Nick Clegg joined James Naughtie yesterday in the Today studio, for the programme’s first of a series of interviews with the party leaders before the elections on 3 May.
Clegg talked about the budget, the compromises of coalition and Lib Dem electoral prospects, among other things.
You can listen to the interview in full over on the Today website here, or read a transcript of the interview below.
Full transcript:
James Naughtie: Coalition government involves some pretty hard bargaining, some difficult compromises for both parties. You might think therefore that the opportunity of a local election campaign would be quite welcome, party leaders being themselves, talking to their own parties without having to worry too much about the other lot. But for Nick Clegg, leader of the Liberal Democrats, times are tough. He doesn’t even need to look at the opinion polls to know that. He said himself at the weekend that coalition life was a roller coaster and acknowledged that any government sooner or later found itself in a rut where every potentially good story turned into a bad one. He was obviously referring to the present. So how does he breathe life into the Liberal Democrat campaign? The Deputy Prime Minister is with us. Good morning.
Nick Clegg: Morning.
JN: You obviously have to defend decisions of which you are a part. In the course of this campaign are you going to claim credit for a budget that you can describe as fair?
NC: Oh I attach a great deal of significance to the fact that the centrepiece change in the budget — and I acknowledge it has been perhaps somewhat lost by recent coverage about the budget since it was announced — but the centrepiece remains the huge change in the personal income tax system which will benefit over 20 million basic rate taxpayers to the tune of several hundred pounds. It will take by next April over two million people on low pay out of paying income tax altogether, mainly from the lifting of the income tax allowance and, you know, I think you have small changes in budgets which can be controversial or not and then you have big changes in budgets which in my view can be judged whether they are significant on whether we believe that future governments are going to change them or not. My feeling is that what we’re doing on the allowance is one of the biggest, boldest and most radical changes in the personal tax system in a very long time.
JN: Well the IFS judged immediately after the budget that people who were going to lose out were middle-income families with children and it pointed out that the burden was going to fall mainly on the 20 per cent lowest paid. Acknowledging what you’ve said about the rise in the allowances which will have an effect, but you see budgets are packages and if you look at what’s happened to this one, you talked about potentially good stories turning into bad ones at the weekend, the stuff that’s unravelling is stuff that comes from your corner. Charities are absolutely livid about what has happened on the proposed cap, that is absolutely in line with the speech that you made about tycoon taxes and sold to your party’s spring conference, it comes from you.
NC: I make absolutely no apology at all that we should seek to make changes in our tax system when we had a tax system that looked like a sieve with great big holes in it, but everyone pays their fair share. Now as it happens…
JN: But you don’t think what has happened with charitable donations is abusive and evasive?
NC: No, no, no. I’m not saying that people make contributions to charities to avoid tax, of course not, of course not. What I am saying is that it is very rare actually in the developed world to have allowances in the tax system which are completely unlimited. In fact I think only Australia of all the developed economies I’m aware of that has such a big exemption where there is no limit at all. What we’re saying is yes, there should be tax incentives to help charities, that’s a good thing, we should encourage philanthropy. I was with a number of philanthropists at an event just yesterday evening thanking them for what they have done… hang on…
JN: You thanked them but did they thank you?
NC: What I explained to them was, look, there is a simple principle at stake which is that if you have an unlimited allowance you are asking ordinary tax payers on much lower incomes to fund that tax break.
JN: In other words you said to them we’re in the business of compromising on the figure.
NC: What I then said was of course, as we said at the budget, we will look at this in detail, we have time to get the details right, we will look at it in the round and we will do so with an open mind and very sympathetically because we don’t want to damage charities, we don’t want to inhibit philanthropy. But that doesn’t mean the principle of saying there should be some limit to what our taxpayer funded allowances in the tax system as a whole isn’t something which is sensible and by the way it’s happening across the developed world. Money is tight, everybody is asking, particularly those at the top, to at least pay their fair share in income tax.
JN: But that answer reveals how far the government has moved in the last few days because what you’re saying is we can argue about the detail, there is a principle that there shouldn’t be an unlimited freedom but nobody is suggesting that that was ever going to be defended. What you’re saying is that we’ll change what we proposed in the budget. You see, this gets to the heart of your problem doesn’t it? You, particularly you, in the government find yourself constantly on the defensive, don’t you, every single day?
