Nick Clegg has repeatedly promised in recent weeks that the coalition government’s deficit reduction plan will be fair. But it will not be easy to deliver on these words. ‘Fairness’ cannot be measured simple by considering the gap between the richest and the poorest: as the Institute for Fiscal Studies has shown, during the last three recessions, it was low to moderate income households who were hit hardest.
All the evidence so far suggests that it has been no different this time round. It is the working poor who are struggling most when it comes to the labour market, security of housing and rises in food and fuel prices. Today the Resolution Foundation publishes a report which explores what options the new government has to cut the deficit, and the impact these options might have on the UK’s 7.2 million low earning households.
There is no question that the deficit must be cut: as for everyone else, the best way of protecting those on low and moderate incomes is to achieve a return to sustainable growth. That will require a stable macroeconomic environment. In turn this requires the new government to convince investors it has got to grips with the deficit. Failure to do so would see investors demanding higher returns, leading to spiralling borrowing costs which ultimately will constrain future administrations for years to come.
So tackling the deficit matters for low earners – but the path taken is critical. The challenge for the Liberal Democrats, as part of the new coalition government, is to hold on to their manifesto commitments to prioritise progressive measures to achieve a return to balance. Given the size of the deficit, it’s clear that cuts are unavoidable. But they will hurt those on low incomes far more than higher earners. Protecting low earners will require the new government to exhaust every single progressive taxation measure available before axing public spending.
That means fighting to see a much greater emphasis on the taxation of unearned wealth than has been evident thus far. The Liberal Democrats must maintain their stance on taxing wealth: recent spats about bringing capital gains tax into line with income tax are simply special pleading and should be ignored. It is simply not fair to choose to raise an additional £3 billion a year from limiting tax credits to middle income families, without also removing the existing distortions in the system that favours those fortunate enough to enjoy capital gains.
The second Liberal Democrat manifesto commitment that must be at the heart of the deficit reduction plan is the promise to raise personal tax thresholds. This will obviously be helpful to the six million low earners who pay tax at the basic rate. However, it is also the case that higher earners will benefit disproportionately more from an increase in tax-free earnings – so additional measures must be introduced to fully target this change at low and moderate income households.
Finally, our analysis highlights the need for caution when it comes to tightening eligibility criteria and increasing means-testing on benefits as a way of cutting public spending. Low earning households exist at the cusp of state support, and their already-fragile finances risk being stretched beyond the limit by confusing changes to tapers and thresholds. It would be far better to opt instead to tax universal benefits, which achieves a similar outcome in monetary terms, but with a much less negative impact on low earners.
This Government does appear genuine in its desire for a progressive approach as it tackles the deficit, and the Liberal Democrat voices in the coalition should be given credit for this. But the devil is in the detail, and it is fairness across the entire income distribution, rather than the gap between richest and poorest alone, which matters.
Everyone must bear their share of the burden. Equally importantly, it must not only be the rich who benefit from a more healthy economy as the UK returns to growth. That is the challenge for the coalition government if it wants to leave a positive legacy when it comes to equality and social mobility.
What’s the damage? – assessing the impact of fiscal consolidation proposals on low earners is published today and is available at www.resolutionfoundation.org.
Matthew Whittaker is a senior economist at the Resolution Foundation.
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27 Comments
Of course, closing tax loopholes is unambiguously fair and would probably help quite a bit.
“Everyone must bear their share of the burden”. Well it looks like, from the cuts already announced, it is not everyone sharing the burden. In fact it is looking very very one sided. Don’t worry I am sure the ” we have to honour our side of the bargain in the coalition” copy and paste will be at the ready when someone has the audacity to ask is this really what Lib Dem voters really voted for or if someone mentions Clegg saying no going back to Thatcherite style cuts.
http://redrag1.blogspot.com/
There are some very good points here, such as taxing universal benefits (as is done in Sweden, for example). This alleviates some of the ridiculousness of wealthy families getting child benefit since they would pay 40-50% tax on it rather than 20%, without creating the poverty traps of means-testing.
