Published on 25 Aug 2010

Budget: time to admit poorest hit hardest?

In political terms, the word “progressive” is the apotheosis of meaningless waffle, and it would be no loss if politicians were banned from using it. In economic and statistical terms, however, it has a precise meaning. It refers to the notion that a set of tax and benefit reforms gains the poorest more (or loses them less) than it does the richest.

Whichever way you skin it, in these strict economic terms, the new announcements made by George Osborne on 22 June, are clearly regressive.

They are regressive in proportional terms, because the poor lose a greater percentage of their income. Remarkably they are also regressive in cash terms. Households with post-tax income of less than £19,000 will lose £466.20 on average. Households with post-tax income above £30,000 will lose £437.20 on average.

If you accept that allocating VAT spend is a bit controversial and consider only the direct taxes and benefit changes, almost unbelievably, the poor lose money, and most of the rich actually gain, a type of reverse Robin Hood.

Even if you include all of the already planned measures from Mr Darling’s March budget, which was the chancellor’s argument to me last week (note: table 2.1 the seminal ‘budget scorecard’ of the actual Budget red book does not include previously announced measures) then how about this killer fact…Households earning under £9,891 per year, the poorest tenth, will lose 4.85% of their income. Households earning above £84,410 per year, the richest tenth, will lose 4.16% of their income as part of the austerity plan.

It was, apparently, Nick Clegg, who was obsessed with having some sort of tabular evidence, a piece of paper no less, in the budget, that he could use to show the Lib Dem masses that the budget was fair and “progressive”.

This has created something of a rod for the coalition’s back. In many ways it should not be surprising that the cuts agenda hits the poor more than the rich. In the US, for example, this would be standard practice, and probably uncontroversial.

Perhaps the most striking thing about the government response to the Institute for Fiscal Studies (IFS) report is that they are so keen to bat down suggestions that the poor will face the biggest initial hit from austerity. It is a mathematical consequence of cuts to benefits, a landmark coalition policy. They could, and perhaps should, openly admit that the budget was regressive on almost every fair measure, and then defend it politically as the consequence of dealing with a bloated benefits bill.

When I caught up with Nick Clegg today he didn’t seem to want to talk details, nor engage with the notion that the budget was regressive. He said that the IFS report was partial and selective.

He told me: “The IFS analysis was about benefits, we want to get people off benefits. That is a plan for real fairness, that is progressive, and I think that is a richer understanding of what fairness is about than a single snapshot that simply doesn’t provide the full picture of what we’re trying to do over the coming months and years.”

There is a whiff of Brownian denial about all of this. It’s the same sort of straight denial that we got off the former prime minister after, say, the 10p tax debacle, or the calls for some act of contrition about his responsibility for the credit boom.

Also questioning the motives of the IFS is interesting. They have only done exactly what the coalition treasury did in their first budget. Same method, with more data on benefits gleaned from the DWP.

As James Browne, of the IFS told me: “I’m surprised by the criticism from the government. We’re essentially doing exactly the same as they did in the annexe of the budget, but including more measures, not less.”

It’s also worth noting that the likes of Nick Clegg repeatedly cited the IFS analysis in the hallowed leadership debates. More concerning for the DPM might be the work the IFS is doing on precisely why it is that middle high earners are the relative winners so far from the coalition. And it all boils down to the increase in the income tax threshold – ie precisely the policy that was brought to the coalition table by the Lib Dems to introduce “fairness” into the tax system.

To add to the comic irony of this, that was the critique of this very policy before the election, by yes the IFS, and promulgated in an analysis that I have, by the now chancellor’s own staff in the Conservative party.

13 reader comments

  1. John Boweser says:

    Yes indeed. It remind ALL of us of the Poll Tax.

  2. Lorna says:

    Does one need to be a sociologist to understand the reality to hammering the poor in the way described?

    Quite simply, in making the poor poorer we create more crime. And in treating people with absolute contempt we generate more social unrest and social malaise. In other words, the coalition is constructing a fractured and dangerous society.

    Reader, also note that a great many of our poor ARE working for their poverty. Our society is about to become even more divided.

    And people are going to ask why our troops are dying abroad. What kind of society will they be coming home to? What will our brave ex-servicemen be treated like? WHY fight and die for a state like ours, people will ask.

  3. TGR Worzel says:

    An easy solution would be to raise the national minimum wage to £7.50 or £8 per hour. That would mitigate the effects on the poorest mentioned here.

    And as those on the national min wage are perhaps most likely to spend their income, it should help tax revenue too.

    Not to mention taking people off benefits and tax credits…

  4. john h says:

    Seems to me that everything that Cameron, Clegg and co are doing(We did as a country VOTE for them remember??).
    Why??
    We had become sick of the lies, the theft of our pensions, the control(remember id cards and all those databases?
    We got a new party.
    They began a job that should never have been needed to happen.
    What have we got from ex cheerleaders of Brown and Blair??
    Constant repetition that the medicine isn`t necessary, constant coverage of the failed labour has beens telling everyone how bad the coalition is!
    Wake up! The blairites and brownites got us into this mess. Maybe the new lot will fail, maybe they will succeed.
    Remember the Spin Machine of NL and think next time you see media reporting criticism of the Coalition.
    Having been through a lot of recessions, the poor sufferd those times only in proportion.
    That will happen now.
    As for the comments on the idle poor, who do you think did all the jobs during the boom?
    Just because NL wants Brits to be looked on as loafers vis a vis immigrants, don`t always believe politicians. They MAY be lying!! And tv reports what is said, assuming it to be true.
    remember Mandleson and Cameron, who twisted truth for labour??