NC: I’m not in the slightest big defensive, Jim, about the fact that this very month…
JN: Really?
NC: This very month I have launched a youth contract which will help every 18-24 year old who is out of work to either earn or learn. I’m not the slightest bit defensive about the fact that pensioners have received the largest cash increase this month in a state pension ever. I’m not the slightest bit apologetic that we’ve given the largest uplift in the allowance ever, that we’re increasing the pupil premium… This is very significant, we can trade, I can talk about the things I’m proud of and you can talk about the things that the government is… but hang on, let’s be fair for a minute to the government, I don’t think it is entirely unreasonable for me to take this precious opportunity to tell the other side of the story. There are things we’re doing for pensioners, for young people in school, just this last week I was talking about the massive expansion that we’re doing — it’s never happened before in this country — of pre-school support and child care support for two year olds, hundreds of thousands of two year olds from the most deprived families in this country, that has never happened. Of course I accept that governments get into situations where you have bumps and scrapes and media squalls where it’s difficult to get your side of the story across, but we’re doing a lot of difficult things to rescue and repair the economy, we’re doing good things which I believe will last, will work for the long term and will help the young, the old and people across the country.
JN: With respect, it’s not a media squall that engulfed the budget, it is the fact that it has unravelled before our eyes. It appears to be an incompetent package, I needn’t mention pasties, the granny tax, the charities which you’ve acknowledged yourself a few minutes ago you’re having to deal with, with philanthropists who don’t know what’s going on. This appears to be a government that’s characterised in many of its actions by incoherence.
NC: No, I think if you look at the big judgements in the budget, and I think this always happens in politics generally, in particular the slightly sort of frenzy, high velocity media environment we work in, people get absolutely swept up by some specific issues and they lose the bigger picture. The bigger picture on the budget is that firstly we, unlike many governments in the developed world, are able to hold steady on our plan of dealing with the deficit, we’re not changing that. It is very important that other governments are constantly having to run around, reinvent budgets at every turn because of deteriorating situations in their economy, we have pulled back this country from the brink, we have made our economy safer than it is in many other parts of Europe and the developed world and that was reflected in the budget and at the same time what we did was we made some very major reforms, worth around three and a half billion pounds a year to the benefit of over 20 million basic rate tax payers, on the route to making the tax system as a whole fairer and I believe that in the long run it is those big changes which will be the legacy of this budget, not some of the other issues.
JN: But you see the government seems not to be able to see things coming. The granny tax, the charity row which you have acknowledged that you are having to repair now and this gives the impression of a government that is not confident of which foot it’s putting forward, that’s why I use the word defensive because you talk for example about coming into this job to produce fairness, that was the theme of your election campaign, all that long time ago, two years ago and the trouble is that you are constantly finding yourself — you’ve acknowledged this — in a position where people say whatever they say is it isn’t fair. Do you understand that that’s why you are lagging in the polls, that’s why your party is…?
NC: I totally accept that at a time that we as a government — and by the way whoever was in power would have to do this — are taking very big controversial decisions to help our country recover from one of the largest economic shocks — it is like a great big heart attack at the centre of our economy which occurred in 2008, which will have aftershocks and after effects which will last for years — that to do that does mean that you have to take controversial decisions and of course that generates anxiety, it of course may even generate anger but at the same time we are doing things that help millions of ordinary people and just look, if I may for a minute, just cite what Liberal Democrat councils are doing. Liberal Democrat councils, we are the only party that has either frozen or cut council tax in areas where we are in control, neither the Labour nor the Conservative parties can say that. We are much more likely than either Labour or Conservative councils to also give real help to public sector employees, council employees, on low pay. That is an example of us being committed, not just rhetorically but in action, to fair taxes and fair wages.
JN: Can I suggest to you that one of the reasons why you find it difficult, and you admit this, find it difficult to get your message across is because people remember for example that highlight of your first period in office when having said that you would come in to government to put an end to broken promises, you broke a very famous promise on tuition fees. You defended it but people said, ‘Well if we can’t believe him on that, why should we believe him on anything?’ And that still hangs round your neck doesn’t it?