But I’m wary of the suggestion of “targetting” the increase in tax allowances. Income taxation is inevitably individual rather than household-based, so naturally a two-earner household will benefit more than a one-earner one. But transferable allowances and suchlike are fiddly and open to becoming a subsidy to well-off one-earner households, like previous Tory plans to “recognise marriage in the tax system”. Low income one-earner households are usually that involuntarily, either because one member can’t find a job or because there is only one adult in the household; well-off men may choose to support a middle-class lifestyle with or without their wife working, so providing a tax incentive to get women out of work would be a perverse, unfair and poorly-targeted policy.
The only alternative form of targetting would be to withdraw some or all of the tax-free allowance for higher earners, as is already being done for those earning over £100,000 a year. But this raises the marginal tax rate (to 60% in that case!) and so risks creating another poverty trap.
>if someone mentions Clegg saying no going back to Thatcherite style cuts.
That, Red Rag, would be as against Labour’s then chief secretary to the Treasury Liam Byrne, who on March 26; “has confirmed a re-elected Labour government would make bigger public spending cuts than Margaret Thatcher.” ???
Hard to cut public spending without hitting those who use public services, sadly. And they tend not to be the rich.
Cassie – Any chance of defending the Lib Dem Thatcherite cuts, rather than talk about Labour. Has no one noticed that when the Tories want to unveil their unpopular Thatcherite cuts, they just happen to let the Lib Dems announce it.
Red Rag:
Any chance of spelling out the difference between the Lib-Con Thatcherite cuts and Liam Byrne’s proposed worse-than-Thatcher cuts? No point defending anything if they were going to be the same.
Cassie, nice to see you missed the very next line of what Liam Byrne said ” But we will do it in a way that will protect our priorities”…I assume you must have missed the following line out by accident eh.
>I assume you must have missed the following line out by accident eh.
??? I’m not sure I see the relevance of it.
Byrne ringfenced health, education, policing. Cameron, pre-election, ringfenced the NHS. What’s your point??
Mine was that you seemed to be making out that Labour wouldn’t have cut public spending if they’d got back in, when they said they would.
I don’t want to see anything cut and my opinion of Thatcher isn’t printable, but the economy is stuffed. I’d rather see constructive ideas on how to reduce spending without hurting those who are already worst off, rather than political sniping from a party that’s now in opposition and has the luxury of not having to take unpopular decisions.
Cassie – by the look of the cuts that have been announced and those being leaked by your coalition friends to their press, your party might as well be sat on the opposition benches with Labour, for the amount of effect it is having on where the cuts fall. It makes Cleggs statement of “fiscal retrenchment does not mean a return to the 1980’s” look even more laughable.
http://redrag1.blogspot.com/
Labour of course has the luxury of opposition – being able to just criticize and snipe without actually being accountable for all of its decisions. It’s a nice change, I suppose, as after thirteen years which had such developments as illegal wars, and the introduction of a benefits system which a) gives money to companies such as A4e (who I’ve heard nothing but bad things about) and b) punishes and humiliates jobseekers rather than empowers them.
We’re in the early days of the coalition government yet, and I’d like to see how it pans out. Labour can spend all their time opposing things and putting out scathing press releases… but a lot of the country obviously didn’t want another Labour government, and rather than just simply shouting “no” at everything the coalition does, it might want to examine itself and work out why and how it realistically might be able to offer a better alternative.
Red Rag – as the only ‘cuts’ made so far are cuts in additional projects rather than the real cuts to existing spend which will take place next year, its difficult to condemn them in the way you are trying and failing.
I find Labour’s inability to spell out anywhere that thye would have cut money completely unconvincing.
