35 Comments

• Adam 13th Dec '12 - 10:43am

  Overwhelming support for an extremely expensive policy (the allowance increase) that benefits the richest households much more, and gives just as big a tax cut to people on £116,000 as it does to those on £10,000. An extra £1bn well spent?

  The Autumn Statement continues the pattern of taking from the bottom 50% and the top 10% in order to give tax cuts to those inbetween, and our party is partly responsible for that. http://www.hm-treasury.gov.uk/as2012_distributional_analysis.htm

• John 13th Dec '12 - 11:36am

  Given the £10K tax allowance is on the front page of the manifesto it’s no surprise the party supports it! It obviously doesn’t benefit people already below the tax threshold but above that as a proportion of income the poorest benefit most. What I am surprised about is the amount of support for making cuts in subsistence level benefits. What are supporters thinking?

• Paul Pettinger 13th Dec '12 - 12:07pm

  A plurality support cutting benefits in real terms. Very surprised. Joseph Rowntree would turn in his grave.

• Tony Dawson 13th Dec '12 - 12:15pm

  Adam, you are being silly writing about the tax allowance move as if it was happening on its own. The very rich (as the graphs you direct us to show) are being thumped under this government, having been padded by the last one year after year after year.

  There are, however, serious concerns about what the government is doing both with respect to wasteful spending and its effects across the income range.

  An elephant in the room for those who’d like to spend their way out of austerity is this: you can only spend even more money you don’t have if someone will lend it to you. Generally, the more profligate you’ve been in the recent past, the less likely anyone is to believe your plans to escape through spending which means that they wont lend to you. So your plans (whether the would work or not) cannot get off the ground. Another crucial factor for lenders is whether the organisation they’re lending to shows any signs of respecting reality. UK plc is still very far from that.

• Geoffrey Payne 13th Dec '12 - 12:54pm

  I am in the camp that thinks it is unacceptable to cut benefits such as JSA and I am shocked that half of the party does not agree with me. This policy will increase poverty, something that the preamble to our constitution wants to get rid off.

• Mark Valladares 13th Dec '12 - 1:11pm

  Adam,

  I think that you need to look at the Autumn Statement in the light of previous announcements. Given the cut in the higher rate threshold from 2012//13 to 2013/14, someone on £10,000 will be £257.00 better off, whereas someone on £116,000 will be just £62.00 better off, if my calculations are correct.

  Geoffrey,

  It might be argued that real terms benefit cuts (it is a cash terms increase) are an inevitable result of choosing to protect the NHS. Ring-fencing this large area of government spending exacerbates the cuts to be found from the rest of government. And given that every cut has an impact somewhere, the question to be put is, if you don’t save money on X, which Y or Z do you cut further?

  The argument about whether you invest for further growth or cut spending to reduce borrowing is clearly an open one, and I don’t intend to come out on either side of that debate – I’m not an economist – but if one accepts that the public deficit is too high (and I don’t think that there are many people arguing that it isn’t)then to balance the books, either growth is going to have to exceed inflation, taxes are going to have to go up, or spending is going to have to come down. And that choice is going to be painful, regardless…

• Chris 13th Dec '12 - 1:36pm

  “It might be argued that real terms benefit cuts (it is a cash terms increase) are an inevitable result of choosing to protect the NHS.”

  Nonsense. There’s obviously nothing “inevitable” about penalising those on lower incomes and favouring the majority of those on higher-than-average incomes – which is what the Autumn Statement did.

  It’s a political choice, and one for which the party must accept responsibility.

• Rob Heale 13th Dec '12 - 4:50pm

  I am also surprised by the results and agree with the point above about the Constitution of the Party. Maybe some people from so-called “Liberal Reform” have been encouraging their members to respond to these surveys. After all, they are the ones with all the time and the money…………..!

• Stuart Wheatcroft 13th Dec '12 - 6:56pm

  Rob Heale – What makes you think Liberal Reform members want real-terms cuts in benefits for people who are struggling? That’s certainly not my experience, and Liberal Reform’s statement on the issue comes as close to condemning the decision as is consistent with the sort of concerns that Mark Valladares raises above:

  “Liberal Reform is also pleased that many benefits will rise in cash terms next year, although there will be a small real terms cut in a number of benefits. However, we would much rather have seen the welfare bill reduced by stopping the numerous unnecessary payments made to those on high incomes. At a time of austerity it is indefensible to be protecting benefits for the well-off while cutting those for the poorest.”

