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/

New Labour Leader Ed Miliband

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Roy Hattersley, Guardian 25/09/2010

At last the Labour party has a leader who is both capable of winning the next general election and actually believes in the principles of social democracy. Ed Miliband‘s greatest strength – more than either his undoubted intellect or obvious lucidity – is the courage of his conviction.

Labour lost the last election because, despite the Blair/Brown governments’ acknowledged achievements, they were intimidated into believing that victory depended on imitating their enemies – light touch regulation in the private sector and the internal market in public services, combined with a wanton disregard for personal liberty. Not surprisingly, its core vote felt abandoned and thousands of more prosperous families asked the question that sounds the knell of political hope: “But what does Labour stand for?” Ed Miliband knows what the answer should be. He will provide it with the confidence that comes from the certainty that a natural progressive majority in Britain is waiting to support a genuinely radical party with an unapologetically radical leader.

During the first week or two of his leadership he will be faced with the allegation – promoted by cynical Tory newspapers and garrulous Labour ancients – that he wants to take Labour back to the days of wholesale public ownership and subservience to the trade unions. He will not find it difficult to refute what the evidence confirms is obvious nonsense. Ed Miliband is a moderate – but a moderate with a clear personal philosophy. He wants to see a more equal society and he knows that equality and liberty – far from being enemies – go hand in hand. It is a gentle and joyous philosophy, and now its time has come.

By bringing fundamental principles up to date, Ed Miliband offers Labour a fresh start. No established political party can ever begin the long haul of a five-year parliament with a clean sheet. But, as Tony Blair so eloquently insisted when he first led the party, it is sometimes necessary to move on. New Labour was the idea of the nineties. Real Labour will prosper only when it puts “the middle way” – an overt compromise between right and wrong – behind it. I have never believed that David Miliband wanted to bring back Blairism from the grave, or that Ed Balls was the political reincarnation of Gordon Brown. But it became clear during the leadership campaign that Ed Miliband is more likely than either of them to steer a new course.

His willingness to examine new ideas has made Ed Miliband the candidate of dash and daring – qualities that Labour desperately needs. It took courage to stand – initially as an absolute outsider – and courage to hold firm to his convictions in face of an almost universally hostile press. He was more than steady under fire. He had decided that saying what he believed was the right way to win. It was. The same rule will apply during the general election.

A couple of months ago, my local Labour party met to decide which leadership candidate to nominate. Wise and world-weary members repeated a cliche about choosing between “heart and head” – a choice Labour has had to make too often in the past. In the end, we supported Ed Miliband in the certainty that he met both requirements.

None of Labour’s leadership contenders have faced a Tory prime minister at question time. I have. Success – perhaps even parliamentary survival – depends on possessing the confidence to enjoy it. Ed has already demonstrated that, in the modern idiom, he is comfortable in his own skin.

But it is vital to remember that the real political battle goes on in the country not in the Commons. Miliband was the leadership candidate most likely to swing the vote to Labour for the simple reason that, more than any of his rivals, he identified with the people whose support Labour needs. Not since Crosland, Healey and Jenkins were beaten by Jim Callaghan has a Labour leadership election been graced with such an array of clever candidates. But brilliance is sometimes a barrier to popular appeal. In Scotland this summer, a member of Gordon Brown’s cabinet (and supporter of another candidate) asked me if I was voting for Ed Miliband “because he looks and sounds like a human being”. I told him I had several other reasons for my choice, but that I would add his encomium to the list.

The Labour leadership election has gone on for far too long, inevitably holding back the essential exposure of the Tory government’s innate extremism and the (equally necessary) judicious explanation of the opposition’s alternative. Fortunately, the campaign has ended with little or no bitterness from either the candidates or the factions that make up Labour’s broad church. Ed Miliband must build on the desire for unity which the party will display when he speaks on Tuesday. I have no doubt that he will. I recall him reproving me when I disparaged one of his ultra-Blairite cabinet colleagues.