NC: There are two things which I will be very open about and which of course I will explain over and over again. The first thing is, I didn’t win the election, the Liberal Democrats came third. I represent a party… no, can I finish, hang on. I represent a party with 8 per cent of MPs in the House of Commons. I’m flattered that people think I should lead a party which has over 50 per cent, we do not. If you look at that manifesto in full, vote for Liberal Democrats in larger numbers, it didn’t happen and I have to deal with the world as it is and not as I would like it to be. I would love to be Prime Minister and I would love this to be a Liberal Democrat government but it isn’t and no one can accuse me of never being up front about the fact that that means that there are painful compromises where you can’t do everything. It so happens to be the fact that there are four big pledges we made on the front of our manifesto — pupil premium, fairer taxes, sorting out the economy, reforming politics. We’re delivering on all four, but of course we weren’t able to, and most notoriously, on higher education. The second thing is, all of those difficult compromises are made even more acute by the fact that, as Liam Byrne kindly informed us after Labour left office, there is no money and if you have no money you are faced with difficult choices and I suppose as a politician the easy route would have been two years ago, this is all too difficult, I am going to retreat to my tribal corner in politics and just throw lots of sort of bricks at the other parties and be terribly holier than thou about it, or we get stuck in and sort out the problems this country faces. They are big problems. We are sorting out a monumental mess left by Labour — what happened in 2008 is almost without precedent in the post-war period and it will take some time to sort it out. It requires courage, it requires resilience and it requires a government that is bold and I am proud of the fact that the Liberal Democrats in this government are being courageous and are being bold.
JN: So you’re enjoying it?
NC: Yes, it’s a great privilege. Of course it’s tough but it’s a great privilege and I feel genuinely lucky that I am playing a role, as other people are, in making sure this country is strong, prosperous and safe in the future.
* Nick Thornsby is a day editor at Lib Dem Voice.
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14 Comments
“OK, Nick, here’s what you say when he starts asking nasty questions. It’s easy, OK? One: It’s all the fault of the media and their squalls. Two: All other countries are in trouble but we’re coming back. And if he starts getting real pushy: Use the ‘I’ll be frank’ and the ‘Look, I’ll be very open about this’ defence. Got it? Great!”
There is no “granny tax”. That wording suggests a special extra tax for elderly people, no such thing was proposed. Rather, the very reasonable suggestion was made that elderly people should pay tax at the same rate as anyone else, but this would not be implemented immediately, only through the slow adjustment of freezing the extra tax allowance for older people. It ought to be very obvious that if older people deserve a special extra income, as I believe they do, that should be done through a state pension that goes to ALL old people, and not through extra tax allowance which only goes to older people with a higher income so in a position where that tax allowance comes into play.
It follows that James Naughtie’s repeated use of the phrase “granny tax” is unacceptable coming from a body, the BBC, which is bound by law to be strictly neutral in politics. The phrase “granny tax” is not neutral, it is a piece of political propaganda, it is not a phrase that should be uttered by anyone who has a duty to exercise political neutrality. I am disgusted at the BBC for allowing it to be used by one of its broadcasters in a political interview.
NC: What I explained to them was, look, there is a simple principle at stake which is that if you have an unlimited allowance you are asking ordinary tax payers on much lower incomes to fund that tax break.
JN: In other words you said to them we’re in the business of compromising on the figure.
No, James Naughtie, what he said, unlike you and your blatant anti-LibDem propagandising, was just the honest truth.
It is a simple fact, that is what a tax allowance on charitable donations means. For every pound a person on a high income gives to charity, the state has to give an extra 40p which has to be paid for somehow – by higher taxes on poorer persons, by cuts in government spending.
In a time of economic crisis, why should we be doing this? Why should it be assumed that what a rich person deems to be the best recipient for a charitable donation the state must also deem likewise at the expense of what representative democracy deems the best way to spread out state money? Rich people have enough power already, why should we in this way let them dictate where so much state money goes to?
It is no loss to anyone if they give £1000 to a charity and that charity gets £1000 rather than £1400. To that person, there is still a loss of £1000. A truly charitable person would respond to the loss of this state top-up not by saying he or she will stop paying that £1000, as is being claimed, but by perhaps adding a little more in compensation.
Why is it, James Naughtie, when you are so full of propaganda the other way round, you cold not make that point? After all, there is no shortage of right-wing newspapers making the same misleading propaganda point, so why should you join in with them? Isn’t the BBC supposed to be in favour of political balance?
