Category: Deficit reduction

Slipping behind: with benefit reform, keep an eye on the index

Historians generally agree that cutting back public spending is difficult in a modern democracy. Losers shout louder than winners; the most expensive programmes are generally the ones with the most interests behind them; radical cuts are more likely to provoke strong reactions. (Similar objections apply to tax rises, of course.) The current cuts are striking, not just in their sheer unprecedented scale, but in the extent to which they cut back on services on which a lot of people rely in a very visible way.

So governments have always tended to fiddle with the small print of tax and spending rules – it’s hard to twig exactly what’s going on, the consequences aren’t immediately clear and by the time the full impact is clear the deed will already be done. Freezing the basic-rate limit (or, in days gone by, the personal allowance) for income tax is a classic example. So, too, with changing the rules for calculating benefit increases.

Of course, the Government’s already played this game. Nearly £6bn of its £18bn of planned welfare savings come from changing the measure of inflation used in uprating benefits from RPI/the Rossi Index, depending on the benefit, to CPI (see p40 of the Emergency Budget). This is simply because small changes, repeated each year, add up. If you look at the chart here, the impact over a long period becomes very clear. Whether Gordon Brown specialised in stealth taxes or not, George Osborne certainly has a fondness for stealth cuts.

The exception to the rule is the Coalition’s ‘triple guarantee’ on state pensions, guaranteeing annual increases of the highest of an increase in earnings, prices or 2%. Of course, this will start undoing the work of the last Conservative Government, when it broke the link between pensions and earnings. The (clearly documented) consequence was that the basic state pension fell further and further as a share of earnings – from 20% in 1978 to under 15% by 1998; it has carried on falling ever since. That trend will now reverse over time; but note how differently a large, vocal, Conservative-inclined group is being treated from people on low incomes, with disabilities or in need of housing.

We need to spell it out: the decision to uprate benefits by CPI rather than RPI is a straightforward decision to make the very poorest people in Britain poorer. It hits people on Income Support, on Jobseeker’s Allowance, on Incapacity Benefit or ESA. As the Government are even cutting the link between Local Housing Allowance and rent levels, it will drive more and more people out of their homes: eventually, given long enough, it will make people out and out homeless. (This holds even if we ignore the effect of all the other LHA cuts.) The single biggest policy change, fiscally speaking, in the Emergency Budget and the Spending Review combined is a plain and simple cut to the incomes of Britain’s most disadvantaged inhabitants – one which will be repeated every year, until it changes.

That’s quite bad enough as it is, and it makes the Government’s claim that it’s determined “not [to] balance the books on the backs of the poor” look pretty hollow already. This September, the difference between CPI (5.2%) and RPI (5.6%) was fairly small, but the long-term effect will be dramatic. So for the Government to even consider ways of reducing the annual rise again, even for one year only, is a particularly nasty attack on the living standards of a lot of very vulnerable people. The reason inflation is high is that the cost of living is going up: a lot of that is to do with global food prices, which (as a relatively fixed cost) will bear especially hard on the poorest. When the IFS says that £1.4bn (out of £1.8bn) could be saved by averaging out six months’ worth of inflation figures, they mean that most of a badly needed boost to incomes for the very poorest people in the country could be removed.

If the Government want to argue that that’s justified, then I’d disagree, but it’s a point for debate. But they cannot then claim that they’re not “balancing the books on the backs of the poor”. As a matter of cold, hard, statistical fact – whether they go ahead with this one-off change or not – they already are.

The March for the Alternative, and why it’s OK for the marchers to want different things

Like many (probably most) of my friends in London, I spent my Saturday marching in protest against the Coalition’s planned spending cuts. Like everyone else on the march, I don’t believe that £81bn of spending cuts by 2015 and only £29bn of tax rises represents a plan in any way compatible with social justice: and I do believe that it will do terrible social damage and wreck lives.

I’d have to concede, though, that the alternatives put forward by the marchers were many and various. People miles to my political left and my right were there – from those who were much more concerned by the speed than the composition of the fiscal tightening through to those who ‘opposed every cut and fought for every job’ (except Trident, usually!). The Coalition’s response has been, in essence: ‘You have no alternative; we have a plan; we’re carrying on with the plan’.

The trouble is, their plan bears no relationship to anything the public could reasonably be said to have endorsed. Forget the fact, for the moment, that all three parties fudged and dodged a real accounting of what would have to happen in this parliament. Even on the points which did come up – should we cut over five years or over eight? – the current plan is at odds with the votes. During the campaign, the public displayed a preference for the more gradual approach. 52% of people voted for parties who (at the time) agreed. Whatever you think about the balance of taxes and cuts, this is not a mandate for shock therapy in Britain. But that is what we’re getting: the sheer depth of austerity we now face parallels the 1920s.

