Opinion: Hitting who the hardest?

The contents of the emergency budget have been a bitter pill for many Lib Dem activists to swallow. I have to admit that my support for the Liberal Democrats has been mostly on the basis of their commitment to civil liberties, their scientific literacy (Evan Harris is greatly missed!) and their hard work in my local area. I can make no claims about being educated in economics but I like to think my Maths degree qualifies me as basically numerate.

Recently I read The Observer story on the briefing from Tim Horton (of Fabian Society, not doughnut, fame) and Howard Reed from Landman Economics. Chris White described this as a ‘study in intellectual dishonesty’ in an earlier post. It certainly is, but the details of the model described (and, more importantly, those left out) deserve greater scrutiny.

The premise of the results is that, as a proportion of income, the cut in public services spending represents a higher fraction of income for the poorest decile than it does for the richest. According to the report, funding for the lowest decile will be cut by £1,344 per annum whereas the cut in funding for the highest decile will be cut by £1,135 per annum. This is based on a survey of welfare usage (lower-income households use public services more than higher-income households) as well as some kind of distributional model (I hope – this reasoning step is omitted) of how much money given to departments actually reaches the front line. But then the authors depict this as a percentage of income, implying that the poorest decile are losing over 20% of their notional wealth whereas the richest are losing only 1.6%.

This comparison is, frankly, ridiculous. While I can see the argument that, if welfare is cut across the board, the poorest may have more to lose; to give it monetary value as though it is a component of income is shaky at best. Richer people don’t use public services in proportion to their income, so it’s unavoidable that any cut in spending will constitute a fairly small proportion of it.

Consider road maintenance. A local budget is cut and some potholes take longer to fill in than usual. Has a low-income resident living in this area suffered financially over twelve times more than a high-income resident because of the same pothole?

The report presents cuts as a loss for a household, rather than a loss for services which a household accesses. It makes an attempt to justify its monetarisation of the value of services by asking readers to ‘imagine’ that households replace the value of these lost services by spending the same amount. They propose that, if road maintenance were to lose funding, privately operated toll booths would spring up instead. Do the authors think that the housing estates of Britain would club together to pay for a private gardening company if their local park lost a share of their funding? Or pay for a private security guard if they lose one local policeman?

The missing data in the report is the scale of current public spending per household. A useful, and more honest, measurement would be of the cut in welfare in each decile as a proportion of the spending under the previous government. In the lowest income households, welfare spending may be many times the income of the household, which is why any decrement sounds shockingly high when expressed as a percentage of income. In reality, however, it may not represent a great difference in the value of services provided. Indeed many of these cuts may not represent loss of services at all, but loss in the salary of those providing the services (did I mention that the TUC and UNISON commissioned the briefing paper?).

Before I get accused of denialism, the budget cuts do discomfort me and I would have liked to have seen a slower deficit reduction, but criticism must be rational and honest. This report from the Fabian Society and a supposed economic expert is neither. It performs a numerical magic trick in order to draw a graph that can be superficially labelled ‘regressive’. Real questions can and should be asked about welfare reforms when the exact breakdown of the cuts is revealed. If there are cuts to social housing, for example, then the poorest families will face a very real financial loss, but trying to argue that all spending can be valued at the point of delivery and then subtracting this value from income is merely a smoke and mirrors game to justify spending at the status quo.

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41 Comments

  • Great piece – i read the study and knew something must be wrong but you have demonstrated it rally well.

  • Philinlancs 29th Jun '10 - 3:00pm

    “Consider road maintenance. A local budget is cut and some potholes take longer to fill in than usual. Has a low-income resident living in this area suffered financially over twelve times more than a high-income resident because of the same pothole?”

    Well Ed, I don’t even have a maths degree but to use your comparison of potholes consider this. If two car owners, one low income, one high income get their tyre or suspension damaged I would strongly argue that the latter would shrug off these repair costs.Low income families that don’t have access to fantastic public transport sometimes rely on a car to get to work. Where I live there is no public transport anyway before 07.30. So yes even potholes and lack of public money to rectify them can be devestating to low income families. Nice try though!

