity programme.

In a move that forced the government on to the defensive, the highly respected Institute for Fiscal Studies challenged the chancellor’s contention that his plans for four years of belt-tightening would be progressive, safeguard frontline school spending, and require smaller savings for departments than Alistair Darling would have demanded.

The IFS said poor people would be hit harder than the rich, the four-year plan would see spending for most secondary school pupils cut, and Whitehall departments would face deeper cuts than under Labour’s plans.

The IFS also said that the £2.5bn pupil premium would fail to compensate for rising school numbers and other cuts in the education budget, resulting in funding reductions for 60% of primary school pupils and 87% of secondary school children.

Angela Eagle, shadow chief secretary to the Treasury, said: “George Osborne’s smoke and mirrors have well and truly unravelled. On any measure his plans hit the poorest hardest. And the IFS have all but called him a liar for his ridiculous claim that he is cutting less than Labour planned.”

In its detailed analysis of Wednesday’s comprehensive spending review, the IFS said the £7bn of fresh welfare cuts, together with public spending reductions, reinforced the regressive nature of the changes introduced by the coalition since it came to power. Families with children would be the hardest hit by the changes and only by including the increase in the top rate of income tax introduced by Labour could the coalition justify the claim that the better-off were being hit more than the poor.

“The tax and benefit changes are regressive rather than progressive across most of the income distribution. And when we add in the new measures announced yesterday this is, unsurprisingly, reinforced,” said the acting director of the IFS, Carl Emmerson.

“Our analysis continues to show that, with the notable exception of the richest 2%, the tax and benefit components of the fiscal consolidation are, overall, being implemented in a regressive way.”

Emmerson expressed concerns about the government’s plans to reform council tax benefit, saying it would make the system more complex and less transparent. “It will also make it harder to make the benefit system fit together better as a whole. The incentive it provides to local authorities to encourage low-income people to move elsewhere is undesirable.”

The IFS also questioned Osborne’s claim that the 19% cut he is demanding of Whitehall departments was slightly less draconian than the 20% cut pencilled in by Labour. The thinktank said that once both sets of plans had been adjusted for the ringfencing of the NHS and Department for International Development, Labour’s cut would have been 16%.

A Treasury spokesman said last night it was legitimate for the government to include tax changes previously planned by Labour in the assessment of whether the coalition’s tax, spending and welfare package was progressive.

David Cameron, meanwhile, said that higher earners would pay more as a percentage of their income and that fairness was “about asking how much people give as well as how much people get”.

He added: “They pay most, not just as an amount of cash, they pay more as a percentage of their income, and that is what the definition of what being progressive is. You are asking those, as you go up the income scale, not just to pay more in cash but to pay more as a percentage of your income. That is what the figures show.”

None of the cuts would increase child poverty, he said, thanks to extra help for youngsters from deprived backgrounds.

“I think that we have done it in a way so we can genuinely say: it is difficult, it is tough but it is fair and we are going to take the country with us,” the prime mini ster added.

Imran Hussain, head of policy, rights and advocacy for the Child Poverty Action Group, said: “The IFS analysis is a devastating dismissal of the chancellor’s hollow claims of fairness yesterday. The government’s reputation on fairness is now shot to pieces. The IFS have made clear the awful truth that families with children are hardest hit.”

http://www.guardian.co.uk/politics/2010/oct/21/ifs-spending-review-cuts-poor-hit-hardest

A crackdown on tax dodgers will help the poor and make huge cuts unnecessary

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Our guest writer is Paul Collins of War on Want

Anti-poverty charity War on Want will demonstrate today after chancellor George Osborne announces the worst cuts in jobs and public services for decades under his spending review, under which poor people will be hit hardest by a financial crisis sparked by the rich.

Tax-havenWar on Want will join a Coalition of Resistance protest outside Downing Street, where speakers will include Mark Serwotka, the Public and Commercial Services Union leader, and former Labour cabinet minister Tony Benn, arguing that it is scandalous the coalition government plans to make the poor suffer for a crisis they did not cause.

There is a positive alternative to the government’s cuts programme – an alternative that is within our grasp. Taxing the banks and launching a crackdown on tax dodgers can not only avoid the cuts, but raise billions to help the poor.

The most vulnerable people face worse living standards while banks rescued with a £500 billion bailout from trouble prompted by greed are now piling up profits and paying huge bonuses to executives: Lloyds TSB in August reported £1.6 billion profits with RBS recording £2.1 billion profits in the same month, while cash bonuses in the City will reach almost £7 billion, according to the Centre for Economics and Business Research.