  Before you attack people for their views, it’s worth checking whether you’ve correctly identified those views.

  As far as my analysis of the result of that question goes, I can’t help but feel that the question is a little ambiguous. A 1% increase is better than no increase, so perhaps people who would actually rather avoid a real-terms cut chose a supportive option because they saw the question as a choice between the announced policy and the cash-terms freeze that was floated. It’s now being interpreted here as a choice between a real-terms cut or no real-terms cut – despite the fact that some people may have thought they were answering a different question.

  I can’t actually remember which way I read it.

• Rob Heale 13th Dec '12 - 8:47pm

  Fair enough comments Paul (above). I have probably generalised a bit. I am waiting for someone to try to justify the 1% freeze, preferably in fewer than 200 words!!

• Eddie Sammon 13th Dec '12 - 9:04pm

  It’s about freedom: if we didn’t make cuts we would have to raise total taxes. If we only cared about poverty and not freedom we would be the Labour Party.

• John 13th Dec '12 - 9:30pm

  And you don’t think poverty seriously impinges on a person’s freedom, Eddie?

• Eddie Sammon 13th Dec '12 - 9:36pm

  Yes I do, but you have to balance priorities. I only support the policy because I accept we are in a coalition with the Conservatives. No way would I advocate it as a Liberal policy when all other sources of tax haven’t been exhausted. Sorry I don’t mean to back track – just trying to be succinct earlier!

• John 13th Dec '12 - 9:47pm

  Ah that’s interesting. I wonder how many others do that – it could explain the unexpectedly high levels of support. I tend not to answer these policy questions in the context of what is achievable in coalition but whether the policy itself is a good idea.

• Chris 13th Dec '12 - 10:10pm

  “It’s about freedom: if we didn’t make cuts we would have to raise total taxes.”

  But this government has made and is continuing to make large cuts to income tax for all basic rate taxpayers by raising the personal allowance!

  The effect of that, in combination with cuts to benefits in real terms, is to leave those on low incomes worse off, but to give a handout to most of those on higher than average incomes (deciles 6-9). Why not share the burden out in a fair way rather than hitting the poor hardest? You keep saying you’re protecting the low-paid, but it’s simply not true.

• Giselle Williams 13th Dec '12 - 11:39pm

  John 13th Dec ’12 – 11:36am

  What I am surprised about is the amount of support for making cuts in subsistence level benefits. What are supporters thinking?

• jenny barnes 14th Dec '12 - 8:59am

  A country (one with its own fiat currency) has absolutely no need to be constrained in budgetary terms in the same way as a household, or a country without its own fiat currency like Greece. As long as its debt is issued in its own currency, it need never default. Possibly inflation will reduce the value of the repayment, but that’s not the same as the situation in Argentina which had a lot of dollar denominated debt, nor Greece which has Euro ditto.
  Arguments about “you can only borrow if someone will lend” at the country level are an indication of failure of economic understanding.

• BrianD 14th Dec '12 - 9:48am

  Thyis survey result supporting real terms benefit cuts is shameful. It may be OK to blame the Tories but it is shameful to agree with them. We ar colluding in punishing the poor and yes we are giving a whopping tax cut to the rich. We even hear Lib Dem Parliamentarians use the term ‘hardworking families’ presumably to distinguish them from the 2.5million unemployed! We are heading for a well deserved electoral disaster.

• Ruth Bright 14th Dec '12 - 10:41am

  Geoffrey and BrianD – agreed that the survey results make depressing reading. I would be interested to see the results when members are consulted on the forthcoming abolition of Disability Living Allowance. If most members are gun-ho about that I’m not really sure I know what the party is for anymore

• Geoffrey Payne 14th Dec '12 - 1:21pm

  Mark – we all have our priorities . There is the question about why we are supporting George Osborne’s timetable for budget deficit reduction when it is clearly proving to be counter-productive. But let’s assume he is right for the sake of argument. My preference for alternative funding would come from taxing the rich via LVT or the mansion tax. Plus implementing a Tobin tax make make the people pay who put us in this mess in the first place rather than the poorest people in our society. And if the Tories don’t agree, then lets have a crises in government, possibly leading to a general election. The Tories think they can say no to the mansion tax because there is nothing the Lib Dems can do about it. Well that makes our negotiating position weak and because of that the results are there for all to see.

