Aug 2010 25

In many ways, all the attacks that the Government are enduring over whether their policies are ‘progressive’ or ‘regressive’ are their own fault.  They endorsed the ultimately superficial analysis of the Institute for Fiscal Studies (IFS) to the point of including it in the Emergency Budget report.  Now they are being hung from a gallows they erected themselves.  In reality, such a simplistic analysis of where the money is going obscures the real debate over how we can best improve the prospects of poor families.

Suppose you invented a policy, some kind of economic miracle, which doubled the incomes of the poorest ten per cent of families without the Government spending a pound.  That would reduce benefit spending.  It would also increase tax revenues from the poorest.  The same method that the IFS are using in their reports would show the effects of that policy as horribly regressive, cutting spending on the poor and shifting the fiscal scales against them.

Of course that is an extreme and artificial example.  But it shows the big problem with the IFS analysis, which essentially assumes that the fortunes of the poor add up to the amount of Government money spent on them.

That isn’t just a problem in theory.  In many British regions government spending is far too high as a share of income.  While public spending is 41 per cent of GDP in the South East, it is 56.8 per cent in the North West and a massive 64.2 per cent in the North East.  On that measure at least, parts of the country are closer to the Soviet Union than the South of England.
An economy so dominated by government spending always tends to economic stagnation which ultimately means misery for the people who live there.

Getting a grip on the situation, and creating the conditions for the North of England to become the economic powerhouse it was a century ago, requires not more money but rebalancing their economy away from a dependence on subsidies from the South.  That is essential to improving the prospects for Britain’s less fortunate, but it won’t look good on an IFS spreadsheet.

That isn’t to say that assessing the distributional impact of fiscal policies is a bad idea in itself.  Hiking VAT, for example, can hit the poor hardest and that is bad news.  It will increase poverty and benefit dependency.  But policies should ultimately be assessed on whether they improve the prospects of the poorest, ideally whether they make it easier for people to stand on their own two feet.

It also isn’t to say that the vital fiscal adjustment won’t be tough for plenty of ordinary people who didn’t cause the crisis in the public finances.  Public sector workers, for example, weren’t the ones who hiked spending to an unsustainable level, politicians did that.  But even with all their fiddled expenses there aren’t enough politicians, and they don’t have enough money, to make up the near £150 billion a year deficit.  Correcting a decade of profligacy doesn’t come for free.

But the kind of simple sums that the IFS have produced, and the implicit assumption that more money is the way to help the poor, should be the start of the debate over how best to help the poorest and avoid them suffering unduly with a fiscal adjustment, not the end.  We should judge the Government on whether, at the end of their term, poorer families can look forward to more opportunities to improve their standard of living and better chances for their children.

That means reforming welfare so that it doesn’t trap people on benefits; giving the parents of children at state schools the kind of consumer power those with the money to choose a private school have always had; building a dynamic economy that will produce new jobs and new opportunities.  There isn’t a single, neat graph which will show whether they’ve done that.  But good policy was never that simple.

Matthew was the Chief Executive of the TaxPayers' Alliance, author of Let Them Eat Carbon and editor of How to Cut Public Spending (and still win an election)

  • william

    ‘Hiking VAT can hit the poor hardest and that is bad news’.But, as part of a package which raised social security payments and the starting points for income tax and NI,increased VAT need not be bad news,but rather a simple way of rebalancing the economy away from consumption as part of the programme or deficit reduction.

  • Phil Taylor

    The IFS numbers are a con in another important respect. The major driver for the disbenefit to the poor that they point up is of course the curtailing of housing benefits. This is largely a disbenefit to landlords and not to tenants.
    Does anyone not want to see cases such as the Acton Afghan case tackled? The Acton Afghan case and thousands like it were the product of Labour’s mad Local Housing Allowance scheme. High council rents are a product of Labour’s rent equalisation scheme which entailed them encouraging councils to raise council rents above inflation to equalise them with housing association rents. Both of these moves would have generated spurious increases in income for the poor. Of course they are in reality increases to the income of landlords with tenants on housing benefit. Clamping down on housing benefit curtails landlords’ income, not tenants’.
    The IFS need to recast their figures to take out the housing benefit changes. Then we will see their argument collapse. Waiting.