  • David Morton 29th Jun '10 - 3:07pm

    I take this articles point which is worth making that the Fabian pampflet is value laden, commissioned by opponents and uses a model of spending and cuts which is likely to show the poor suffering hardest from this budget. It also makes assumptions about how the cuts will be made which may not be right.

    However isn’t it also a statement of the Bleedin’ obvious. Poor people tend to use public services more. Poorer areas tend to get more public services to off set structural inequality. Poorer areas tend to have impaired political and organisational capacities to fight cuts.

    Ergo public service cuts in general and flat rate ones across departments will likely effect the poor most.

    To use your parks and police examples you raise. To answer your question directly no poorer people won’t all chip in and buy replacement police patrols or parks litter colection or cctv if it is cut because they can’t afford to. The wealtheir you are the more able you are to do that, live somewhere nicer or moan effectively to the politicans to ensure your neighbourhood is hit less.

    The Fabian report is biased but no more biased than the figures used by the coalition to show the budget wasn’t regressive.

    personally i welcome the Fabian intervention and indeed this artcile to show its agenda. However it helps move the debate on to one the Lib Dems can’t ignore.

    1. Will these epochal spending cuts accept a social and capapcity narrative around the value of public services to the poor or will it just be crude income tables or somewhere inbetween.

    2. Will the 20%, 25% , whatever percent departmental cuts be across the board or targeted at schemes that aren’t disprortionally used by the poor.

    We have until the autumn to answer that and if we get the answer wrong then the discontent and consequences will make the Budget fall out look like a tea party.

  • SMcG – thanks for the compliment.

    Philinlancs – thanks also. I don’t dispute that there are risks that could lead to householders having to spend extra money as a result of cuts. But this is a potentiality. The model by Horton & Reed presents as fact the notion that every pound cut from public service spending will need to be matched by spending by the public.

    I’m not arguing against claims that the budget will be unfair on the poor, I’m arguing against the pseudo-quantitative presentation of this model, which is being touted by The Observer and various leftish blogs as somehow meaningful.

  • Barry George 29th Jun '10 - 3:40pm

    @ Ed

    ‘I’m not arguing against claims that the budget will be unfair on the poor, I’m arguing against the pseudo-quantitative presentation of this model, which is being touted by The Observer and various leftish blogs as somehow meaningful.’

    Doesn’t the former concern you considerably more than the latter? The former is about the real suffering of millions of people across the country, the latter is a pseudo intellectual and somewhat pedantic debate with the leftist press.

    I do wish we would stop this reaching around in the dark to find justification for an appalling ‘ideological’ budget and start facing up to our responsibilities to protect the poor and the vulnerable in society

    Remember, we are the only hope they have!

  • Philinlancs 29th Jun '10 - 3:41pm

    @Iain. Thank you for your comment Cuts are cuts and will at every level impact on low income families. Car parts cost the same off the shelf for a 1999 Audi A4 as for a 2009 A4 from the main dealers (personal experience here). I accept that you can use e-bay to get cheaper alternatives but garage labour costs at a local independent specialist for say Audis will still cost the same too. The same would be true pertaining to any make of vehicle.I really don’t get your point with the greatest respect.

  • Don’t worry Lib Dems you will pay the price for your desicion to side with the Tories come the next election.
    Sadly thousands will have suffered because of your Lib / Tory Goverment.

  • Simon – I agree with you that public spending should be taken account in the impact of the budget and that, in principle, it could manifest as increased expenditure. Indeed it’s possible that households would have to spend more than the corresponding cut in service funding to replace the service like-for-like, especially if healthcare was being threatened.

    All of these are important points which should be addressed individually (transport costs, social housing, social workers) when the departmental and sub-departmental breakdown becomes apparent. Unfortunately the briefing doesn’t list all the services included in their model so I have concentrated on road maintenance as the toll-booth example was the main specific point mentioned in the paper. I don’t mean to trivialise potholes of course: a friend of mine was very badly injured hitting one on her bike last month.

  • Philinlancs 29th Jun '10 - 3:56pm

    @E. I’m truly sorry to hear about your friend, I hope she recovers very soon. I used to enjoy cycle racing as a youngster and have experienced such an event too but came away unscathed (apart from pride of course).