• Chris 14th Dec '12 - 1:32pm

  Based on the Ipsos MORI survey about the real-terms cuts in benefits, I would guess that the results above are pretty meaningless because of the way the questions were asked. Ipsos-MORI gave people a set of alternatives so that they could express whether they thought the rise should be lower or higher than inflation.

  The result was that 69% thought that benefits should rise in line with or by more than inflation, and only 27% thought they should be frozen or rise by less than inflation. Even among Tory supporters these figures were 56% and 41%. I would hope that even these days Lib Dem members would be less supportive of benefit cuts than Tory voters:
  http://www.ipsos-mori.com/Assets/Docs/Polls/Dec2012_tables_release2.pdf

• Alex Sabine 14th Dec '12 - 3:27pm

  Chris, since when has cutting people’s taxes been synonymous with ‘giving a handout’?

  Whatever you think of the policy of raising the personal allowance, allowing people to keep more of the money they earned in the first place is not giving them a handout.

  The idea that it is betrays a strange and deeply illiberal conception of how wealth is created, in which there is a big central pot of money which the government decides to divvy up.

  This is not just semantics; the distinction is a pretty fundamental one in a free society. (This is not to deny that raising the personal allowance is an ‘expensive’ policy in terms of the revenue cost to the Exchequer, which needs to be weighed carefully against other priorities in a period of austerity. But can we please leave the arrogant assumption that it’s the government’s money to the Labour party?)

• Chris 14th Dec '12 - 4:31pm

  Alex

  If the distinction is important to you, “tax cuts” will express my meaning just as well. The practical effect is identical. (I think we probably have very different views about people’s rights and responsibilities as citizens. If you think my views are ‘illiberal’, so be it. I tend to think the same myself about the supporters of this government, but there’s little point in name-calling.)

  Anyhow, as you have apparently “weighed carefully” this question, would it be rude to ask what conclusions you came to about it?

• Simon Banks 14th Dec '12 - 5:35pm

  I think the third and fourth questions, while not precisely ambiguous, produce confused responses. If you say you support a 1% increase below inflation, is that as opposed to no increase or as opposed to an increase in line with inflation?

• Alex Sabine 15th Dec '12 - 3:50am

  Chris: I wasn’t name-calling. The reason I picked you up on the ‘handout’ claim was that logically it seems to rest on the assumption that all income or wealth properly belongs to the government, and only then is to be distributed to citizens. If this were the case then there would indeed be no difference in principle between the state allowing people to keep more of their earnings or giving them that same amount in benefits, nor any justification for differences in income/wealth.

  Personally I just think this is a dangerous place to start from in terms of first principles. The practical effect can be seen in Gordon Brown’s client state, whereby you tax as many people as possible as much as possible, then spend a lot of money employing a load of people in HMRC and the benefits office to return some of it to groups deemed deserving – and portray the whole exercise as an act of generosity and ‘fairness’. In the process you make an ever larger proportion of taxpayers dependent on welfare so that they come to have a vested interest in such spending and look to the government to organise their finances for them.

  Untangling this and returning to a saner system cannot be done overnight, but raising the personal allowance is a step towards this and thus I welcome it in principle.

  When I said it needed to be ‘weighed carefully’ against other priorities, I simply meant that advocates of this policy have to accept that it imposes some pretty major trade-offs. This is because such a broad-based income tax cut, which benefits the vast majority of taxpayers, inevitably dents a large hole in government revenue; the IFS reckon the coalition’s increases in the personal allowance above normal price-indexation will ‘cost’ the Treasury about £10 billion per year by the end of this parliament.

  In that sense a number of the coalition’s other measures, ostensibly justified by the austerity plan, in fact were needed to pay for the income tax cut. Without it, most of the VAT rise could have been avoided and petrol duty reduced to keep the cost of living down, or – if you prefer – many of the welfare cuts could have been avoided, or indeed the deficit could have been reduced more significantly.

  So I agree with you that it was a political choice; the priority given to it by Lib Dems and indeed many Tories reflects the belief that low earners should see the maximum possible direct return from their work, and that it is a better way to help middle earners than tangling them in a web of tax credits with nightmarish withdrawal tapers.

