Don’t forget the spending cuts

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.

http://twitter.com/leftofsaturn/status/17161912892 Fraser Fulton

RT @leftfootfwd: Don’t forget the spending cuts – the real impact of Budget http://bit.ly/90oQbi
http://twitter.com/houseoftwits/status/17161921061 House Of Twits

RT @leftfootfwd Don’t forget the spending cuts – the real impact of Budget http://bit.ly/90oQbi
http://twitter.com/drkmj/status/17162387609 DrKMJ

Dont forget the spending cuts – the real impact of Budget http://bit.ly/90oQbi via @leftfootfwd
http://www.taxresearch.org.uk/Blog/2010/06/27/dont-forget-the-spending-cuts-the-real-impact-of-budget-2010/ Tax Research UK » Don’t forget the spending cuts! The real impact of Budget 2010

[...] the authors have said on Left Foot Forward: The Government had previously claimed that the impact of the budget is “fair” and [...]
mike

Did you see that Capello to appoint Clegg as deputy
Mr. Sensible

It is good to hear from Tim Horton and Howard Read again.

In fact, I think they ought to become regular writers for LFF on this issue.

Since I’m in a generous mood (despite the England performence), I think congratulations are in order for Joh Swinson and Dr Even Harris, who became the latest Lib Dems to completely change their position over the issue of the deficit and fail to justify it.

I notice, though, that in today’s Independent that some Lib Dem rebbles are said to have held talks with Labour about voting against it:
http://www.independent.co.uk/news/uk/politics/lib-dem-rebels-in-secret-talks-with-labour-on-tactics-to-block-budget-2011741.html

This as a poll reported in the Observer suggests a backlash among lib Dem voters to the VAT increase:
http://www.guardian.co.uk/politics/2010/jun/27/lib-dems-vat-rise-anger-poll

I believe the Commons votes on it tomorrow, and any Lib dems who wish their principles to be taken seriously should vote against the budget. If the Lib Dems help this budget through, they will be seen as having sold themselves for a seat in government.
http://www.leftfootforward.org/2010/06/politics-summary-monday-june-28th/ Politics Summary: Monday, June 28th | Left Foot Forward

[...] to the 23 per cent they got at the general election. Left Foot Forward yesterday reported how the poorest were hit hardest when spending cuts were included in the assessment, and how the most deprived areas were most [...]
http://www.timworstall.com Tim Worstall

Fascinating stuff in this report.

Back running the numbers (if a £34 billion cut in spending means a £1,344 drop in services delivered to poor households then what is the value to poor households of the spending remaining?) shows us that the bottom 10% of households have a consumption value of some £26,000 a year from public services.

Add the £7,000 they get in income and….well, median household income in the UK is only £30,000 a year, isn’t it?

So the consumption value of the bottom 10% households is actually over UK median income….are you absolutely certain that’s what you want to be telling everyone? You know, while you’re arguing that there should be no cuts in the State?

We can even go further. Top 20% households have incomes of £70k or so on average. OK, assume a straight line (it isn’t, as this report insists, but it’s close enough for a blog comment) and add £26 k to their consumption basket.

We’ve now got the rich on consumption of £96k, the poor on consumption of £33k.

3:1 ratio, rich to poor in consumption.

Pretty tough to go from here to the argument that we’re grossly unequal as a country, that more redistribution must be done, eh? Especially if we think that 20:1 pay differences within an organisation are OK…..
Tim Horton

Tim – you’re right that public spending acts to equalise the distribution of resources in society (because a lot is funded through progressive taxation and a lot of spending is pro-poor). You can see this most clearly in the analyses the ONS do (‘The effects of taxes and benefits’) – see the final rows of the tables they produce – though these only look at ‘benefits in kind’ like health and education.

That is why we’re arguing that cutting public spending has real distributional consequencces.

However, I think your £26,000 figure is way out – I’m not sure how you got it – so I don’t think your argument is quite as strong.

But when we write up this research, we’ll look specifically at how much households benefit from all public spending – so watch this space…
http://www.timworstall.com Tim Worstall

£26,000 is quite easy to reach.

Total public spending is around £700 billion.

You’ve said that a £34 billion cut leads to a fall in consumption of services by £1,344.

I took the total spending post cuts (actually, £650 billion, just for ease) and made the same assumptions that you did.