The doubters in the parliamentary party will quickly swear allegiance. The real job is convincing the country that Labour is worth voting for. Because he believes that his brand of social democracy is right for this time and right for this country, Ed Miliband is supremely fitted to that task. For a party leader, courage and conviction are indispensable attributes. Fortunately, Ed Miliband possesses both.

Roy Hattersley is a former deputy leader of the Labour Party.

“official action to tackle tax avoidance and fraud is “a drop in the ocean”

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A former adviser to the Thatcher government has warned that official action to tackle tax avoidance and fraud is “a drop in the ocean” in light of the amount of tax revenue lost to the Treasury, which he believes to be almost £120bn a year – almost twice the amount estimated by Revenue and Customs.

John Christensen, former economic adviser to the UK and Jersey governments, who has also worked within the tax haven industry in the past, said government plans announced yesterday at the Lib Dem conference in Liverpool to raise an extra £7bn by 2014-15 by tackling tax avoidance and frauds were “too timid”.

He criticised Britain’s “permissive” tax laws, which he said placed Britain in the unenviable position of leading the world on tax evasion, with over half of all tax havens around the world being British, he said.

Christensen, part of the non-partisan Tax Justice Network, said the government needed to reverse the job cuts in HM Revenue & Customs – which unions say have numbered 30,000 over the past five years, to allow tax collectors to claw back the billions of uncollected revenue.

He told a fringe meeting at the Liberal Democrat conference in Liverpool organised by the Public and Commercial Services Union (but not listed in the conference guide), that tax avoidance by the wealthy who pay accountants to identify loopholes had become “too respectable”.

Those who shunned paying their dues to the nation’s coffers ought to be named and shamed in the same way as those convicted of benefit fraud, he said.

“HMRC are doing deals and settling out of court with people who have been avoiding tax for many years,” he said. “There is a fundamental injustice here.”

Christensen said that the government needed to apply an “anti-tax-avoidance principle” and crack down on slack tax laws.

He cited one mechanism that allowed large companies and supermarket chains to avoid VAT on items worth £18.50 or less by shipping products such as DVDs and CDs to Guernsey and Jersey before posting them back to the UK for sale.

Christensen said the “anti-competitive” loophole, put in place as a special arrangement in the 1960s to stop flowers being shipped to the UK perishing during delays at customs, was benefiting the “big players” at the expense of small businesses.

A Lib Dem MP who attended the meeting and backed the coalition’s budget deficit reduction programme described the loophole as “mad”.

John Hemming, who represents Birmingham Yardley, said he had no idea this loophole existed and agreed the government “should not allow that to happen”.

Danny Alexander, the Lib Dem chief secretary to the Treasury, yesterday promised to clamp down on wealthy individuals and business who thought paying extra tax was an optional extra.

Much of the plan will involve more intensive scrutiny of those liable to pay the new 50p tax band introduced by the Labour government. Revenue and Customs looks at 5,000 high net-worth individuals, but will expand that number to 150,000.

He also promised a more robust criminal deterrent against tax evasion by increasing the number of criminal prosecutions by Revenue and Customs fivefold. Alexander revealed the Treasury would strengthen a team of investigators to catch those hiding money offshore.

The plans will be funded by a ringfenced investment of £900m, which will cover the spending round and is separate from any final deal imposed on Revenue and Customs in the spending review due on 20 October.

The Treasury estimates evasion costs £7bn a year in uncollected tax revenues, while avoidance costs roughly the same. Attacks on the tax system by organised criminals are estimated to cost around £5bn.

Alexander also promised to contract out up to £1bn of tax debt per year to private sector debt collection agencies.

But Christensen claimed the true scale was far higher, citing annual figures of £26bn in uncollected revenue, £25bn lost annually through tax avoidance, and a further a further £70bn in tax a by large companies and wealthy individuals.