  I share that belief, but I think further action on the direct tax side should concentrate on lifting the National Insurance threshold and re-aligning it with the income tax personal allowance (helping to pave the way to an eventual merger of the two systems) and that this would be the most progressive and economically efficient route to go down. If we can get marginal tax rates down from 32p to zero across a decent band of income then this would be a bigger step towards ‘making work pay’ than further increases in the PA above £10k. That said, this is only a timing issue and I agree that in the longer run setting the starting-point for both income tax and NI at the level of full-time minimum wage earnings (and then pegging it at this level) makes a lot of sense.

  The issue is the cost to the Exchequer in a situation where future spending are likely to be needed to reduce the deficit and will not release money for tax cuts. The Lib Dem answer seems to be to reduce the deficit through spending restraint, but to reduce broad-based direct taxes through a mixture of indirect tax rises and various tax rises on the wealthy.

  However I think we are nearing the limits of this approach, and even if the so-called ‘wealth taxes’ were implemented they wouldn’t come close to raising the required revenue to lift the personal allowance to the level of minimum wage earnings. Simply assuming that any desirable or popular tax cut for 90-plus percent of the population can be financed by an ever-increasing tax burden on the relatively small number of wealthy people is naive and relies on some pretty strange arithmetic.

  The reality is that future large real-terms increases in the PA will have to be funded partly through spending cuts additional to those required to reduce he deficit, as well as tax rises elsewhere; and the tax rises will have to claw back money from many of the same people in the broad middle of the income distribution (say deciles 3 to 9) who benefit from the higher allowance. In other words, it would be a matter of recalibrating the tax system rather than redistributing from rich to poor. To some extent this is what has already happened with the VAT increase fully offsetting the lost revenue from the income tax cuts.

  I realise this has been a very long answer to your question… The shorter answer is that I don’t think tax reform should consist of a singular focus on one element of our hugely complex system. We really need to redesign the whole thing in a systematic way so that it better balances the objectives of economic efficiency and equity. This would seek to pursue that perennial refrain ‘closing loopholes’ not by complex tax legislation but by cleaning up and rationalising the entire tax base so that there is little or no advantage in artificial tax manoeuvres. (This is less about a single rate, as flat-tax advocates often obsess about, than about harmonising the tax BASE so that it doesn’t arbitrarily tax different forms of income or savings differently thus distorting markets and inviting avoidance responses.)

  It is frustrating that few politicians have shown any willingness to engage with his agenda, for example with the proposals of the Mirrlees Review. But that sort of radicalism is required to deliver a genuinely fairer and – crucially – more economically efficient tax system as opposed to economic nonsense like hiking stamp duty or constantly messing around with the arrangements for pension saving or floating a wealth tax without the faintest idea of how to implement one…

• Chris 15th Dec '12 - 9:29am

  “So I agree with you that it was a political choice; the priority given to it by Lib Dems and indeed many Tories reflects the belief that low earners should see the maximum possible direct return from their work, and that it is a better way to help middle earners than tangling them in a web of tax credits with nightmarish withdrawal tapers.”

  You seem to have an ideological belief that low direct taxation is good even if the end effect of lowering direct taxation is regressive. Low earners may be seeing a larger _direct_ return, but what good is that to them if their overall incomes are lower because of the cuts in benefits?

  Perhaps you are right that this is today’s ‘liberalism’, with its obsession with tax-cutting and its denunciation of the ‘client state’. I’m afraid it’s a very poor successor to the liberalism of a few years ago, which was honest enough to recognise that if people wanted to live in a humane society there was a price to be paid in terms of taxation, and which didn’t try to con people with the promise of ‘big permanent tax cuts’ with no price tag attached.

• Alex Sabine 15th Dec '12 - 1:21pm

  But I’m saying there IS a price tag – that’s precisely my point. I’m saying Lib Dems need to recognise that their cherished policy of raising the personal allowance – if it is to be raised by a further £3000 in real terms, which is what would be needed to get to full-time minimum wage earnings – cannot be financed simply by ‘the rich’. There aren’t enough of them. Instead it will largely have to be financed, in one way or another, by raising other taxes or cutting spending on many of the same people.

  In other words the policy should be seen as a supply-side tax reform measure rather than a simple act of redistribution. Implicitly it seeks to return to a time when a good chunk of earnings were untaxed, but means-tested benefits were less extensive.