David Blunkett’s attack on the cut of the Sheffield Forgemasters deal was incredible – he claimed the money wouldn’t be saved as the govt would have to pay the 160 people who lost jobs (i.e. non creted new jobs) unemployment benefit to the same amount. By my calculation £80m for 160 jobs = £500,000 per job – no wonder we are in a mess with maths like that from Labour MPs!
what a great coilition this is turning out to be – the north bears massive cuts – schools not being built – young people not given support for jobs – workers health and safety down the pan – liberal democrats unelectable in the future – how progressive is this
So, if we accept the line about “getting back to growth”, how do we square that with a need to protect the environment (not only from global climate change, but from a wide variety of other threats, most of which are drawn from our over-use of natural resources)? Do we redefine growth? Can we honestly believe that simply by “creating green jobs” that we will solve this in a “win-win”? I hope I am wrong, but it seems to me we are in danger of panicking over economic issues to the detriment of solving the larger problems – environment, environment, environment. Many of the conflicts which bedevil the world have a significant root in resource shortages, and we cannot simply rectify the issue by means of continuing to rape the earth of natural resources. We have to do with less, and we have to share better. I think the straw that broke the camel’s back in 2008 was not “sub-prime” loans in the US, but the increasing oil price at that time which put pressure on to expose less than 110% secure financial trickery.
I hope Chris Huhne and his Department have an eye on this agenda as well as “green jobs”.
Paul, are you really that naive to think that you only take in consideration their wages when talking of the costs of unemployment? Never heard of pecuniary costs and non-pecuniary costs of unemployment? I refer you to the following document, maybe once you have read through it, when you slag off Labour MP’s calculations, you may have a leg to stand on.
http://www.diw.de/documents/publikationen/73/61949/diw_sp0032.pdf
Paul, forgot to add, you did notice it was a loan not a gift, so the government would be getting the money back with interest. Commonly known as a returnable profitable investment into our manufacturing industry, but put that to one side and talk us through those calculations again.
http://redrag1.blogspot.com/
Tim, you bring in a whole new debate there which is well worth debating, ideally separate from here. That said I cannot resist a reply all the same.
The difficulty the green movement has is making a compelling case for a no-growth economy. As things stand it looks as though we have one, whether we like it or not. The deficit hawks say we should rely on the private sector to dig us out of the hole we are in, but the obvious question to ask is what part of the private sector? Last time it was banking, and we have seen the results of that. Manufacturing may sound like a good idea, but how can we compete with China and South Asia? And as for natural resources, we have already reached peak oil in the North sea. Maybe soon globally as well.
And of course we have the public spending cuts. The government led stimulus has actually shown signs of working and bring down the budget deficit, and is in any case needed to employ people and build a better infrastructure in which the private sector can benefit. However that will be soon stopped in it’s tracks as well.
So all roads are leading to recession (and increasing budget deficits).
As far as the Green perspective is concerned; Green politics has invariably been on the left because environmental problems invariably result from market failure (albeit in the former Soviet Union it was a case of state vanity and ideological blindness). However the contradiction here is that what we also want on the left is social justice, and for that you need a wealth generating side to the economy, ie the private sector. Yet on the Green front you cannot have infinite growth in a finite environment. The Green party believes it has made a hard choice for opting for “no-growth”, but when it comes to public spending you really can have whatever you want.
The Greens of course will point out that we should scrap Trident and it’s successor and introduce a Robin Hood tax and personally I would agree with them (at least in principle). However I really do not get the impression their policies are costed and a difficult problem for the Greens to confront, as they have done in Ireland, is that as we get poorer as a nation it gets harder to deliver social justice. That is not just a problem for them, it is a problem for everyone. However I personally would have hoped they might have thought about it more given their position on economic growth.
Small point, may not be relevant, public expenditure grew in real terms (albeit more slowly) when Mrs T was PM.
I think the party political spats here hide something that I’ve been worrying about for a few weeks. All the cuts that are being touted apart from public sector pay seem to be at arms length from Whitehall. They’re cutting quangos (not in itself bad but not in itself good either) – reorganising government departments in this way can often cost money, particularly in the short term, rather than save it – also many of these quangos were set up to deliver government policy, so even if we save the full £70 billion from scrapping all of these then lots of things we don’t even realise exist will stop delivering things we use. And they’re cutting between 20-30% from local government, which apparently isn’t a front line service?? But at the same time many of the local government funding streams that come through quangos are being cut – not devolved just cut. So in reality the cuts to local areas will be much greater than 20-30%.
