Assessments of the Budget's fairness have ignored the impact of spending cuts. Including tax and spend, the poorest households are hit the hardest.
Our guest writers are Tim Horton (Fabian Society) and Howard Reed (Landman Economics)
Today we have published a briefing paper for the TUC and UNISON setting out the true impact on households of last week’s Budget.
To date, assessments of the Budget’s impact, and how fair or unfair it might be, have centred on the impact of the tax and benefit changes announced, while ignoring the impact of spending cuts. But using a new model that we have developed for analysing how public spending is allocated across households, we can look at the distributional impact of the spending cuts announced in the budget.
Excluding benefit cuts (and reductions in debt interest payments), the budget announced a further £34 billion of spending cuts by 2012-13. We therefore model the impact of these £34 billion cuts across all areas of non-benefit spending, excluding health and international development (which the Government has said will be protected from cuts). As can be seen from the blue bars in the graph below, the impact of these cuts will be deeply regressive. All households are hit considerably, but the poorest households are hit the hardest.
Assuming these cuts fall evenly across non-ringfenced departments, the average annual cut in public spending on the poorest tenth of households is £1,344, equivalent to 20.5 per cent of their household income, whereas the average annual cut in public spending on the richest tenth of households is £1,135, equivalent to just 1.6 per cent of their household income.
One important reason for this regressive impact is that a lot of public spending is ‘pro-poor’, with poorer households receiving a greater value of services to meet their extra welfare needs. Because of this, cuts in public spending on major areas of welfare (such as education or social housing) will tend to hit the poorest hardest. Another important reason for this regressive impact is that, for a given value of services lost, the impact will be larger relative to household income for poorer households than for richer households.
When the impact of these spending cuts is combined with the Government’s own analysis of the impact of the budget’s tax and benefit changes for 2012-13, we can generate a picture of the budget’s overall impact – shown by the green line in the graph above.
The result is, once again, deeply regressive, with the magnitude of the impact of spending cuts on households dwarfing the impact of the tax and benefit changes. Overall, the combined average annual loss in income and services for the poorest tenth of households is £1,514, equivalent to 21.7 per cent of their household income. For the richest tenth of households, the annual loss in income and services is £2,685, equivalent to just 3.6 per cent of their household income.
These calculations assume that the cuts fall evenly and proportionately across non-ringfenced departments – because until the autumn spending review we have no basis for allocating different levels of cuts to different departments. So these results should be considered a ‘baseline’ scenario, which we will update this autumn when we have a more detailed picture of where the cuts will fall.
The Government had previously claimed that the impact of the budget is “fair” and “progressive” on the basis of the distributional impact of the budget’s tax and benefit changes alone – in particular, making a great play of one graph in the Budget report (Chart A2, p.67), showing the impact of tax and benefit changes by 2012-13 (these are the red bars in the graph above).
But this completely ignores the impact of cuts in public spending on households. What really counts for fairness is not how families are affected by tax and benefit changes in isolation, but how they are affected by the whole package – spending cuts included. And, as TUC General Secretary Brendan Barber, commenting on our analysis in today’s Observer, puts it, when you consider the impact of spending cuts too, it “destroys” any claim that the budget was progressive.
While it is likely there would have been significant spending cuts whoever had been in government, this analysis of the impact of spending cuts raises real questions about the coalition government’s decision to rely much more heavily on spending cuts for reducing the deficit than other parties had planned to. Far from being ‘unavoidable’, this was a discretionary decision – and one that has clearly hit low-income households much harder than they otherwise would have been.
You can download our briefing paper from the TUC website here. More details of our model for analysing the distribution of public spending, which has been developed for a project for the TUC and UNISON, will be published later in the summer.
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