  An alternative approach (if you insist on defending the current welfare edifice in toto, on the bizarre logic that anything created by Gordon Brown but not existing before his period as Chancellor is inviolate) would be to pay for the higher personal allowance by a substantial rise in the basic rate of income tax. This could have the effect of limiting the benefit of the higher PA to those in the low-to-middle income deciles while substantially raising taxes on those in the upper-middle. However it would be a strange policy for the Lib Dems to advocate having as recently as 2008 argued for a 4p CUT in the basic rate!

  Also, it’s worth noting one point about the distributional effect of the PA increase. It is a function of household type as much as anything. The reason the graphs show it helps most those in the upper-middle of the income range (say deciles 6 to 8) is because it helps dual earner households twice as much, and these households tend to be better off than the average (which obviously takes into account many households where no one works, many where one partner works, others where one works full-time and the other part-time, etc). They may still be pat of the ‘squeezed middle’ in that both partners have to work full-time in order to make ends meet.

  This policy also needs to be seen in the context of Osborne’s policy of reducing the higher-rate threshold so that a much larger slice of the working population will be paying 40p tax by the end of this parliament. As the IFS has noted, this is quite a major development that stated under Labour and which the coalition has accelerated. For middle managers, a large swathe of public sector workers and anyone earning slightly above average salary in London, 40p is becoming the default marginal tax rate (not including NI of course). So I hardly think this constitutes low direct taxation of the middle and upper middle classes!

  In any case, extrapolating precise distributional consequences for household income from particular tax changes (such as the higher personal allowance) can be tricky because – unlike the benefit and tax credit systems – the tax system operates on an individual level and not the household level, and has done since Nigel Lawson introduced independent taxation of men and women.

  Clearly from the standpoint of an individual earner or taxpayer, the person who benefits most as a proportion of income from a higher tax allowance is someone earning just above the new here’s hold, ie £10k. This would not strike most people as directing tax cuts to the affluent! Instead I would simply describe the PA policy as a broad-based tax cut which benefits the majority of the working population to varying degrees based on household type and total household income.

  At the same time, at the bottom of the earnings scale it reduces the marginal tax rate by 20p – of course the benefit withdrawal tapers necessitated by the be of intersecting means-tested benefits still create horrible disincentives, but at least the tax system is not aggravating the problem.

• Alex Sabine 15th Dec '12 - 1:33pm

  Sorry about the typos – penultimate para should read ‘…is someone earning just above the new threshold’ and in the last para ‘…necessitated by the web of intersecting means-tested benefits’.

• Chris 15th Dec '12 - 1:42pm

  “Clearly from the standpoint of an individual earner or taxpayer, the person who benefits most as a proportion of income from a higher tax allowance is someone earning just above the new here’s hold, ie £10k. This would not strike most people as directing tax cuts to the affluent!”

  Of course the effect of raising the allowance in isolation – at least if you confined your consideration to those who paid income tax – would be (mildly) progressive. But equally, the tax cuts are indisputably directed to the affluent as well as those on lower-than-average incomes.

  But equally obviously, this policy isn’t being pursued in isolation. When combined with real-terms cuts in benefits, the net effect is to penalise those on below-average incomes, while leaving the majority of those on above-average incomes better off.

  What I’m still not sure about, despite your lengthy comments above, is whether you think that net effect – penalising those on below-average incomes, while benefiting most of those on above-average incomes – is a good thing – whether it’s something the government should be doing. I think it’s a very bad thing – something the government should not be doing.

• Alex Sabine 16th Dec '12 - 2:38am

  Chris:

  – The British government is running a huge structural deficit. You might disagree with the coalition’s strategy for tackling it; you might think the pace of fiscal tightening is too fast given weak domestic and global demand, or alternatively that it is too complacent in attempting only very mild cuts in current expenditure after a decade of exceptionally large increases. But no one seriously disputes the fact that there is a large hole in the public finances that was allowed to emerge during the boom years and exploded during the financial crisis, and which – sooner or later – will have to be filled.

  – It therefore follows that the structural deficit has to be eliminated over a multi-year period (some 8 years under the latest version of Osborne’s plan). In order to achieve this the government either has to increase its revenue or cut its expenditure, or (more likely) a combination of both.

  Note that increases in revenue have not in the past always been achieved by raising tax rates, and raising some taxes (corporation tax, capital gains tax, petrol duty, income tax above a certain level) will eventually yield not only diminishing returns but an actual decline in overall revenue to the Exchequer. Rates need to be set intelligently and where possible it is better to widen the tax base by reducing exemptions and deductions rather than raising rates.