  • tonygreaves 29th Jun '10 - 3:57pm

    I think the problem with studies like this is that they try to turn everything into money. Trying to quantify the value of all public services in purely money terms is silly.

    If the streets are full of litter, the problems are quality of life not financial. If your bus service is withdrawn, it’s a matter of convenience (even life-line) not money. If your street or estate is less safe there may be financial consequences (chance of getting burgled or mugged may go up) but that’s not the main concern. If your child has a smaller choice of A-levels it’s their future that’s affected but not the immediate costs of keeping them at school. If an old person has to go into a home because domiciliary services are cut (or has to stay at home because home places are cut) there may be financial consequences one way or another but they are not the real issue. etc etc.

    On the other hand if the Tenants Services Authority is scrapped (which is happening) it won’t have any direct financial effect on any tenants (unless they employ any).

    Of course there are many cases where there are indeed direct financial consequences to people which affect poorer people more (eg closing an A & E unit which results in people having to travel much further to an inconvenient place). But you can’t sensibly measure the whole thing in money terms.

    Tony Greaves

  • Philinlancs 29th Jun '10 - 4:06pm

    @ Huw Dawson
    “Don’t poor people also have a lower chance of owning a car, thereby reducing the average impact of that pothole on the poorest groups?”

    Not if you badly injure yourself like Ed’s lady friend on a bicycle. I think Ed has made it clear on the “potholes” issue.
    The “poor” as you refer to the many low income working families in the UK perhaps prefer the term “Anti Tory under any circumstances or whatever Floats my Vote”………

  • Barry George – yes, the former concerns me but I don’t know enough about how cuts will be distributed and how services will adapt to them to know whether or to what degree they will affect financial inequality; and I don’t consider myself qualified to write a post on economic policy. I’m all for well-founded criticism of the budget but I think it’s important to point out when criticism is poorly constructed, especially when it uses dubious figures measured in unclear terms (e.g. The Observer’s headline: ‘George Osborne’s budget cuts will hit Britain’s poorest families six times harder than the richest’).

  • Barry George 29th Jun '10 - 4:38pm

    Ed

    Thank you for clarifying your concern for the disadvantaged. I had been starting to worry that many in the party had lost touch with the principles that make us Liberal Democrat’s.

    I am all for healthy debate and questioning the criticisms of the Labourites but we mustn’t lose sight of questioning how far ‘right’ the party is being pulled by this coalition either.

    It is vital that we steady the ship back on course to our true values, otherwise we will see massive reductions in support from the people and this is what the latest polls are suggesting.

    Please, by all means do carry on looking left before crossing the road but don’t forget to check right as well or we could end up being mauled by the oncoming traffic.

  • Roger Shade 29th Jun '10 - 5:18pm

    It is a very interesting discussion but rather like sitting in a corner contemplating our navels. It is unquestionably the case that our Benefits system is the very worst in Western Europe and this Government is intent on making it worse. We said in the election campaign that the cost of reducing this apalling deficit should rest on the ‘Broadest shoulders’ we have now allowed our Coalition Partners to do the complete opposite. Whether or not Public Services affect the poorest by X and the richest by Y is irrelevant, that it affects the poorest at all is a disgrace.

  • Roger Shade 29th Jun '10 - 5:39pm

    Sorry I meant ‘the cuts in Public Service’

  • Anthony Aloysius St 29th Jun '10 - 5:52pm

    In all that erudite argument I missed the answer to the question in the title – “Hitting who the hardest?”

    But maybe that was the whole point.

  • Roger Shade – that cuts affect anyone is unfortunate. It is not irrelevant how much it affects those in different income (or, if you prefer, expenditure) brackets. If trying to encourage informed and rational criticism of a very real budget which affects all of us is ‘navel gazing’ then I’m open to suggestions as to what else to do.

    The authors of the briefing also use the same distributional model to attack the £10k tax threshold, assuming that it is entirely funded by cuts to frontline services rather than CGT increases and make it look like giving tax breaks to low-earners actually leaves them poorer. I think that questioning that assertion is worthwhile as it sounds like it is much more in the interests of those working in public service provision than those in low-income households.

