As the IFS analysis points out, the government's budget impact assessments completely missed out £4.1 billion of the £11 billion cuts to welfare budgets, including the significant changes to Housing Benefit. Claims of a 'progressive' budget have been based on ignoring a large proportion of the policies within it. The coalition's defense of this claim continues to be based on the idea that cutting the deficit is progressive in and of itself, even if the effect of those cuts falls disproportionately on the poorest. I for one would query whether this is what 'progressive' actually means.
What particularly struck me in the IFS report is the contrast between pre-announced and budget policies. According to the IFS analysis, the coalition policies announced before the budget were geuinely progressive, taking most from the richest. These polices were basically tax-based; raising the income tax threshold, changes to national insurance, etc.
Compare that to the policies announced within the budget, including significant cuts to welfare budgets and an increase in the biggest regressive tax: VAT.
Look at that reversal. The implication is depressing but not surprising - all the nice policies were touted during the election and when the coalition was formed. Once the government was entrenched, they laid into the poor.
But is the effect regressive when all of the policies are taken into account - do they balance out?
In a manner of speaking they do. However, if you aren't a pensioner and don't have children, yes, the total effect of coalition tax and benefit policies is regressive. The largest proportional impact will fall on the poorest of this group. For families with children, the greatest impacts are shared between the richest and poorest. Pensioners at all income levels are effected relatively equally, as most of the changes pass them by.
Take a look at more detail of the impacts by household type.
The greatest negative impacts will fall on households reliant on benefits. This is consistent with the government's fuzzily-articulated aim to get people off benefits and into work. However the simplistic 'take away benefits and they'll work' approach is based on any number of fallacies, for instance that work is available, that claimants have the suitable skills for work that is available, and that it's appropriate for everyone to work. Why should a single parent work full-time? They'll just have to employ someone to care for their child(ren), which seems like a waste of money and time. Plus of course there are many with disabilities or illnesses that prevent them working.
You will note that the greatest loss of proportional income falls on households with no earners and children. I'd emphasise the word proportional; such households aren't going to have much of an income to start with. Losing 7% of it will be significant, not least in its effect on the children. It's ironic that a government claiming to be pro-family are in fact penalising people for breeding through the tax and welfare systems.
No-one gains from this budget, but to lose out least you'll need to be in a childless household of working age in the upper half of the income distribution. Which I am lucky enough to be, for the moment. (In case you're wondering where in the income distribution you are, try this tool.)
The IFS analysis is very useful, but what's more alarming is that it only models tax and benefit policies. This is reasonable, as modelling the effects of wider cuts to departmental budgets is nigh-impossible. It's important not to forget, though, that departmental budget cuts will also have a disproportionate impact on poorer households. Many don't have the option to 'go private' when public services reduce or disappear.
The 25% cuts apply to much that we take completely for granted: the police, fire service, environmental health, justice system, scientific research, flood defense, road maintenance, and public parks & nature reserves, for example. These are the kind of things people assume will be there when needed. That won't necessarily be the case.
Friday 27 August 2010
Regression
Recently the Institute for Fiscal Studies has confirmed the intuitively obvious: the 2010 budget will be regressive. In other words, it will have a stronger negative impact on the poorer inhabitants of the UK.
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Reading the report in full was interesting. The first assumption is that the decrease in housing benefit won't result in a decrease in rent (either directly or by moving) - depending on to what extent that happens that moves the loss from the poorest households (who rent houses) to the richest (who rent out houses).
ReplyDeleteIt ignores the effect of the VAT rise triggering a rise in inflation and consequently an uprating of benefits in line with it (naively you'd guess that the VAT rise would boost inflation from 2% to 4ish%, resulting in a 2% rise in income for the poorest but no correponding rise for the rich).
It also averages things out, for disability allowance it's expected that 25% of people will cease to be eligible. This is a massive drop for those 25% (but justified by the coalition as people who shouldn't have been claiming that much in the first place) but leaves the rest unaffected.
Most of the effect on the benefits is based on the difference between RPI and CPI over the next five years - sadly they don't publish the RPI and CPI rates they used in the analysis.
They also assume that the NI cut will be passed on in the form of lower wages which clearly isn't true in the case of the public sector.
The government's analysis is clearly too simple and over states the progressive case. I think the IFS's analysis is also too simple and probably over states the regressive case, but the amount it does so can't be estimated which is why they've ignored it.