  Nonetheless we can pretty sure that adding 3p or so to broad-based taxes like VAT or the basic rate of income tax (basic rate taxpayers on the whole not being as mobile or having as much discretion over how to take their income as top earners) will bring in a good slug of revenue.

  The balance between tax rises and spending cuts is both a political choice – reflecting views about the appropriate size of the state, and the limits to the public’s willingness to pay taxes – and an economic judgement. On the first point, the endpoint of the Osborne plan is to have public spending at about 40pc of GDP, slightly above the amount the British government has typically been able to raise in tax revenue over the past 30 years. So hardly a revolutionary small-state agenda there. The unusual thing is not what he is aiming for but where we are now, with a state sector accounting for just about half of national income.

  According to the IMF, the balance of international evidence is that tax rises and cuts to capital investment are more harmful to prosperity than cuts in day-to-day government spending and transfer payments, and deliver less of a sustained improvement in the underlying fiscal position.

  Before the election Labour was proposing that about 70pc of the adjustment should come from spending cuts (although they have subsequently opposed nearly every specific measure the coalition has taken), while the Osborne plan proposes an eventual 80pc contribution from cuts by the end of this Parliament.

  Thus far, however, the balance has been skewed much more towards tax rises. The government has also largely followed Labour’s plans for a sharp cut in capital investment, and has not sought any significant reduction in overall current spending. Personally I don’t think this emphasis on front-loaded tax rises and investment cuts and back-loaded current spending cuts has been ideal, but politically it was expedient. Over the next few years, however, the plan is to abate the cuts in capital spending and start to trim current budgets.

  – The government also decided to ring fence one very large area of spending, the NHS budget, and to increase the generosity of the state pension (while clawing the money back in future years through raising the eligibility age). It also decided to increase the relatively small DfID budget exceptionally rapidly in order to meet the overseas aid spending target. These choices have necessitated bigger cuts in other budgets, including the welfare budget.

  – Clearly I never suggested that the policy of raising the personal allowance was being pursued in isolation. I simply said it seems to be the main tax reform priority of the coalition, reflecting the strong Lib Dem emphasis on this policy and it’s popularity with most Tories (many of whom wished it was their policy in the first place).

  The government has chosen this measure as a way of sweetening the austerity that it ineluctably has to mete out as a result of the appalling fiscal inheritance, even though the policy in isolation makes the fiscal hole bigger not smaller. This suggests it sees an inherent virtue in exempting the lowest earners from paying income tax, as distinct from simply recycling money to them via cash benefits. In the case of the Lib Dems it also reflects an increasing trend in recent years (pretty much since Vince Cable became the party’s Treasury spokesman) to favour redistribution via the tax system rather than high state spending. Clearly you disagree with this trend for reasons I appreciate.

  – Finally, on your point about the distributional consequences of austerity, I’m sorry but I really do think the context (all the stuff I’ve explained above) matters. Of course it is the case that if you reduce state spending, the recipients of that spending are going to lose out. I cannot see how it can be otherwise. You clearly place the blame for that squarely at the current government’s door. I think this blithely overlooks the fact that the largesse that Gordon Brown indulged in was never properly funded to begin with, and that much of the welfare spending entrenched dependency rather than spreading opportunity.

  Equally obviously, tax rises are borne by those who pay taxes, and raising the personal allowance only benefits those who are paying income tax to start with. I agree that this policy benefits the affluent as well as those on lower-than-average incomes, but because it delivers a uniform cash gain per taxpayer, the percentage gain is highest further down the income scale (just above the new threshold).

  For example, next April the PA will rise from £8105 to £9440, a rise of £1335. This will mean that everyone earning above £9440 will keep an extra £267 per year of their income (unless their income is high enough that the PA is withdrawn). Clearly this will be worth more to a taxpayer earning £10k than someone earning £50k. To someone earning £10k the rise in net income is 2.67pc; to someone on £100k it is worth a paltry 0.267pc.

  On your point about real-terms cuts to benefits, you overlook the fact that benefits have risen twice as fast as wages for several years now, which the public does not regard as fair and which obviously blunts work incentives. The new policy will not fully reverse this trend, but simply bring benefit increases into line with the public sector pay policy and continuing real-terms pay cuts in the private sector.