    Anthony Aloysius St – yes that was the whole point: the briefing does not help to illustrate who is “hit” the hardest.

  • David Allen 29th Jun '10 - 6:27pm

    I’m afraid we’re severely into hair-splitting on this and several other recent threads, and the reasons are not hard to see. We are ashamed. In those circumstances, debating erudite abstrusities feels a lot better than hanging our heads. However, it’s not going to convince the outside world of anything, other than that we are ashamed, and that we are hiding ourselves away from our own shamed feelings.

    To minimise our sense of shame, and to explain ourselves to the outside world, the mantra we must repeat ad nauseam is:

    Trying to prop up a minority Gordon Brown Government for a few turbulent months would have been crazy.
    Letting the Tories run everything on their own would have meant letting the poor be hit a lot harder.
    The decision we made was the least worst option.
    So we shouldn’t be ashamed of it.

    Not, that is, unless we also lose our voice, and console ourselves by immersion in intellectual over-analysis.

  • Barry George 29th Jun '10 - 6:57pm

    David Allen

    Interesting and thoughtful post but I do beg to disagree.

    The Conservatives failed to win command of the House of Commons in this election. Therefore they would have had to come looking for support in order to legislate.

    Where else could they have found sufficient and stable support if not us?

    I believe that it is arguable that our bargaining position would have been stronger outside the coalition rather than in it. Sun Tzu is attributed to have said “keep your friends close, but your enemies closer” and I believe this statement holds true. As a ‘friend’ of the Conservatives we can be dismissed as the weak partner in a coalition. Yet still be tainted by the smell of their ideological crusade Outside the coalition we are an ‘enemy’ that is capable of bringing down the government.

    I know which position I would rather be fighting our corner from.

    To steal one more quote to illustrate my opinion, I am thinking of Al Capone when he said “You can get more with a kind word and a gun than you can with a kind word alone.”

    We gave up our ‘gun’ when we entered the coalition so all we are left with to defend the vulnerable is a ‘kind word’

    I don’t see how we can now argue from a position of strength and I share the shame you so eloquently describe.

  • toryboysnevergrowup 29th Jun '10 - 9:06pm

    You raise the legitimate question of how it is possible to measure the impact of cuts in public services. But rather than accusing those who try of intellectual dishonesty perhaps you should also address the moral honesty or otherwise of those who are prepared to announce such cuts before they have undertaken any such analysis, and who only a few weeks ago were spouting a commitment to progessive politics and fairness.

    Trying to measure the impact using flawed models is at least a basis on which to build and improve the analysis. Using no models whatsoever might be seen as not giving a damn.

  • I’m short of time to add much to the discussion, but see this by the IFS http://www.ifs.org.uk/budgets/budgetjune2010/browne.pdf
    who, I think, we should all agree *are* credible. So we still have the same problem.

  • You could add congestion – if queues are longer, the assessed value is the same for all drivers, which is a higher % of the income of poor drivers, and people on buses. So apparently congestion hits the poor harder, but that really isn’t the case.

    Also, the IFS will tell you that the bottom decile are a very odd group, including a lot of people with zero income, and high expenditure – affluent early retirees living off savings. Since their income is 0, making them £1 worse off is an infinite % reduction – that is why the figures for the bottom 10% often behave oddly, and the next decile may be more reliable as a guide to the things we care about.

  • Matthew Huntbach 29th Jun '10 - 11:53pm

    Gary, you and others who write things like

    Don’t worry Lib Dems you will pay the price for your desicion to side with the Tories come the next election.
    Sadly thousands will have suffered because of your Lib / Tory Goverment.

    should answer the question “What else should we have done?”.

    We did not won the election – the Tories did. The people chose to vote in a way that gave the Tories the most seats. Had there been no Liberal Democrat effort and politics was the old two-party system – which both Labour and the Conservatives would prefer – the Conservatives would have had a big majority anyway. The Labour Party supports the current electoral system which distorts representation in favour of the big two parties on the grounds “It’s best to have a system which puts one party in absolute control of government”, so isn’t it a bit of a cheek for any Labour supporter to moan about the coalition? By voting Labour/Tory you have in effect said you want a government of one of Labour or Tory. Since it wasn’t going to be Labour, your Labour vote was in effect a vote for the Conservatives.