I thought that Nick Clegg was very good indeed and put Naughtie back in his box. One of my workcolleagues was very impressed, drew my attention to the interview and sent me the link. “I thought your man was brilliant,” he said – and he wasn’t being ironic!
I find this interview annoying. The key sentence from James Naughtie, the one that matters more than anything else, is where he says “Well the IFS judged immediately after the budget that people who were going to lose out were middle-income families with children and it pointed out that the burden was going to fall mainly on the 20 per cent lowest paid.” But then he waffles on and Nick Clegg then has a different question to answer and it all gets forgotten and they talk about less important things. In my opinion the whole interview should have been just on that point. The gap between rich and poor will be the key measurement by 2015 of this Coalition government, and independent research so far by the IFS and the Resolution Foundation shows that it is likely to increase.
The difference, Geoffrey, is that the IFS doesn ‘t pretend that deficit reduction on the scale required in the UK can be done in a pain-free ‘progressive’ way. For example, they never have much truck with the idea that the government could fill its offers simply through closing some notional ‘tax gap’ that previous Chancellors knew about but for some unexplained reason decided to leave untouched (an idea beloved of the unions)…
The comparison should not be with a world where no deficit reduction would have to happen and the government had a lot of freedom of manoeuvre, as Labour had in 1997-2010. What is the counter-factual?
Alex, I do recall that Nick Clegg said the cuts would be progressive after the 2010 budget. The IFS said at the time the budget was actually regressive and Nick denied it by saying it incentivised people into getting jobs. Since then of course unemployment has gone up and the IFS was probably right. It wasn’t anticipated that unemployment would rise the way it has (considering also that there has also been a shift from full time to part time employment) because the OBR predicted higher growth than has turned out to be the case. The OBR is meant to be independent of government but nonetheless has made the kind of predictions you would have expected the government to make based on the assumption that the policy would work of course. Given how far they were wrong it would appear that the austerity measures are not working.
What you do not explain is why it is those on low incomes who have to suffer the most? I think it is a real shame that the government fluffed it on the wealth taxes. I prefer LVT, but the mansion tax is also worth persuing. I think it really would have been worth the effort to fight harder on that policy, because if the Tories rejected it they would have suffered the fallout in the opinion polls. They have anyway by cutting the top rate, but we have not benefited because we did not stick to our guns on our policy.
I notice you do not dispute the 20% figure from the IFS. However it does put into context the raising of the tax thresholds, which maybe is not as progressive as we would like to think it is. In fact that policy alone has the effect of widening the budget deficit, and as a result has to be funded by public spending cuts, including the welfare act which contained regressive policies, plus the policy on tax credits.
Perhaps also Nick Clegg ought to say things as they are as you have done? If he believes what you believe, then in order to tackle the budget deficit the government has to pass regressive policies and should not pretend to be progressive?
@Matthew,
You might be right about the useage of ‘granny tax’ by a BBC interviewer, a different term should have been used, but they are meant to play devil’s advocate in these situations, I also seem to remember Paxman asking Reid about the ‘Scottish Raj’ and comparing Salmond to Mugabe.
Rich philanthropists will work out the gift-aid in advance, i.e. they would of before given £1400 inc gift-aid now they will give £1000 inc gift aid. Why don’t they just compensate this difference out of their own pocket?, well you could also ask why do they not just give more right now?
I have always thought the idea behind the gift-aid is, since taxes are a contribution to society, that if you give to society in an alternate form ,it is fair to receive some tax relief on it.
Perhaps a minimum level of tax might be the solution?
@Paul
I think you mean sarcastic :), (sorry pet peeve)
Geoffrey, you are conflating several different issues there which I think we need to disentangle. One is the question of the direct impact of government policies designed to tackle the structural deficit, ie tax increases and spending cuts. Another is the indirect impact of the government and Bank of England’s management of the economy (and indeed of the external economic environment) on the fiscal position and on the way in which the burden of austerity is shared. Another is why those on low incomes suffer more from cuts in government spending than those on higher incomes. Yet another is the choice of tax increases and whether this could have been more progressive in relation to either income or wealth. And a final one is how Nick Clegg has sought to answer criticisms that the coalition’s policies are regressive.
On the first issue, I do not dispute the IFS figures but I do invite you to consider several points, including some which the IFS have made at briefings I have attended and in their publications.
