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.