There are warnings that cutting 500,000 public sector jobs over five years risks triggering a double-dip recession in Britain, as in many other European countries.

The UK exchequer loses £120 billion a year through tax evasion, tax avoidance and uncollected tax. The Channel 4 television programme Dispatches on Monday accused three cabinet ministers of tax avoidance – Osborne, international development secretary Andrew Mitchell and transport secretary Philip Hammond. Moreover, tax dodgers cost developing countries £250 billion a year.

War on Want asks that banks pay their fair share to help tackle the crisis via a Robin Hood tax on financial transactions which could raise £20 billion in the UK alone. Reversing a programme of cuts in tax inspectors’ jobs and the closure of their offices would fight tax dodges.

http://www.leftfootforward.org/2010/10/war-on-want-say-cracking-down-on-tax-dodgers-will-help-poor-and-make-huge-cuts-unnecessary/

Has the Health budget been cut?

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The Chancellor today announced that Health spending would rise in real terms. But a closer look at the numbers suggest that the Health budget will fall against the baseline set out in the June Budget.

Table 2.2 of the June Budget clearly shows that the departmental expenditure limit for current spending in the Department of Health would be £101.5 billion. But Table 1 of today’s Comprehensive Spending Review sets out that the same number is £98.7 billion.

Health spending will rise to £109.8 billion by 2014-15. In real terms, the rise from the new baseline delivers a 1.3 per cent rise. But compared to the baseline set out just four months ago, the rise turns into a cut of 1.5 per cent.

What has happened to the missing £3 billion this year? If these are the the administrative savings, why have they not been reinvested in the NHS?

UPDATE 14.38:

On May 12th, Health Secretary Andrew Lansley said:

“What is sustainable for the NHS is that we deliver efficiency savings in the NHS in the same way as the rest of the public sector.

“But because of the nature of the demands on the NHS, if we can secure those efficiency savings, we can reinvest them in the NHS to deliver improving outcomes for the public.”

If the missing £3 billion is explained by efficiency savings, what happened to them?

http://www.leftfootforward.org/2010/10/has-the-health-budget-been-cut/

Osborne’s fairness claims fall flat. Again

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This is a joint post by the Fabian Society’s Sunder Katwala and Tim Horton

It was striking that George Osborne made so much again of his claim that the Comprehensive Spending Review (CSR) had met the fairness test of “progressive austerity” – so that even his spending cuts would hit the better-off harder. Back in June, his emergency budget ‘fairness’ claim unraveled in 24 hours. Are his claims to a “progressive” spending review any better? The immediate answer appears to be no.

Howard Reed and Tim Horton had previously provided the most comprehensive analysis to date of the current distribution of public spending. The report, published by the TUC, showed that, based on what we knew prior to the CSR about government commitments, proposed spending cuts seemed very likely to hit the poorest much harder. (Perhaps unsurprisingly, since public spending is ‘pro-poor’, giving more help to those on lower incomes).

Today George Osborne claimed he had avoided that consequence. Yet he has published figures and documents which again prove that he has not done so. Reed and Horton will update the analysis based on the CSR numbers. But it is possible as a first step to set out why the Treasury’s claims in the distributional annex published today do not stand up.

Firstly, on tax and benefits, his chart B.5 on page 98 again shows he had preannounced measures which (thanks to Alistair Darling’s policy proposals) hit the best off harder – but the green bars show very clearly that today’s proposals are worst for those at the bottom and better at the top, with a regressive gradient across the income distribution.

What about spending on services? How does the Treasury manage to produce a graph (chart B.3 on page 95) which purports to show the greatest hit on services to the most affluent quintiles? Through very creative presentation.

On The Treasury’s own modeling assumptions (which account for and model around 50 per cent of public spending, a lower proportion than addressed in the Fabian/TUC report), we are told that the average loss of services (‘benefits in kind’) in the top quintile is £10 a week (or £520 a year) out of services worth £5,400 for those earning on average £48,700 and the loss to the bottom quintile is £7 a week (or £364 a year) out of services worth £11,500 for those earning an average of £13,800.

If the Government wanted to turn the overall pro-poor distribution of public spending to its advantage, you might then say ‘why not draw a graph showing those changes as a proportion of the lost benefits in kind’. Which is what the distributional annex does.

Changes-in-benefits-in-kind-as-a-percentage-of-2010-11-household-consumption-of-benefits-in-kind

But this makes no sense at all for anybody asking ‘what is the distributional impact of the CSR’.