Thousands of jobs had been cut by HM Revenue and Customs in recent years and thousands of local tax offices closed, making it more difficult to collect taxes, he said.

Christensen said the government should reverse the job cuts and follow Denmark’s example, who added 500 additional staff to target tax avoidance rather than £900m to bring staff to investigate the problem on a short-term basis.

Mark Serwotka, the general secretary of the Public and Commercial Services (PCS) union, said Alexander’s announcement was a “small step” in the right direction.

The PCS has spearheaded the call to target the billions of pounds of uncollected taxes by people who were avoiding or deliberately evading paying their fair share, instead of targeting public services for cuts.

He is lobbying for a reversal of staffing cuts in Revenue and Customs, which have seen around 30,000 jobs cut in the past five years; more are expected following the spending review.

Serwotka warned the fringe meeting that taking the axe to public services had not been part of the Lib Dem general election manifesto.

Millions of people voted for the party’s progressive policies, not to see it go along with slashing spending on essential public services, he said.

The union leader warned that the coming months would be “dire” if George Osborne, the chancellor, confirmed billions of pounds of cuts in next month’s comprehensive spending review.

He said the prospect of a cull of hundreds and thousands of job losses in the public sector and in private firms would lead to spiralling unemployment and threaten a double dip recession.

“We intend to step up our political campaign, but if this is dismissed we will see a lot of industrial strife the length and breadth of the country, the like of which we have not seen for decades,” Serwotka said.

Avoid the masochistic excesses of the chopper Chancellor.

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With the Spending Review just four weeks away, pressure is beginning to ramp up on George Osborne with widespread public dissatisfaction over his cuts and a challenge from his colleague, Boris Johnson, over the strategy. Pre-empting the Labour leadership candidates’ debate on deficit reduction, I gave a presentation to the Reform think tank earlier this week setting out my own deficit reduction plan which avoids the masochistic excesses of the chopper Chancellor.

My slides started with four graphs setting out the true story about the deficit, public debt, and thebond market using figures from HM Treasury, the OECD, and Bank of England. Regular readers of Left Foot Forward will be familiar with the argument on which I elaborate below(*) but the essential point is that while the deficit has to come down, there is no compelling economic case for the pace of retrenchment that George Osborne proposes.

But since the deficit has to come down, how can we do so responsibly? My proposal is to stick to Alistair Darling’s plan to cut the deficit in half over four years but split the impact 50:50 between tax and spending cuts – precisely what Norman Lamont and Ken Clarke did in the 1990s.

This would mean £28.5 billion in tax rises by 2013-14 delivered through the 50p tax rate and fulfillment of Labour’s proposed increases to NICs. I would add to that a mansion tax, the full Capital Gains Tax rise proposed in the Lib Dem manifesto, and a doubling of the banking levy.

On the spending side, there is no need for any of the deeply regressive welfare cuts including to housing benefit, the freeze on child benefit, or tax credit reforms (though I do have some sympathy with making 16 the cut off for child benefit). Instead, I would look for an average efficiency of 8.1 per cent across all Government departments aside from DfID. This would, of course, include the Health department which makes up close to one-third of all departmental spending. A significant chunk of this could come from a 3-year public sector pay freeze (around £8 billionaccording to the SMF).

Before getting into the broad macroeconomic and specific microeconomic policies that are needed to deliver economic growth, this responsible deficit reduction would reduce growth by virtually half as much as the Tory programme. Using the cautious multipliers estimated by the Office of Budget Responsibility (Table C8 of the Budget), I have calculated that my deficit reduction plan would take just 1.5 per cent out of the economy compared to 2.7 per cent by the Conservatives.

The responsible deficit reduction plan also avoids the ideological and masochistic approach taken by the Tories. There is no need for a regressive VAT rise, no need for huge welfare cuts that will disadvantage the most vulnerable, and no need for 25 per cent cuts from unprotected departments.

Given the proximity of the Spending Review, I’d be very interested to hear your thoughts on this approach.