    The balance of seats in Parliament meant a coalition with Labour would not work even if Labour wanted one, which it did not. There were not enough Labour MPs to give such a coalition a clear majority. A revolt by one or two coalition MPs could have brought down the government, whereas a revolt by one or two MPs in the Con-Lib coalition does not.

    Unfortunately, when the election took place the country was in an economic mess, so any uncertainity in government would have been dangerous. A government with enough support to be stable for a long while was a necessity, and the Con-Lib coalition was the only possibiity for that. Sorry, the people voted to make it that way, we had no choice.

    Additionally, the Liberal Democrats were on a downward trajectory. If we had done better than expected, we could have toughed it out daring the others “call another general election and see – it will damage you, we will win more seats”. But we did worse than expected – the results suggest we would suffer most if there were another general election. Knowing this, the Tories are in the controlling position in the coalition – they can say “like it or lump it – because the alternative is we call another general election and you all lose your seats”. Sorry, that’s the way the people voted, I wish they hadn’t voted that way, but they did, we have to accept it, that’s what’s called “democracy”. It gave us LibDems a very limited influence, it did not give us a full LibDem government. If you wanted a full LibDem government you should have voted LibDem and persuaded everyone else to do so.

  • Sunder Katwala 30th Jun '10 - 12:39am

    I welcome the debate about methodologies. But you will surely agree

    (i) (many) public services do have a direct value to households, and that it is important to consider this alongside tax changes. [I don’t think we want to say these are “income” but rather the “value of services”
    (ii) is there a dispute about the distributional benefit of public spending being progressive (while taxation – in the round – is pretty flat). There may be a range of different ways to capture that, but there is a very strong expert and academic consensus on this point.

    So if you don’t like the Fabian Society’s methodology, do challenge your own government to produce from the Treasury and department-by-department the fullest possible analysis of the distributional impact of spending, how that has informed the macro and departmental spending decisions. I have suggested that to Nick Clegg. it is obviously vital to have the most information possible, when the government tells us (i) deficit reduction is the no 1 priority (ii) it will meet a progressive distribution fairness test (iii) it believes in transparency. I have written to Nick Clegg to suggest that
    http://www.nextleft.org/2010/06/dear-nick-clegg-how-to-meet-fairness.html

    We are very clear that the initial modelling of the additional £32 bn of cuts has to be based on a simplifying assumption to give us a baseline. We will model the actual spending changes.

    The model uses the Treasury public spending database and links this to for example National Statistics data on the distribution of household use of services. It does have to make generic assumptions about (eg) pure public goods like defence, but that is a fair approach to take.

    PS: By the way, its unnecessarily rude to call Howard Reed a “supposed economic expert”. He was on the IFS staff for a decade, including being in charge of their Tax-Ben model, and was chief economist at ippr, and has an enormous amount of modelling experience. (see link). And we are certainly engaging with expert academics to make this new model as good as possible. clearly its credibility with independent voices is important. But we will very happily engage with LibDem economists, economic modellers and others over the issue of how to have serious public scrutiny of the distributional impact of spending and cuts.
    http://www.landman-economics.co.uk/modelling.html

  • Barry George 30th Jun '10 - 1:08am

    Mathew

    It could be interpreted from your comment that we were bullied into the coalition. I am sure that is not what you’re implying.

    Regardless, it appears we won’t have to wait long to lose much of our support. The coalition has certainly polarised the electorate. A ICM poll I came across the other day had the current voter intentions as CON 41%(+2), LAB 35%(+4), LDEM 16%(-5).

    I accept that the choices were difficult but if the current trend in poll data is correct then it appears that we made the wrong one.

    Of course it is just my opinion, but I do not believe that the support we did have would have collapsed quite so dramatically if we hadn’t signed up to this coalition.

  • Sunder – thanks for responding to the post.