One is that it is hardly surprising that deficit reduction measures impose net losses of income across most of the population; measures like the increased personal allowance serve to mitigate but do not change this reality. The blame for the fact that there is hardship imposed by spending cuts lies in the earlier unsustainable increases in spending under Labour, and their general mismanagement of the economy and the public finances which, together with the effects of the financial crisis in permanently reducing the trend level of GDP, has necessitated a major fiscal adjustment.
I would like to hear of your examples of where a deficit of more than 10% of GDP, most of it structural, has been tackled without most of the population losing out either through higher taxes, lower transfer payments or reduced services of one kind or another.
The second point is that the IFS, not unreasonably, tend to use plans announced by Labour by the general election of 2010 as the baseline and then compare coalition policies with that. One of the features of the run-up to the election was that Labour chose not to hold a spending review and not to reveal virtually any of the spending cuts which were implicit in their plans. On the other hand they were slightly more explicit on the tax side, announcing deferred increases in National Insurance and the top rate of income tax as well as a hike in stamp duty at the top end and restriction of pension tax relief.
One of the effects of doing this was that it gave a ‘progressive’ tilt to the measures which Labour had announced, while leaving a huge number of blanks to be filled in as they dodged the tougher questions on VAT (or some other large revenue-raising alternative needed to meet their desired ratio of tax rises to cuts) and public expenditure. It is highly likely that Labour’s plans would have looked a lot less progressive once those blanks were filled in.
Then there is the question of whether you ‘credit’ the coalition only for new measures that it dreamt up itself, or also for measures planned but not implemented by Labour which the coalition kept in place (such as the NI rise). My view is that the current government needs to take responsibility for all the measures it implements, including those conceived by the last government, since clearly the coalition could have decided to drop those it didn’t like and replace them with measures of its own design.
As I’ve explained, the politically easier measures to raise some money from the well-off through the tax system had already been put in place by Labour, and the coalition chose to keep those (although in the case of top-end pension tax relief it improved the particular form of the change). These measures ensured that the top decile of the household income distribution would pay the most towards deficit reduction, which continues to be the case taking into account all coalition policies.
But by themselves they made little dent in the deficit, for the simple reason that tax rises on the rich raise little revenue overall (even if you assume no behavioural response, but simply because there aren’t enough rich people and even if you confiscated all of their income you would still have a big shortfall). Therefore the measures needed to fill in the blanks would inevitably spread the pain through the upper-middle, middle and lower parts of the income distribution as well, while leaving the top decile (and in particular the top 5% or so) taking the biggest hit. I do not find it plausible that Labour would have achieved a significantly more progressive distributional outcome once they had filled in the huge blanks in their programme, especially as they oppose measures like the clawback of child benefit from households with income above £50K and also want to protect (like the coalition) the full range of universal pensioner benefits.
John
Rich philanthropists will work out the gift-aid in advance, i.e. they would of before given £1400 inc gift-aid now they will give £1000 inc gift aid.
Yes, but the net difference to them is the same. My point remains – when we are in a difficult financial situation, what should we do with that £400? Carefully work out where it should go according to democratic principles, or give it to wherever a rich philanthropist says it should go?
Why don’t they just compensate this difference out of their own pocket?, well you could also ask why do they not just give more right now
Well, with top rate income tax going down from 50% to 45%, they’ll have more money, won’t they?
Turning to the second issue, the macroeconomic picture, it is fair to point out that the government and the OBR initially expected a pacier recovery than the one we’ve experienced so far.
To put this in perspective it is worth recalling that Labour’s forecasts in March 2010 – on which Alistair Darling’s projections for a falling budget deficit were predicated – were much rosier still, predicting buoyant GDP growth of 3.25% per annum by this stage. These were heroic assumptions even at the time given the historical precedents for recoveries from financial crises, and they may even have gone against Darling’s better judgement due to pressure from Gordon Brown to downplay the need for a major correction.
In any event, there is no way those targets were ever going to be hit, and it’s no use pretending that if Labour’s more softly-softly approach to austerity had been followed the difference to demand would have been so great as to make anything like those growth forecasts attainable. (Even economists who argue for fiscal stimulus, or slower austerity, expect it to add only a few tenths of a percentage point to GDP, not least because Keynesian fiscal multipliers are low in an open economy with a floating exchange rate like the UK’s.) Claims that the slippage in the coalition’s own fiscal projections means it will now borrow more over this Parliament than Labour planned are therefore tendentious in the extreme; those ‘plans’ were a fiction based on highly implausible growth assumptions even without the subsequent worsening of the world economy.