 

What’s wrong with the Treasury’s approach and claims? It makes little sense to expresses the impact of cuts to public services (Chart B3) as a proportion of the total amount of public services received by households (rather than as a proportion of household income).

In our view this is conceptually flawed: you cannot add the value of public services received to someone’s household income in order to produce a grand measure of their standard of living, since the public services people receive are related to their underlying needs. It doesn’t follow that someone is better off because they are ill one year and so receive more NHS services than someone who is fit.

If we want to know who is hit hardest – and who escapes most easily – in the real world we surely want to know instead what proportion of their income the lost services represent. Imagine a household has to pick up the cost of services lost out of its own pocket; what matters is how much this is relative to their household income. This will be a very real consideration to people facing, say, rises in bus or rail fares because of spending cuts reducing the public subsidy.

The Treasury annex does provide the necessary figures to express impact in this way – but somehow forgot to draw the relevant diagram. The bottom quintile earn on average £13,800 and are losing £364 of benefits in kind. The top quintile earn on average £48,700 and are losing £530 of benefits in kind. Here is what the distributional impact looks like on the basis of the Treasury’s own figures.

The impact for the top 40 per cent is relatively lighter – that on the bottom 60 per cent worse:

Changes-in-benefits-in-kind

Here are the tables used:

Table-B1-B2-CSR-2010

A further concern is that today’s analysis leaves out many more areas of public spending than seem necessary, including only half of public spending in the analysis. For example, it omits all Home Office spending (including policing) as well as other things like support for rural communities, and all broad “public goods” such as defence and environmental protection. Clearly, the government does not think that these areas do not have public value for UK citizens!

The Treasury suggestion that methodological complexity makes it most sensible to exclude the value of these public goods from consideration should be challenged. A perfectly sensible approach is to include the value of public goods on a flat-rate basis – except where data is available (as in the case of the British Crime Survey) to allocate public spending more specifically. (The Fabian/Landman research was able to allocate 70 per cent of public spending on a household distribution basis, with a flat-rate allocation of remaining spending).

This matters because excluding the public value of so much of public spending changes the outcome: it suggests the distributional impact of the spending cuts is less regressive than if these important areas were also included. The government has explained why the distributional fairness test matters.

But they will need different policies if they want one of their future claims to have met it to stand up for 24 hours.

http://www.leftfootforward.org/2010/10/the-regressive-unfair-comprehensive-spending-review/

The spending review: key questions and the democratic deficit

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WEDNESDAY, 20 OCTOBER 2010

Here are some of the key political debates across the enormous detail of the spending review. 

1. Are the cuts real?

A question to which the answer is Yes. There has been a concerted attempt to suggest the biggest spending cuts for 90 years are no big deal. John Redwood is among those to point to spending totals rising in nominal terms – a soundbite which lacks weight with most thoughtful observers among the pro-cuts advocates on the political right.

Tim Montgomerie of ConservativeHome wrote a cogent piece on Monday about why a the cuts won’t hurtargument would simply leave pro-government supporters stranded in a parallel universe, “out-of-touch with the real world”.

In response, Spectator editor Fraser Nelson has crunched some numbers. He says in context, the real terms total cuts to government spending will be 3.7% over 4 years. What his helpful numbers also show is that the rising costs of unemployment along with debt interest payments will mean 8% more being spent on Annual Managed Expenditure. This means 13.3% cuts – £61 billion – failling from £380 billion to £329 billion in today’s money between 2010/11 and 2014/15 – in departmental spending. Factor in the ring-fencing of some budgets, and all £61 billion is coming from other departments, averaging 18% and higher in several cases. (And don’t forget ring-fencing the NHS isn’t going to feel like no health cuts: there is a cogent argument not to ring-fence all health spending; however demographic pressures inevitably increase costs on care for those over 75 and over 85, small real terms increases will require some sharp cutbacks in health services too).

One thin silver lining of the last two months is that almost every government minister and right-wing commentator has come to value public spending in at least some areas – counter-terrorism, defence, policing, infrastructure for growth, local public services, children’s services and so on – leaving the core Taxpayers’ Alliance that most spending is just waste looking sillier than ever before.

2. Whose responsibility is the deficit?

The government has done well to establish a public narrative that the deficit is the result of Labour over-spending, even though the facts show otherwise. The difference in the deficit would be miniscule had the Conservatives been in office from 2005, because the primary cause was the necessary response to the (existential) financial crisis of 2008.

Jonathan Freedland captures why this matters to the future political debate in his Guardian’ column today:

If Labour’s spending was so wildly out of control, why did the Tories promise to match their plans, pound for pound, all the way until November 2008? Why didn’t Osborne and Cameron howl in protest at the time?