    Apologies for the word ‘supposed’ but it does genuinely surprise me that this briefing was published by someone with modelling expertise. I understand that the model is in development, but in that case surely it is too soon to be announcing quantitative results with such authority? On a political blogging scale, though, I think I’ve been quite polite here ;-)

    I don’t dispute that services have direct value to households. My main issues are that:
    1) the model assumes that value at the point of delivery is the same as departmental spending (i.e. efficiency savings are impossible, management can’t take pay cuts etc.)
    2) showing the percentage cut as a fraction of household income rather than as a fraction of public spending per household exaggerates the degree to which low-income households are “hit”.

    I think assessing the financial impact of cuts on households is an important question and I hope there is a real population study which can be compared with the model from Landman/Fabian.

    I noticed you mentioned defence. Do you know whether defence spending is included in this model? Does that also mean that scrapping Trident would be regressive because the value of the nuclear deterrent is a greater proportion of income for lower-income households?

  • Lib Dems agree to abstain from vote on nuclear.
    Core principle. Sold down the river.
    Labour are pro-nuke and tories would have their support. LDs could’ve voted against. Where are the Lib Dems’ principles??!

    VAT bombshell warns Clegg pre-election? Post-election… Schoolboy Alexander rolled out to press to tell us ‘the debts were more than we thought’ – the same old line used by every govt minister in history. New politics my a*rse! Old politics reigns…

    The LDs shoud have a good look at how other countries run PR – they dont run around fawning to the majority party and sit in silence while everything they stand for gets torn apart. With 30-40% cuts to local govt funding coupled with council tax freezes, someone prey tell, how on earth can ‘localism’ work? Merely removing nationally set standards and targets will do nothing more than bring us a post code lottery for everything, rather than just in parts of the NHS.

    The Lib Dems are the worst of all three, as we knew Labour were corrupt/tired, and we knew the Tories were, well, Tories. LD MPs should hang their heads in shame. I feel ill thinking they got my vote. Green Party next time.

  • We are going to hear a lot more of these ludicrous statistics from labour. One of their MPs is tweating that the poor have ‘lost’ 21% of their income. As we know of course those with children are considerably better off.

  • @ Jared

    “The LDs shoud have a good look at how other countries run PR – they dont run around fawning to the majority party and sit in silence while everything they stand for gets torn apart.”

    Newsflash: We do not have PR. We have a system which penalises Lib Dems so heavily that they only got 57 MPs. So what on earth are you talking about?

    Green party next time? Hmm… so how many MPs will they have and how much influence? Vote Green and you will get nothing new at all, just Tories and Labour.

  • Jared – a reminder of our core principles:

    1) Fairer taxes – coalition agrees raising income tax allowance
    2) A fair chance for every child – coalition agrees pupil premiums *and* increases child tax credits to the poorest families
    3) Making Britain greener – coalition will scrap the third runway at Heathrow and a Green Investment Bank is on the way
    4) Cleaning up politics – coalition will offer the public a referendum on electoral reform, set up a statutory register of lobbyists and limit large party donations from businesses and unions

    All of our core principles are being implemented to some degree. “Nuclear” (you don’t mention whether you are referring to nuclear power or nuclear weapons) is a important issue for many Lib Dem activists but it was not central in our manifesto and the replacement of Trident will not take place in this government anyhow.

    More to the point, how is your contribution related to the topic?

  • Patrick Smith 30th Jun '10 - 6:25pm

    The net local services impact on the worst off decile of residents is a fair way of judging a run of `Coalition Budgets’ over a five year parliament.

    But when put only in the local context of this enforced `emergency’ budget will give some skewed grist to the left driven mill, turned by the Fabian Society.

    I believe that the Liberal Democrat `Coalition Government’ will be a time honoured 5 year project of reform.

    The question of cost benefit on the lowest income earners should be evaluated regularly by the Fabian Society over the next 5 years.They will then have seen the social and economic improvement on the well being poorest, more clearly to either detriment or benefit and much hope to the former.

    I care very much about the condition of our local roads and it is also a good example of the ability of the `Coalition Government’ to deliver better road safety under a progressive public transport policy to reduce wear and tear for many self employed and vehicle dependent drivers, particularly from lower income households.

