Osborne’s fairness claims fall flat. Again


This is a joint post by the Fabian Society’s Sunder Katwala and Tim Horton

It was striking that George Osborne made so much again of his claim that the Comprehensive Spending Review (CSR) had met the fairness test of “progressive austerity” – so that even his spending cuts would hit the better-off harder. Back in June, his emergency budget ‘fairness’ claim unraveled in 24 hours. Are his claims to a “progressive” spending review any better? The immediate answer appears to be no.

Howard Reed and Tim Horton had previously provided the most comprehensive analysis to date of the current distribution of public spending. The report, published by the TUC, showed that, based on what we knew prior to the CSR about government commitments, proposed spending cuts seemed very likely to hit the poorest much harder. (Perhaps unsurprisingly, since public spending is ‘pro-poor’, giving more help to those on lower incomes).

Today George Osborne claimed he had avoided that consequence. Yet he has published figures and documents which again prove that he has not done so. Reed and Horton will update the analysis based on the CSR numbers. But it is possible as a first step to set out why the Treasury’s claims in the distributional annex published today do not stand up.

Firstly, on tax and benefits, his chart B.5 on page 98 again shows he had preannounced measures which (thanks to Alistair Darling’s policy proposals) hit the best off harder – but the green bars show very clearly that today’s proposals are worst for those at the bottom and better at the top, with a regressive gradient across the income distribution.

What about spending on services? How does the Treasury manage to produce a graph (chart B.3 on page 95) which purports to show the greatest hit on services to the most affluent quintiles? Through very creative presentation.

On The Treasury’s own modeling assumptions (which account for and model around 50 per cent of public spending, a lower proportion than addressed in the Fabian/TUC report), we are told that the average loss of services (‘benefits in kind’) in the top quintile is £10 a week (or £520 a year) out of services worth £5,400 for those earning on average £48,700 and the loss to the bottom quintile is £7 a week (or £364 a year) out of services worth £11,500 for those earning an average of £13,800.

If the Government wanted to turn the overall pro-poor distribution of public spending to its advantage, you might then say ‘why not draw a graph showing those changes as a proportion of the lost benefits in kind’. Which is what the distributional annex does.

Changes-in-benefits-in-kind-as-a-percentage-of-2010-11-household-consumption-of-benefits-in-kind

But this makes no sense at all for anybody asking ‘what is the distributional impact of the CSR’.

What’s wrong with the Treasury’s approach and claims? It makes little sense to expresses the impact of cuts to public services (Chart B3) as a proportion of the total amount of public services received by households (rather than as a proportion of household income).

In our view this is conceptually flawed: you cannot add the value of public services received to someone’s household income in order to produce a grand measure of their standard of living, since the public services people receive are related to their underlying needs. It doesn’t follow that someone is better off because they are ill one year and so receive more NHS services than someone who is fit.

If we want to know who is hit hardest – and who escapes most easily – in the real world we surely want to know instead what proportion of their income the lost services represent. Imagine a household has to pick up the cost of services lost out of its own pocket; what matters is how much this is relative to their household income. This will be a very real consideration to people facing, say, rises in bus or rail fares because of spending cuts reducing the public subsidy.

The Treasury annex does provide the necessary figures to express impact in this way – but somehow forgot to draw the relevant diagram. The bottom quintile earn on average £13,800 and are losing £364 of benefits in kind. The top quintile earn on average £48,700 and are losing £530 of benefits in kind. Here is what the distributional impact looks like on the basis of the Treasury’s own figures.

The impact for the top 40 per cent is relatively lighter – that on the bottom 60 per cent worse:

Changes-in-benefits-in-kind

Here are the tables used:

Table-B1-B2-CSR-2010

A further concern is that today’s analysis leaves out many more areas of public spending than seem necessary, including only half of public spending in the analysis. For example, it omits all Home Office spending (including policing) as well as other things like support for rural communities, and all broad “public goods” such as defence and environmental protection. Clearly, the government does not think that these areas do not have public value for UK citizens!

The Treasury suggestion that methodological complexity makes it most sensible to exclude the value of these public goods from consideration should be challenged. A perfectly sensible approach is to include the value of public goods on a flat-rate basis – except where data is available (as in the case of the British Crime Survey) to allocate public spending more specifically. (The Fabian/Landman research was able to allocate 70 per cent of public spending on a household distribution basis, with a flat-rate allocation of remaining spending).

This matters because excluding the public value of so much of public spending changes the outcome: it suggests the distributional impact of the spending cuts is less regressive than if these important areas were also included. The government has explained why the distributional fairness test matters.

But they will need different policies if they want one of their future claims to have met it to stand up for 24 hours.

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  • Mr. Sensible

    What a complete mess this whole thing really is.

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  • mike

    Cuts unfair and ideological

    why wont they (Coalition) say they will put back the money into the economy when it improves

  • adrian

    put what money back? 150 billion this year is borrowed. there is nor spare money. in order to avoid national bankruptcy spending has to be cut.

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  • Ian Graham Hunter

    What about the money used to bail out the banks?
    Surely if, as seems likely, the banks will be sold back to the private sector shouldn’t the receipts be used to restore some of the cuts?

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  • http://fistfulofeuros.net Charlie Whitaker

    I think you’re right to question the assumption that you can quantify totals of public services provided before and after the cuts (by quintiles) and say that people will be better off (or worse off) to the extent that they’ll continue to receive those things. As you say, those services may include provisions we think are best allocated purely on the basis of need. But I’m not sure that you can go on to assume that a related calculation is automatically OK: that is, a calculation where you sum only the services that are to be cut (by quintiles) and assume that those who would have received them will now feel obliged to pay similar amounts for substitutes. Perhaps if the cut services were all to be things like bus subsidies you could assume this. This is a consistency nit-pick; I generally agree with what you’re saying here.

  • http://www.universal-inheritance.org Dane Clouston

    “We are all in this together”. What nonsense! What makes it nonsense is the excessively unequal inheritance of wealth.

    Rupert Murdoch’s children each received £50,000,000 a few years ago, to be getting on with. Other people’s children receive nothing, ever, by way of gifted or bequeathed capital.

    “We will make sure that no one who does not work is better off than someone who does work”. What nonsense! What makes it nonsense is the excessively unequal inheritance of wealth.

    People with inherited wealth often do not have to work and are often better off not working than people who do work.

    When we talk about poverty, we should not just think of poor children, but of the poor parents of children. We should be thinking about a way of making poor young adults, whether parents or not, less poor.

    How? By tackling the nonsense of excessively unequal inheritance of wealth. By ensuring that every young UK born UK adult citizen in each new generation inherits a basic minimum of capital, a national UK or British Universal Inheritance, financed by an Inheritance Tax sensibly reformed from a 40% tax with too many vast exemptions into a 10% Capital Donor Tax (40% if given to non-UK tax payers) in tandem with and deductible from a Lifetime Unearned Capital Tax on the receipt of gifted and bequeathed capital at a progressive rate from 10% up to 40% or more on large inherited fortunes.

    Once upon a time, the Fabian Society brought out “A Capital Idea”. What happened to it? Smothered by New Labour. Shame on you!

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