And a large part of the reason for this is that, in the coalition negotiations, the Liberal Democrats didn’t prioritise economic policy when they chose their sticking points. In fact, they may well have decided to reverse their policy before they even entered the room; according to Nick Clegg, at least some of them changed their minds before they went to the ballot box themselves. The result is that the basic process of discussion, of splitting the difference – of negotiation – which a hung parliament might have been expected to require has been short-circuited. Instead, we’ve got a deficit reduction plan written in outline by one party alone and occasionally coloured in slightly different tones by another. Perhaps that’s not so different from the norm in British politics: but then, a hung parliament was supposed to change all that.

The marchers wanted a range of different things, granted. A march for any other alternative, if you will. But what they were trying to start, in a way, was that very negotiating process which our Parliament so signally failed to carry through. That’s why it was a March for the Alternative: Saturday’s protesters all agree that there are alternatives, even if they don’t agree which ones should be chosen. And that’s why, rather than saying ‘what’s your alternative?’, the powers that be ought to look at the range of alternatives we do have.

If we’re looking at compromises from the Coalition, they might involve more capital spending, combined with a reduction of the structural deficit at the planned rate; they could involve a greater emphasis on taxes. I appreciate that a Conservative government is not going to give me the deficit reduction programme I actually want – but then the voters didn’t elect a pure Conservative government, even if the deficit reduction programme makes it look as if they did. It’s high time the government acknowledged this reality in its economic policy.

And by the way, they should remember that mass demonstrations don’t always have an effect on the government’s policy … but if that policy goes wrong, the demonstration has a habit of making the government look a whole lot worse later on.

Taxes, taxes, taxes

I realise very few people see it as an interesting exercise to sit down and work out how the plans for £29 billion of net tax rises break down. But if you’re going to think about better ways to close the gap between what we spend and what we raise, then it’s not a bad idea to look at what we’re doing at the moment. And in rough and ready fashion, based on the Emergency Budget* figures, the planned breakdown of net tax rises in 2014-15 is about as follows:

Tax Net revenue raised (£ billion) Tax Net revenue raised (£ billion)
VAT and IPT 13.9 Green taxes 0.7
Pension contribution relief 4.6 Stamp Duty 0.3
National Insurance 3.3 Inheritance Tax 0.3
Income tax 2.5 Other tax rises 0.2
Bank levy 2.4 Other tax cuts -0.2
Other pension tax breaks 2.1 Council Tax -0.6
Capital Gains Tax 0.9 Various business taxes -0.8
Sin taxes 0.8 Corporation Tax -1.3

Those figures conceal significant tax cuts in terms of income tax (£3.9 billion goes to raising the personal allowance by £1,000) and National Insurance (£3.7 billion spent on raising the threshold for employers’ NI to offset some of the increased costs), as well as a number of tax hikes in Corporation Tax to help pay for a headline rate cut. But in terms of where the main burden is falling, you’ll get a fair idea here.

It shouldn’t take too much to work out that any attempt to raise another £26 billion, say, is going to be very politically difficult. Labour have argued for keeping the bankers’ bonus tax (£3.5 billion or so – assuming revenues don’t fall if the tax stops being a one-off), and they’ve pointed to their National Insurance plans too (£3.7 billion more). If you were to argue for, say, 5p on the higher rate of income tax (taking a very brave example), the Treasury’s Ready Reckoner suggests you’d raise about £4.6 billion. Lowering the starting point for the 50p rate to, say, £100,000 might raise £1.3 billion (or about half that, if you raise the 40p rate to 45p – otherwise you’re double-counting). The Liberal Democrats’ famous ‘mansion tax’ was intended to raise about £1.7 billion. If, in another act of extreme bravery, you were to raise Inheritance Tax to 60%, you might net about £1.4 billion. The exact amount of money you could get from tackling avoidance may very well be substantial – but it’s difficult to bank on, and I wouldn’t envy the Chancellor who tried to rely on it as a main tool for tackling the deficit.

This clearly doesn’t, even in terms of orders of magnitude, add up to a £26 billion alternative to the Coalition’s plans. So in the end, substantially higher taxes will mean that people on moderate incomes will also end up paying more – not just the wealthy and the banks. In saying that, I’m not arguing against the idea: in almost all cases, tax rises are more progressive than cuts to services – and of course, it’s quite possible to use some revenue to compensate the poor too. It’s no accident that Scandinavian social democracies pay substantially more VAT than the UK – if you’re serious about social justice, the volume of money for benefits and services will make much more of a difference than the exact degree of redistribution managed through taxes on their own, and the tax burden has to be fairly widely spread in order to be politically accepted.

So not only would a centre-left government almost certainly end up raising VAT at some point, for instance; it would probably be right to do so, though probably not right now. It makes sense that, in an economy which needs to move towards more saving over time, we might increase taxes on consumption. The debate over how progressive/regressive VAT is has run and run, but it’s certainly more progressive than even more service cuts – and if it’s difficult enough to find £26 billion extra, try finding £40 billion instead. In the same way, further income tax/NI rises would be pretty hard to avoid. Property taxes would be politically very difficult, but probably sensible as policy. And if the centre-left want to reduce the damage done to public services, welfare benefits and public investment more generally, then we’d better start learning how to argue it’s worthwhile for all of us to pay more taxes in a good cause.