    1. N Stevens says:

      Anyone with half a brain does not have to be told that it will be the poorest that will be hardest hit. Cam.& Clegg want people of benefits & into jobs, well, everyone wants that but where are the jobs coming from. Also the deficit was caused because we had to bale out the bankers and if Brown had not baled them out think of the real mess we would be in. No-one seems to think about what would have happened if Brown had not stepped in. Bankers anre doing very well now so maybe they should do their bit to reduce the deficit and not the less well of

    2. Andrew Dundas says:

      Since the coalition did not declare their all-out war on public services before the May election, we can hardly be blamed for voting for that.
      Increasing VAT, cutting education and putting up rail fares to pay for even lower Corporation Taxes may well improve company share values, but neither Conservatives nor Lib-Dems had either obtained their own parties’ mandates nor the consent of British electors.
      So far from being ‘worse than expected’, it now turns out that British Public deficit this year and next will be many £billions less than forecast in March. Because the Previous government stimuli measures are working almost as well as the Bank forecast.
      So no excuses there then.

  5. DaveW says:

    A big problem is that few, including CH 4 journalists appear to know the difference between the (National) debt and the deficit, nor indeed do they appear to understand the root cause of each. Once they understand these they might be in a better position to comment on the coalitions need for an austere budget (which is only addressing the deficit) and that this is bound to have an impact on all, and of course, if they are trying to make it less attractive to be on benefit and more attractive to work it is bound to impact those on benefits

  6. Philip says:

    It is worrying that so early into the Coalition that Ministers from both partners appear to have dumped their stated approach of openness and transparency & retreated into spin. Don’t they realise that once you’ve missed golden opportunities to tell the truth – about your own decisions and policies, not just about your predecessors (which is easy) – your credibility is irrecoverable?

  7. Groc says:

    I always get annoyed when I hear people talk of the mess Blair/Brown got the economy into -because it blatantly flies in the face of the facts that New Labour were only continuing down the path set out by Thatcher and Major before them, of privatisation, and various part-state part-privation schemes- the ever increasing deregulation of the banks & financial sector, the encouragement of unfettered globalisation, allowing uncontrolled immigration of European workers and introducing pointless ‘competition’ into the public sector (hospital against hospital, school against school etc.) We’re now reaping the results of all these misguided ideas – and yet the only way forward seems to make the poorest suffer even more deprivations – so we can eventually, hopefully crawl ourselves back up onto the path that caused so much trouble in the first place…

    We’re suffering from a severe lack of political vision and ideas in this country (actually there only seems to ever be one idea – ‘what are the Americans doing? Oh –let’s do that then.’)

  8. Andrew Dundas says:

    We’ve heard this all before.
    The Poll Tax was rated as ‘fair’ because each adult ‘paid the same’. Which meant that poor families had to pay a much larger share of their income in Poll Tax than rich. That is Tory definition of ‘fair’ – rich kids like Clegg & Cameron pay the same as the poor!
    Clegg has now published his very own fallacy of composition (see FT 26th). The Lib-Dems spokesman claims that if one family moves into unemployment it’s better than paying that family JSA etc. He doesn’t understand that five million families moving through U/E this year will each be hit hard by rising VAT and cut benefits. Moving just one family doesn’t salve the increased poverty Lib-Dems are planning to implement.
    Moreover, Clegg’s specious argument that lower Corporation Tax will somehow trickle down to poorer folk is an old Tory canard. George W Bush also used it to justify tax cuts that he said would create jobs but ‘trickle down’ didn’t work for him either.
    When I was a lad, many Tory Constituency parties were still labelled ‘National Liberal & Tory Party’ in commemoration of the 1920s split in the Liberals.
    History does repeat itself. Goodbye then Liberals, you…

  9. john says:

    I agree with your comments, if politics was about telling the truth we wouldnt be writting on here. But can I make a couple of observations firstly by definition if we have to cut the deficit and reign in spending then the richest 10th will not be affected simply because they dont actually receive any benefit in the first place appart from child benefit. I think on a broader point the private sector who ultimately pays for everything has to be encouraged and the public sector asked/told salary reductions are a must as happened in other EU country have to face reality. There is a huge differential in pay in this country with other Western European countries. A doctor earns 120k a Head Teacher 110k a Dept Head 80k other countries are paying a third to a half of this. We simply cannot afford this no ammount of synnergies and quango bonfires will detract from the reality we are living beyond our means.I havent a problem with private sector paying whatever the deem necessary after all if they pay too much they can go out of business, but we have over half a million teachers, nurses and over 50 thousand doctors that cannot go out of business.

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