More fundamentally, it is clear that the intensification in the eurozone debt crisis over the past two years, the weakness of the US economy until recently, and much higher than anticipated commodity price inflation have combined to squeeze exports, business investment and household incomes more severely than the OBR predicted in May 2010, and this has caused a protracted period of near-zero growth. Unemployment is high, but there are tentative positive signs (the rate of increase has been falling for several months and the total level of unemployment has finally begun to fall) that private sector job creation is indeed beginning to outweigh public sector job losses. It is also clear that the UK corporate sector is in robust financial health and has the capacity to invest once trading prospects and therefore confidence improve and the recovery is a little more secure.
There is emphatically no cause for complacency – clearly the macro picture is still pretty bleak – but nor does it invalidate the UK’s deficit reduction strategy in the way you imagine Geoffrey. The economy is not a simple machine whereby you pull levers from the centre and it reacts the way you want it to; a complex web of national and international factors can shift its course, and it is not as straightforward as you seem to think to ascribe cause and effect. For example, when you study the figures in detail you find that government consumption is only now starting to be cut in the sense of subtracting from GDP rather than adding to it; therefore this clearly wasn’t the main cause of weaker than predicted growth in 2011. A more plausible explanation is the weakness of our key export markets and low business confidence increasing the deleveraging that has been going on for several years in the corporate sector (basically paying off debt and building up cash reserves).
In any event, it is not the case that the big reason for the slippage in the fiscal numbers that George Osborne had to announce last autumn was higher unemployment leading to higher welfare payments. This was a comparatively small factor. The main change was that the OBR revised down its estimate of the UK’s potential (or trend) GDP, ie it decided that the permanent hit from the financial crisis was greater than it had previously assumed and that it would therefore take longer to recover the lost ground. In turn this meant an even larger chunk of the deficit was assumed to be structural rather than cyclical, necessitating further policy measures to get it down in line with Osborne’s targets.
The truth is that there is huge uncertainty in judgements about the level of trend GDP, particularly right now, and it won’t become much clearer until conditions normalise. Economists are also in the dark about what sustainable rate of annual GDP growth the UK can expect in the future (in fact it’s hard to say what it was even in retrospect, since much of the growth in the 2000s now appears unsustainable), but it wouldn’t be safe to assume anything better than 2% pa. This uncertainty is one of the problems in choosing a cyclically-adjusted fiscal target, but on the other hand the benefit is that you are focusing on what is believed to be the underlying problem rather than the part of the deficit that will go away of its own accord as growth returns.
Anyway, the point is that if the OBR decides potential GDP or potential GDP growth is lower than it previously thought, Osborne’s numbers go awry, even if nothing has changed to the actual level of growth and employment or the actual budget deficit, and he has to announce new austerity measures to get the structural current budget back on course. Equally, of course, it might be that the OBR decides in a year’s time or so that it has been overly pessimistic about the UK economy’s underlying capacity to grow and in that scenario the structural deficit would be revised down even if the actual deficit is no better. We shall have to keep our fingers crossed that the evidence moves in this direction rather than the reverse, but what is important is that it is an independent judgement taken by the OBR.
To answer one of your other points, the fact that the OBR is independent of government (and not merely “meant to be independent” as you insinuate) does not mean it is omniscient, or immune from the forecasting errors that almost all private and corporate economic forecasters without particular axes to grind have also made, both before the financial crisis and since. It just shows what an inexact business this economic forecasting is, which is why Chancellors ultimately live or die by a more concrete test, the test of the marketplace and the confidence their policies inspire in the people at home and abroad which the British government relies on for funds. (If this subservience to market sentiment is distasteful to governments, they can always decide not to avail themselves of the markets by funding their policies from tax revenue; yet those on the left who are most critical of ‘transfers of sovereignty’ to the IMF and the markets tend to be the heaviest borrowers, and then complain when they have to do so on the lenders’ terms…)
I will try to deal with the final three issues a little more briskly:
3. Unsurprisingly, people on low and middle incomes are affected more than the well-off by reductions in transfer payments such as means-tested benefits and tax credits, since they receive more of these in the first place. Likewise it is truistic that tax cuts like a rise in the income tax personal allowance only benefit people who pay taxes!