How much of this does Labour need to spell out? Some of it, at least – at least as an indication. The Conservatives didn’t give much away on their plans in 2010, but they did highlight plans to raise the retirement age faster and taper tax credits more aggressively. Not an obvious route to electoral success, in a way, but a manifesto which made no mention at all of any difficult tax/spending changes wouldn’t have been more popular: it would just have made people think they either weren’t being given the full story (even more than they already did!) or that the party in question shouldn’t be trusted with the public finances. And in reverse, the same applies to any party of the left.

* Figures weren’t provided for revenue raised by the 50p rate, the restriction of the personal allowance from £100,000 or revenue raised from Labour’s changes to ‘sin taxes’ (alcohol, tobacco etc.) – I did find a Treasury figure for 2014-15 for the first, but the other two had to be extrapolated a bit from previous Budgets. But the broad outline stands.

Deficits: paying for credibility

In a way, it’s easy to be a leftie just now. £81bn of spending cuts and only £29bn of tax rises fill most social democrats’ hearts with dread – and as the scale of what’s in store becomes clearer, the public are likely to be pretty horrified too. So unless you’re a left-wing Lib Dem, the line to take is less complicated than at any time since … well, since the last time the Tories were in power.

I think, though, that this could present a very real trap. It’s refreshing for the left to be able to rail against the enemy’s Budgets; even more refreshing when the public is quite possibly on its side. But Labour’s problem now isn’t just (or even mainly) about popularity per se; it’s about credibility. And that’s exactly where just railing won’t get them very far.

This isn’t just a case of it being unclear what share of the deficit Labour should tackle through tax rises (40%? 50%? 60%?); that’s a cause for concern, but you could argue the party needs some time to redefine itself and that Ed Miliband hasn’t even been leader for four months yet. More worryingly, though, I don’t see any real evidence of Labour engaging with what any of these options actually mean. I understand the difficulties: a party which still remembers what tax plans did to their chances in 1992 is obviously going to have its worries about talking about tax rises too much. But like it or not, Labour’s economic and fiscal record did a great deal to lose them the last election. It may very well be (mostly) unfair, but it’s also a fact of political life with which Labour needs to come to terms.

That means that, even though Labour thinks the deficit should be reduced at a more measured pace, it needs to show it has an idea how it might go about doing so eventually. Bankers’ bonuses, tax avoidance and going for growth by postponing cuts won’t cut it as an economic policy for the next two parliaments. Of course Miliband and Johnson don’t need a detailed Shadow Budget – opposition is not government and the Tories never presented one when they were out of power. But some sense of where the pain would be felt by the public themselves may be important – because it would help to provide some credibility for the Opposition. It’s worth bearing in mind that, if the UK wanted to cut the deficit at the current speed but do half of that through taxes, we would need to raise an extra £26 billion per year by 2014-15.* When the fiscal challenge is that big, ‘no pain (for almost all of you)’ is a deeply implausible message – even if it’s only implied. ‘Pain fairly shared’ sounds less appealing, but has a better chance of being believed.

The need to have alternatives in mind will get more pressing, because the arguments over the speed of deficit reduction will be overtaken by events. I think the Coalition were very wrong to pin their colours to the mast in the way that they have: but they’ve now made it critical to their political, and quite possibly market, credibility. That means that, unless the economy really does go into reverse as a result (in which case all bets are off) or the Government falls (which would have its own problems in terms of market panic and thus the required speed of the tightening), we’re stuck with this pace. By 2013, if the economy hasn’t gone into a double-dip recession (even if growth is sluggish), ‘don’t do this so fast’ may very well seem like yesterday’s news.

So there needs to be a better sense of what Labour would do, not just when it would(n’t) do it. But that also needs to be informed by a clear sense of why Labour wants to do it in a given way. When Alan Johnson talked about shifting the balance of tightening towards taxes enough to roughly halve the size of cuts to capital expenditure, we had a hint. The consistent focus on ‘who pays’ is another. These need to be more explicit. If Labour’s attack is consistently based on ‘what will a particular cut do to our ability to grow the economy?’ and ‘will this cut mean that the poorest are hit hardest?’, then you have the beginnings of a consistent approach to the deficit.

Of course, there is an obvious next question: what sort of tax rises could you go for to cut the deficit, if you’re going to argue that taxes should take more of the load?  Again, Labour doesn’t have to have a fully worked-out Shadow Budget; but it needs to understand the magnitude of the shift it might end up arguing for. But that’s for another post.

* According to the Emergency Budget, £83 billion of spending cuts and £29 billion of tax rises. The Spending Review set more money aside for capital investment, reducing the scale of cuts to £81 billion. A 50/50 split would amount to £55 billion in net tax rises and £55 billion in cuts – an extra £26 billion of taxes on top of the planned £29 billion.