  • Frances A Fox

    What gets to me is the fact that Britain has aided our banks and those abroad also helped Greece. When are these banks going to give back our money? The EU is also using ‘unfair competition’ just like the EEC used this excuse to ruin the British Steel Corporation and are using the same excuse with RBS over their Insurance companies. Yet who is helping Britain to get out of debt no one. The EU does not care a damn about Britain apart from taking millions of pounds from us. Also why are the EU using our money for their embassy expenses allowing MEPs a rise and money for their future pensions at a lower age than our retirement age. Yet getting Britain more and more into debt with the poorest people having to pay whilst the Bankers get bonus amounts etc. and the EU swan around using our money. Unfortunately, for Britain the ‘enemy within’ the three main parties are subservient to the EU and they do not have to suffer the cost of the recession.

  • Colin Runeckles

    @Frances A Fox
    “When are these banks going to give back our money?”
    Northern Rock are on a repayment programme agreed long ago. The others are where the last government took shares in the banks so it’s not a case of them ‘giving back our money’ but the government selling those shares off at some point, and all being well, making a profit from the sale.
    As to Mr Sinclair’s analysis…
    “An economy so dominated by government spending always tends to economic stagnation which ultimately means misery for the people who live there.”
    Well, a more accurate way of looking at it would be the fact that there is a smaller private sector in areas other than the south-east.
    As to the £150m deficit, you are probably aware that it has far more to do with a collapse in government receipts than reckless spending. Funny that, tax receipts going down in a recession…

  • Handsome B. Wonderful

    The policy of economic ‘rebalancing’ was tested to destruction by the Thatcher government during the 1980s.
    Rather than leading to an employment boom and economic renaissance, the removal of tens of thousands of ‘unproductive’ jobs in manufacturing and heavy industry simply condemned large swathes of the UK to economic stagnation and even greater dependency on the public purse.
    No doubt, when Osbourne’s ‘private sector jobs boom’ fails to materialise this time around, jobless Northerners will be offered another ride on Tebbits bike.

  • Running Dog

    To: Colin Runeckles
    Over 13 years of Labour, UK public spending totalled about 1 to 2 trillion more than it needed to be. And we’ve promised a further 1 to 2. That’s reckless.
    If it appeared to be balanced by receipts, that’s only because economic policy encouraged borrow-and-spend, which the government was able to tax. Obviously a recession was going to ensue, but voters believed the “prudence” and “no more boom and bust” propaganda.
    To: Handsome B. Wonderful
    Thatcher did fix the economy. Businesses that were hurting the economy were allowed to fail, allowing the rest of the economy to recover.
    It was tough medicine, but if a person can agree to have their gangrenous leg amputated they can also agree to accept post-socialist economic repairs.
    Maybe this time we can learn to do it less painfully – which I approve of – but paying people scarce money to do unproductive activies is the gangrene, not the anasthetic.

  • rm

    The IFS study was funded by the Child Poverty Action Group, which itself appears to be funded via direct grants from government bodies or by selling research and training, no doubt to other taxpayer funded bodies. Its another example of the tax payer funding lobbying of our politicians about how our taxes collected and spent.
    The Taxpayers Alliance should have highlighted this conflict of interest.

  • Steve Collins

    The sole reason why there is chronic welfare dependency in the North and a huge reliance on the public sector is the Tory policies of the 1980s.
    These policies created the welfare dependency so derided in the right-wing tabloids and by Tory fronts such as the ‘TaxPayer’s Alliance’.
    Give the vast majority of people the choice and they would want to stand on their own two feet and support their families by working – when Tory policy denies this, what else do they have?
    And Running Dog, this – “Thatcher did fix the economy. Businesses that were hurting the economy were allowed to fail, allowing the rest of the economy to recover.” – is Londoncentric claptrap.
    The economy only recovered in parts of the country. In many others it has stagnated.
    We’ve heard a lot about cuts and austerity from the Coalition – where are the plans to create jobs and a dynamic economy? They’re non-existent because they don’t have any.
    In this globalised era the private sector will simply offshore jobs to countries where people exist on $5 a day – not create them in the UK.
    We are in for a very unpleasant decade for a very many people. But obviously not for the likes of the ‘TaxPayers’ Alliance’ and their anonymous wealthy backers, natch.