    There are presently existing 1.4 million potholes on our roads according to the Asphalt Industry Alliance, who has said that an additional £400Million is required to bring roads up to road safety standards, after the recent cold winter weather.

    Did the emergency budget statement mention pothole repairs as I do not recollect any mention of road safety improvements? Or is the condition of our roads still a matter of motorists daily nightmares due to frequent dangerous potholes and is the Chancellor guilty of salient omission on road safety?

    Churchill was a Cabinet member of the Liberal Party Government period 1906 -1919 and was a Liberal from 1904 until 1929 and also attended Fabian Meetings hosted by Beatrice and Sidney Webb.

    If this Parliament is to see out a sustained epoch breaking 5 years of Liberal reforms that will benefit the worst off including the 4 million set to be reached by the new £10K tax threshold, then this first `emergency’ budget should be seen by the Fabians as more in line with Burke who said `Every human benefit,every virtue and every prudent act,is founded on compromise’.

    In this emergency budget compromise was clearly seen to be the case!

  • Anthony Aloysius St 30th Jun '10 - 6:45pm

    “Fairer taxes – coalition agrees raising income tax allowance”

    The problem is that raising the tax allowance is not an efficient way of targeting relief towards the poor, because so much of the money goes to those on middle incomes.

    As a result, the overall effect of this budget was _not_ fair, in that the poorest households were among the worst hit. That’s taking into account tax and benefit changes only. The effect of the general spending cuts will be on top of that.

  • Anthony. When Gordon Brown increased the starting rate for income tax from 10% to 20% and gave a cut in the basic rate of income tax from 22% to 20% – in his last budget – did he help the poor? Was he “progressive”? Not all poor people receive benefits. If you are not poor enough to receive benefits does it mean that you are not poor?

    Yes you are correct that those on middle incomes gain equally, in cash terms. Perhaps other allowances should be reduced?

    Sadly in all the discussion above there has been not one mention of the poverty “trap”.

  • AAS: the IFS analysis shows that the highest-income decile are by far the worst hit as a percentage of income, that the distribution of cuts is fairly flat in deciles 2-9 and that the lowest-income decile loses about 1% in cash terms as a percentage of income compared to decile 2.

    But the lowest-income decile is a bit of a mixed bag. It contains those who are not currently working and those who have existing wealth and so do not need a high income to live on. The latter have a high expenditure compared to their income which explains why raising VAT makes it look like the poorest lose out. Lowest income does not necessarily mean poorest.

    I’d also question the ‘progressiveness’ of directing the majority of financial incentives to the lowest-income decile (even if this is how one chooses to define the meaning of progressive) as it rewards people for staying out of work.

  • Anthony Aloysius St 1st Jul '10 - 12:03am

    “But the lowest-income decile is a bit of a mixed bag. It contains those who are not currently working and those who have existing wealth and so do not need a high income to live on. The latter have a high expenditure compared to their income which explains why raising VAT makes it look like the poorest lose out. Lowest income does not necessarily mean poorest.”

    Well, the bottom income decile would be the 3rd worst-hit in 2012-13, and the worst-hit in 2014-15.

    The IFS suggests it may be appropriate to classify people instead by expenditure. I don’t think that makes much sense, but the result is that the lowest-expenditure decile would be the worst-hit in 2012-13 and the 2nd worst-hit in 2014-15.

    As I said, the poorest households are among the worst-hit, on either of the definitions that have been suggested. Please feel free to come up with another definition and prove that the budget isn’t hitting the poor as hard as the extant studies suggest. But I think we need something stronger than “maybes”, considering that the quantitative studies that have been performed on these two alternative definitions agree in broad terms.

  • Anthony Aloysius St 1st Jul '10 - 12:06am

    “Anthony. When Gordon Brown increased the starting rate for income tax from 10% to 20% and gave a cut in the basic rate of income tax from 22% to 20% – in his last budget – did he help the poor? Was he “progressive”?”

    No, he wasn’t. I thought it was a very bad thing to do.

    But as I’m not a member or a supporter of the Labour party, your observation isn’t much of a counter-argument.

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