The IFS spreadsheet doesn't tell us what policy choices are best for the poor

August 25, 2010 12:31 PM

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.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.

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