  I would prefer the government and Bank of England do all they can to keep down the cost of living and thus help maintain real disposable income for everyone that way, rather than pursue a lopsided policy of continuing to improve the relative position of benefit recipients (whether in-work or out-of-work) compared to those in work but not receiving benefits. This means avoiding piling on further indirect tax rises like petrol duty hikes, having a more coherent energy policy and getting on with planning reform to release more land for residential development and exert some downward pressure on prices and rents.

• Alex Sabine 16th Dec '12 - 2:58am

  One more thing: While reining-in the welfare budget is obviously going to affect the lower half of the income distribution more than the top half, the coalition has not been afraid to curb the benefits of the better-off, notably through the child benefit changes which will contribute significantly to the overall welfare savings.

  On the other hand, it has (wrongly in my view) decided to maintain all the perks enjoyed by affluent pensioners such as the winter fuel payment, free bus pass, prescriptions, TV licence etc. Scaling some of these back wouldn’t have saved an awful lot, but would have helped to make the austerity plan as a whole fairer inter-generationally.

• Chris 16th Dec '12 - 9:03am

  Alex

  Thanks. If you’re not too busy, could you just confirm for me some time that that was a ‘Yes’?

• Alex Sabine 16th Dec '12 - 1:49pm

  It’s a ‘yes, but…’

  I think it is a fantasy to imagine you can precisely calibrate the distributional outcome of a multi-faceted austerity package lasting many years. Rather like the naive idea that the government can engineer sustainable growth and create jobs by pulling a few levers in Whitehall.

  Unless you rely on direct tax increases to a degree that would be politically suicidal and economically unwise, you cannot avoid significant real-terms spending cuts. A component of these will be welfare savings. Not many of these can come from the well-off because they don’t receive many benefits. To the extent that they do, they should lose them.

  The spending cuts affecting public services are hitting the middle classes as well as the less well-off. They are gaining from the higher personal allowance but losing most (proportionately) from the NI and indirect tax rises. Those in the £50k plus bracket are also paying a higher income tax rate at the margin (40pc rather than 20pc) and losing their child benefit.

  The rich are less affected by the spending cuts but more affected by the tax rises, including the scaling back of tax reliefs and tax expenditures. So they are paying 45p income tax rather than the 40p that prevailed throughout the preceding 20 years, higher capital gains tax, have much less generous tax relief on their pension contributions, higher stamp duty on property sales etc. The IFS and others always stress that it is difficult to quantify all this, since the magnitude of the changes will depend on how much people were previously saving, selling shares or property etc – but it is clear that the top 1pc or 5pc are paying a lot more and are the biggest losers in the austerity package not only in cash terms (obviously) but as a proportion of their incomes.

  I would argue that greater efforts have been made in the UK to make austerity as broadly equitable as possible than in most other European countries, which have relied heavily on swingeing indirect tax hikes and across the board cash-terms public sector pay and benefit cuts.

  But ultimately the idea of a perfectly fair distribution to a fiscal adjustment is a mirage. It is also not the only criterion for sensible policy. This is not an ideological point – all economists accept there are trade-offs between efficiency and equity, and if you pursue superficially ‘fair’ but economically illiterate policies (like high marginal tax rates on mobile income and capital, or the wealth tax Clegg floated and then dropped almost as quickly) you will end up with lower trend GDP and more austerity for the general public (who aren’t highly mobile) in the long run.

• Alex Sabine 16th Dec '12 - 2:04pm

  Equally, we quite rightly don’t always prioritise efficiency. For example it is textbook economic theory that the most economically efficient taxes are lump-sum taxes (or poll taxes), since they create no disincentives to production. But because they are distributionally unfair, we sacrifice some efficiency and (by and large) prefer proportional or progressive taxes.

  Economics exists to help us make these trade-offs by highlighting the costs and benefits of different courses of action; but ultimately it can only guide us because non-economic considerations will obviously come into play.

  But this idea that ‘fairness’ can just be invoked as what my philosophy lecturer used to call a ‘hooray word’ – a trump card that makes all further argument unnecessary – strikes me as absurdly puerile. If only the world was that simple, we wouldn’t need to bother about all these difficult choices and trade-offs and we would simply consult the Fairness Textbook and it would tell us what do (and naturally, we’d all agree on what fairness was…)

• Paul K 22nd Dec '12 - 5:47pm

  Like others, I understood the question about whether I supported a 1% increase in benefits as implying that the alternative was no increase at all. So the results are not shameful as some have said but simply meaningless.