If £34 billion means £1,344 spent each on the bottom 10% of households then £650 billion must mean £26,000 being spent each on that same 10% of households.

Yes, very rough and ready but I reached it by making exactly the same assumptions you did.

And as I say, wandering around saying that “Woes, woes, each poor household only gets £26,000 a year spent on it” doesn’t strike me as quite the way to engender support for no cuts in public spending.

The average response on the mythical Clapham Omnibus is more likely to be “How Much!?!?!? F**k Me!!!! Keep cutting Boyo!”
http://www.landman-economics.co.uk Howard Reed

Actually, given that support for the Liberal Democrats has slipped to 16% in the latest polls, it looks like the reaction of many people on the mythical Clapham omnibus is more like “hold on, I voted for a progressive party, not a bunch of frauds who are just there to prop up a reactionary and extreme right wing Tory government. Perhaps I’d better vote Labour this time so that this doesn’t happen again.” In other words I think this Budget has just won Labour the next election.

Our research is a very good way of showing just how important the benefits-in-kind that poorer families receive from public services are. Of course, they need disposable income as well – man shall not live by the imputed value of public services alone. Which is why looking at disposable income remains important (for example, DWP’s annual HBAI publication). But our work provides an important measure of the real value of public services to households – which has been sadly neglected in current debate.
http://janespoliticalramblings.wordpress.com/2010/06/28/coalitions-economic-policy-demand-focused-non-green-and-regressive-80s-style/ Coalition’s economic policy: demand focused, non-green and regressive ’80s style… « My Political Ramblings

[...] well as a cut on jobs, the government is intent on cutting the welfare bill – no wonder a recent report has found that when accounting for public spending cuts the budget will result in the poorest will [...]
http://www.timworstall.com Tim Worstall

“Actually, given that support for the Liberal Democrats has slipped to 16% in the latest polls, it looks like the reaction of many people on the mythical Clapham omnibus is more like “hold on, I voted for a progressive party, not a bunch of frauds who are just there to prop up a reactionary and extreme right wing Tory government. Perhaps I’d better vote Labour this time so that this doesn’t happen again.””

I hope you can manage to garble that so as to explain the increased Tory support in the opinion polls as well?
http://www.landman-economics.co.uk Howard Reed

Some increased Tory support for sure, Tim – but a bigger increase in Labour support. And in any case the govt is still in a honeymoon period where the impact of the cuts hasn’t even registered yet.

British politics is undergoing a realignment – moving from 2 progressive parties and one right-wing party (the situation since the 1980s, at least) to one progressive party and two right wing parties. I think it’s a fair bet that the party that benefits most from the Lib Dem encroachment into Conservative territory will be Labour.
http://twitter.com/thehooleys/status/17320074528 thehooleys

CUTS:- 21.7% for the Poorest 3.6% for the Rich
http://bit.ly/ami6GE
http://www.stephenwigmore.blogspot.com Stephen W

Tim Worstall is right. This is a pretty bogus statistical trick.

By your own reasoning the poor 10% are on £33,000 consumption and the richest 10% are on 72,000+21,650=£93,650. Less than a 3:1 ratio, hardly the end of the earth therefore, if each lose about £1000, especially when you factor in that the rich are losing far more from the actual tax changes. And something that makes your ridiculous 20% income cuts graph look just that. In fact, this seems to be a pretty good argument that the budget both was progressive and that britain is pretty damn equal.

Obviously both of these are not really true. The problem is though that you can’t just monetarise public service value in this manner. Things aren’t that simple in real life. This is just a publicity trick.
http://www.stephenwigmore.blogspot.com Stephen W

@Howard.

I think you’ll find the man on the clapham omnibus didn’t vote Lib Dem like 77% of the population, doesn’t use the word progressive to describe his political choices like the 95% of people in the country who don’t read the guardian and wouldn’t describe a Cameron-LibDem coalition as extremist since it is patently not.

But, why listen to me, why not listen to the words of the only labour prime minister since 1974 to actually win an election.

http://bit.ly/9qGVd6

“The British people have again elected a centrist government”

Says it all really. And if the LibDem-Cons are a centrist government, that presumably means labour are a . . .
http://www.stephenwigmore.blogspot.com Stephen W

Whoops, my mistake. Should have been only labour leader since 1974 to win an election.