I’m a lib dem and I understand we need to make these cuts but often the cuts that are made are the ones that are easiest to make (as with the initial £6 billion, where departments were asked for ‘low hanging fruit’) and not those that are necessarily the best things to cut. What needs to happen very quickly is for the coalition to decide what government shouldn’t be doing – not just stopping ‘marketing’, which is ridiculous anyway for things like tourist boards but actual services that won’t be delivered. If they don’t do that then services across the board will just deteriorate (like in the 80s) and the idea of the ‘scalpel’ will be shown up to be ridiculous.
Also when handling the cuts we need to manage our relationships with those it affects. Cutting something as totemic as Sheffield Forgemasters without consulting them at all AND then only telling them a few minutes before the announcement that it was being cut is just rude. Never mind saying the department will ‘help them find alternative funding’ if I was at Forgemasters I’d tell Vince Cable to stick it up his a**e.
Maybe I wouldn’t go that far but the point is, we’re pissing a lot of people off in the way that cuts are being delivered most likely because our Ministers haven’t got a handle on their civil servants yet but this needs to change quickly if we are to succeed.
This is an important point. And of course the civil servants in London are largely ignorant about how the money they hand out is spent.
I would add that our ministers do not appear to have much clue about what they want, and are certainly making no effort to explain what it being announced in the context of the promises to protect the poor and disadvantaged, areas like the North of England, promote manufacturing, and make “intelligent” cuts. Given the announcements that have been made, that might be impossible (for instance about half the councils with the maximum revenue budget cuts are in Lancashire!) but it would be nice to see them making an effort.
The impression is being given that we are just being carved up and stewed by the Tories.
Tony Greaves
Sorry I failed in my attempt to format the first para of the previous posting which is of course a quote from the posting before that.
Tony Greaves
I have sympathy with Red Rag’s comment ‘from the cuts already announced, it is not everyone sharing the burden. In fact it is looking very very one sided.’ However, let’s get real about this. It has always been in a society such as ours that those imposing cuts and hard times on the poorer sections of society have themselves no intention to suffer from such cuts, and that has applied to Tory and Labout Governments stretching back for years.
Having said that, as a Lib Dem candidate in the last general election who castigated Labour for its materialistic policies dominated by the orthodixy of the financial establishment, I am concerned that we insist on those policies that bear the stamp of at least some radicalism and can move us some little way towards a more fair and equal society ( e.g. Capital Gains Tax ).
It’s early days however in politics if you don’t robustly define your self then your opponents, civil society and media will define you its self. The early cuts all look ” reasonable” to me. Its the lower hanging fruit that can be done quickly. However it is begging to look like this isn’t being politically driven and is just managerialism with ministers signing off on Civil servants recommendations.
This will cause cause two problems which long term will screw the party along with the poor. The communications side can be left for another day. The killer about managerial cuts is this. Unless an external political meta narrative is imposed on the cuts process by ministers then all the Civil service will do is be general. And in general this will hurt poorer eople and poorer areas most because they use public services most.
To rectify this we need three things very quickly of which so far I have seen very little
1. Lib Dem ministers to know what they want.
2. To distinctively demand it
3. to show a willingness to walk if they don’t get it.
It is certainly true that cuts in public services will hurt poorer people most and will fall most heavily on the poorest areas. Maybe part of the remit for the new Office for Budget Responsibility, or maybe a job for a new Office, would be to consider how various policies impacted on various groups, and how the levels of ‘wellbeing’ ( which would include incomes but other things as well ) were changing over time to move towards our goal of a fair and equal society.
We should also be careful not to fall into the trap of setting one group of working people against another. The Tories are clearly in this game with their almost gleefull pursuing of public sector workers, many of whom are low paid. They never mention that directors of companies have received on average a 7% pay increase and massive bonus increases over the past year ( IDS figures ). It should be our job as Liberal Democrats to throw light on sucj anomalies and act on them.