Could it be because things were not actually that bad? A quick look at the figures confirms that, until the crash hit in September 2008, the levels of red ink were manageably low. The budget of 2007 estimated Britain’s structural deficit – that chunk of the debt that won’t be mopped up by growth – at 3% of gross domestic product. At the time, the revered Institute for Fiscal Studies accepted that two-thirds of that sum comprised borrowing for investment, leaving a black hole of just 1% of GDP. If the structural deficit today has rocketed close to 8%, all that proves is that most of it was racked up dealing with the banking crisis and subsequent slump – with only a fraction the result of supposed Labour profligacy. After all, even the Tories would have had to pay out unemployment benefit.

3. Can the cuts be fair?

Claims to progressive austerity have become more muted recently. It is evident to all serious analysts that spending cuts on the scale proposed by the government – to eliminate the deficit in one parliament – will surely impact the less well-off disproportionately. Tim Horton and Howard Reed have produced the fullest pre-CSR analysis – published by the TUC – of the distributional impact of public spending and what we knew in advance about the shape of the cuts, and plan to report back this week with their post-CSR headline findings.

The government would demonstrate greater political maturity than in losing their June to August spat with the Institute of Fiscal Studies over their “regressive” first budget if they take the advice of supportive critics like Evan Harris and simply acknowledge that: the cuts can’t be fair, but they are doing their best to mitigate the unfair impact, rather than again entering another row on which Ministers are evidently wrong on the facts.

Anybody seeking to then at least follow the “progressive austerity” goal of spreading the pain as evenly as possible would look at genuine alternatives, particularly in the balance of spending and taxation and the speed of overall deficit elimination.

4. Will cuts on the scale proposed prove possible?

David Cameron is particularly keen to “reframe” departmental cuts of 18-25% as “just 5-6%” a year, suggesting many businesses have to find such efficiencies.

If you follow the logic through, what sounds somewhat plausible for this year becomes a very weak argument from the second and third years of cumulative spending cuts.

Imagine you are in charge of, say, justice, policing, transport or children’s services in a particular area. Initial cuts of 6% are almost certainly going to involve job losses and cutting back services, but will doubtless prove possible if painful. However intelligently such cuts are attempted to try to preserve service quality, the second 6%, the third 6% and the fourth 6% must inevitably cut much closer to the bone. This is where a significant question mark of whether the government can really make the cuts it proposes comes in, especially in the third year of what is proposed.

The government is strongly committed to its “no alternative” rhetoric and policy. And yet it may yet be that the hidden long-term story of the spending review may involve the government seeking to converge – perhaps rhetorically at first – towards Labour’s position of slower cuts, and taking risks to growth more seriously than they have to date. They may yet be forced to rethink the tax/spending balance by mid-term.

5. How can the spending review democratic deficit be closed?

Hilary Benn rightly points out for Left Foot Forward that one hour of debate and no vote today – followed by one day of debate in eight days time – is an absurd lack of Parliamentary scrutiny for the most significant moment, not least for a government which pledged to put the Commons back at the centre of our public and political life.

This is exacerbated by the evident lack of any electoral mandate for what is being proposed. I find it very difficult to believe that David Cameron could have believed, in his own mind, that what he was saying in the final week of the campaign. If he did, he has been on a very steep learning curve to drop his view that most government spending is waste and can be painlessly cut with no loss to anybody.

And there is a deeper issue here too. The spending framework announced in outline form today involves, implies and entails massive policy choices, very few of which have had any political or public scrutiny at all. To name just two: should social housing tenures for life be ended? Should there be no state funding of university tuition in the humanities? There will be dozens more where it make take some days to even spot the question being (implicitly) proposed by the Coalition.

By the time the media and departmental select committees try to get their teeth into what the CSR means, the government will be extremely resistant to unpicking the package it has painfully collated behind closed doors over the last two months.

Yet the rapid unravelling of the policy detail and implementation of the government’s child benefits cut a fortnight ago revealed a high level of negligence in working through the proposal which the main governing party planned to put up in lights at its party conference. does not augur well for the quality of thinking behind much of the hidden policy detail underpinning today’s announcement, where the government can reasonably anticipate that so much less attention will be paid to dozens of larger spending decisions.

So it will be worth watching today’s announcement closely, and looking at the numbers published alongside it. It will take some days – and weeks and months – for what is being proposed today in key policy areas to become clear.

http://www.leftfootforward.org/2010/10/there-is-an-alternative/