So if the starting point is that you have a large state doing a lot of transfer payments, then trimming those (which is all the coalition is doing by the way; in fact spending on welfare and pensions is still rising in real terms, which is one reason why some departmental spending has had to be squeezed hard) inevitably means a loss of income from that source for people in the lower half of the income distribution.
(This assumes no behavioural or other indirect effects. To the extent that, say, lower housing benefit lowers rent levels, or welfare changes make work pay and incentivise work, the ultimate effect might be positive, but let’s disregard this for the moment.)
To the extent that the better-off receive cash benefits, these tend to go to two main groups: families with children and pensioners. The child benefit changes are by and large hitting those on above-average incomes, while pensioners have been almost wholly protected until the freezing of their tax allowance in the most recent budget. If the government’s only objective was to make the distributional charts look better, it could have means-tested the slew of universal pensioner benefits, although how this would have gone down with the public is another matter. (I suspect most people’s perception of fairness isn’t based on wonkish charts about income distribution and Gini coefficients but a more rough-and-ready assessment of which parts of the population are shouldering the burden and which deserve greater protection in their view. They might regard age group as a more important criterion than income level for example.)
It is less clear what the distributional impact of cuts in spending by government departments is, since these are typically universal services in kind rather than cash benefits, and the IFS admits this is very tricky to model. This is quite a problem given that the majority of the savings are of this type rather than welfare/tax credit changes, and shows why it simply isn’t possible to make black-and-white statements about the distributional impact of austerity. But in very rough terms we can say that, while the rich are probably only affected to a small degree, those in the middle and upper-middle of the income distribution will be affected given that they make extensive use of the NHS, state schools, universities, police etc.
4. In terms of the choice of tax increases, the coalition needed to raise a big chunk of extra money to fill the gap in Labour’s announced plans, but also to pay for the expensive policy commitment of raising the personal allowance. Hence the rise in VAT to 20%.
Ironically it was the Lib Dem priority of the £10K threshold that made a large rise in VAT necessary, given that there was judged to be no scope for net tax cuts and indeed taxes were to rise overall. VAT is a less progressive tax than income tax (whether it is actually regressive is debatable, depending on whether you look at the income distribution or – since it is a tax on spending – the expenditure distribution), so you could argue that from a pure distributional standpoint it would have been better to forgo the higher personal allowance and keep VAT at or close to 17.5%. If I were to be provocative I would suggest that the Lib Dem influence actually resulted in a classically Thatcherite policy trade-off of lower income tax but higher VAT (and of course this can be justified on other grounds than income distribution per se, eg that increases the relative value of work). Left to their own devices the Tories might not have cut income tax but in that case they wouldn’t have needed to raise VAT. By the same token, the way George Osborne implemented the higher personal allowance (making adjustments to the 40p threshold) resulted in a more progressive outcome than the policy in the Lib Dem manifesto, which did not propose to claw back the gains from 40p rate taxpayers. So it’s quite untrue to say the Tories are responsible for all the regressive tax changes and Lib Dems for the progressive ones; the reality doesn’t fit the caricature.
As regards the mansion tax, that would have in fact made little difference to the IFS distributional charts since they say it is difficult to match up property wealth against income deciles. Again, that should caution you against over-reliance on these charts.
As I’ve said elsewhere, I’d support a land value tax if the practical issues could be satisfactorily overcome. I don’t support a wealth tax in the sense of a tax on some supposedly comprehensive measure of wealth because I think it is unworkable, undesirable and would lead to large-scale capital flight. I think the tax burden should be redistributed as between labour and capital on the one hand (both of which are over-taxed) and land and resource use on the other.
I don’t think tacking a mansion tax onto our current unsatisfactory forms of property taxation is the answer, but – if LVT isn’t deemed feasible for domestic property – then replacing council tax and stamp duty with a simple proportional tax that charged a percentage of property value would make sense.
5. While of course you can debate the timescale and pace of austerity, dealing with the budget deficit isn’t a choice, it’s a necessity. It’s important to do this in as fair a way as possible, but one way or another, it has to be done. Otherwise you face a spike in bond yields, rapidly deteriorating debt dynamics and the market forces you to make much deeper cuts over a much shorter timescale.