The £2b cuts announced by Danny Alexander last week were cuts in relation to what can best be described as budget-improvised-explosive-devices strategically placed at the roadside in the final months of an outgoing Labour government realising that they couldn’t (and didn’t want to anyway) win the election. The idea, which incidentally has Alastair Campbell’s unmistakable fingerprints all over them, was that these spending pledges would obviously be abandoned by the incoming government, giving David Miliband the opportunity to jump up and down squealing “gratuitous economic vandalism!”
Let’s examine the nature of the pledges in question and you’ll see what I mean;
1. £25 million visitor centre at Stonehenge – cutting this is designed to outrage the whole of middle England, the natural LibDem heartland, academia and anyone with a soft spot for ‘The Nation’s Heritage’.
2. Jobs guarantee for young people – a cut here would guarantee that no one could come up smelling of roses – cue the outraged D Miliband. The fact that this scheme was as yet unfunded? A mere inconvenience.
3. Improvements to a hospital in Teesside – not a hospital!? I hear you cry. Don’t touch our hospitals!! I hear the entire electorate snarl. Guaranteed to whip up deep emotions.
4. Walking routes promised by the Health Department – Eh? Ok, I guess it might upset the Ramblers Association but, I have to admit that the significance of this one is lost on me. Over to you Alastair…
5. An £80 million loan to Sheffield Forgemasters – the piece de resistance, coup de gras, whatever French handle you care to embellish it with, this one’s nothing short of a stroke of genius. Flash Bang Wallop right in the heart of Cleggland! Cue general sniggering at Nick’s hand wringing, oh and the outraged D Miliband again: “Gratuitous Economic Vandalism!”
It has been positively embarrassing (but nonetheless gratifying) to see every single Labour pundit wheeled out during the week, quoting from the same script, almost verbatim, when pronouncing on these cuts, invariably majoring on Sheffield Forgemasters.
The most insulting thing of all is just how clumsily predictable all these devices are, or perhaps we are just getting better at detecting the Labour Spin Machine.
http://newsmanagement.blogspot.com/
Kirsten
At least in respect of the Sheffield forgemasters loan, you are wrong. This deal has taken nearly 3 years to broker, with investment from Forgemasters themselves, and private finance including a loan from the ECB to the tune of 40m. That’s how government fund matching and guarantees work. You have to find your part of the fund before they sign of their pledge. The local business leaders involved in this planning were on television this morning on the South Yorkshire piece of the politics show, and to a man agreed that this is a politically motivated decision. Whether or not you choose to see it as a cut, since as you say no money has been spent yet, it is a spending commitment which is removed, and which now leaves that company floundering to find the money elsewhere at a time where UK banks are not lending to manufacturing industry.
Take a look at the Sheffield Telegraph and Star.
http://www.thestar.co.uk/news/CUTS-Nuclear-ambitions-left-in.6370499.jp
This is not about Labour any more, even though it now suits the Conservatives to keep up the spin of scorched earch policy and Labours debt. It’s about the reasons the Liberal Democrats leadership gave for signing up to this coalition and how those reasons now stand up to scrutiny. I think anyone would say, shame but nevermind to the Stone Henge visitor centre, and possibly the other 2 projects in Sheffield. But the British economy can no longer be allowed to rest on the financial markets and consumer spending. We must have growth in the most labour intensive type of manufacturing industries and compete once again in world markets.
Did you get to watch the chanell 4 documentary last week, on How the Banks Won. This reveals that even in good times. the UK banks lending share to manufacturing industry was on 3% (compared to 70+% on mortgages and other financial products), and yet despite being massively depleted, manufacturing industry contributed more than twice to the tax revenue intake than the financial services industry.
Caroline,
Suppose that the French government had given their heavy industry a state subsidy so that they could beat British companies in competition, what would you have said? Shoudn’t Forgemasters get a commercial loan from private industry?
It seems that one group that will be most heavily impacted is those forced to live solely on means tested benefits, they will see nothing of any change in personal allowances whilst being fully exposed to any change in the rate of VAT.