What I would say is that by setting out a credible plan and showing the determination to stick to the tough measures involved, a government maximises the chances of doing it on its own terms and with as much regard as possible for the way the burden is shared. Even so, you can’t tackle a double-digit deficit without pretty much all sections of society making a contribution, and given the starting point in terms of the distribution of public spending – and the fact that the deficit largely reflects in a big rise in the ratio of spending to GDP rather than a fall in tax receipts to GDP – it is unlikely that it can be ‘progressive’ in the strict sense, at least not if you are also concerned with economic efficiency and the sustainability of deficit reduction.
However, the point that Nick Clegg has tried to make is that ‘snapshot’ measures of income distribution (in relation to child poverty targets he calls it ‘poverty plus a pound’) do not do a very good job of capturing opportunity or lifetime living standards, which is what we are ultimately concerned with. In this context, a measure like the £10K personal allowance – by making a substantial difference to the incentive and rewards to work since it reduces the marginal tax rate by 20 percentage points – could potentially in the medium term have quite a transformative effect, or at least in could in combination with things like the Universal Credit and education reforms the government is undertaking. The IFS doesn’t deny this but quite rightly doesn’t feel able to quantify or give credit for this in its distributional analysis.
In a similar way, the cuts in the top rate of income tax from 98% to 40% in the 1980s on paper delivered a huge boost to the post-tax income of the well-off, and any static distributional chart of household income would have shown this. Yet it turned out that the rich ended up paying a greater proportion of total income tax revenue even taking into account their increased incomes than they did in the 1970s. A static distributional chart would show Denis Healey was the most ‘progressive’ British Chancellor ever, but the reality was quite different.
Alex Sabine
So if the starting point is that you have a large state doing a lot of transfer payments, then trimming those (which is all the coalition is doing by the way; in fact spending on welfare and pensions is still rising in real terms, which is one reason why some departmental spending has had to be squeezed hard) inevitably means a loss of income from that source for people in the lower half of the income distribution.
Demographic changes mean that even if standards of welfare and pension remain the same, costs will rise. Or if costs don’t rise, or even if they don’t rise fast enough, standards will fall. That is why I get so angry when right-wing politicians make comparison of spending on these things now with spending several years back and hint (they are clever enough not actually to say, because they know it isn’t the case) that this means there have been big improvements. Unfortunately, politicians do not seem able to be honest enough with the people to make it clear that if you want state health and welfare and pensions to stay the same, you will have to pay more somehow to enable that.
There is also the costs of throwing people out of work. I have seen how this happens – a department is told it must make cuts, it cuts jobs, there you are, budget saving of X. What is not taken into account is these people no longer paying tax and now claiming benefit, so budget increase of Y somewhere else. Note that if it’s done by jobs freeze rather than actual redundancy, the result is that anyone who is out of work finds it hard to get back in again as no new posts are becoming available, and it is made worse as no-one dare risk getting out of work so they stay put. The nutty idea that if you make it possible to sack people at whim for up to two years into a new job it will help boost employment does not take into account the obvious issue that who in today’s job market would go for a new position with no recourse against unfair sacking for that period of time?
(This assumes no behavioural or other indirect effects. To the extent that, say, lower housing benefit lowers rent levels, or welfare changes make work pay and incentivise work, the ultimate effect might be positive, but let’s disregard this for the moment.)
Again, those at the top have no idea how ordinary people live their lives and so tend to miss the obvious here. It’s low welfare payments that disincentivise work, not high welfare payments. If welfare benefits get cut off as soon as you start earning a bit of money, you’re less likely to bother. The selling off of council houses has had such disastrous consequences long term – not just much bigger housing benefit payments to line the pockets of private landlords, but also unemployed tenants in private rented housing in expensive areas like London need to have huge salaries before it’s worth returning to work. If there was a guaranteed minimum standard of housing for all available at cost price only – which council housing used to give – it would make it much easier and more profitable for people to move back into low paid jobs. It would make it much easier for people who are not wealthy to take the risk of setting up their own small business – you’re far more likely to do it if its not working out doesn’t mean you lose your home.
Most people I know who are out of work are desperate to get back in. If they lose that urge it comes from giving up after receiving rejection after rejection in job applications. Then comes the stage when even the culture of work, the personal discipline and sense of order required to be employed is lost. It’s not a matter of people sitting idle just because they enjoy generous welfare benefits.