What’s the damage?

We have been warned that next week’s Emergency Budget could bring pain for years to come. Cameron’s coalition has promised that such pain is inevitable but that the medicine will be administered fairly. But there remain many questions about what such ‘fairness’ means in practice.

Matthew Whittaker is a senior economist at the Resolution Foundation

We have been warned that next week’s ’emergency’ Budget could bring ‘every single person’ pain for years to come. Cameron’s coalition has promised that such pain is inevitable but that the medicine will be administered fairly. But there remain many questions about what such ‘fairness’ means in practice. In the three recessions of the 1970s, 1980s and 1990s, it was those on low and moderate incomes, rather than the very poorest, who suffered most.

From job security to progression, from housing matters to financial health, it is already abundantly clear that the ‘squeezed middle’ – the UK’s 7.2 million low earning households – have been hit hardest by the latest economic downturn.

Therefore these promises of equity must translate into a plan that aims for fairness across the entire income distribution, rather than focusing on the gap between the richest and poorest alone.

Forthcoming work from Tim Horton and Howard Reed shows how cuts hurt those on low incomes far more than higher earners, so the deficit reduction plan must exhaust every single potential progressive taxation measure before turning to spending.

Wealth taxes should be top of this list, but recent spats about bringing Capital Gains Tax into line with income tax are a stark reminder that this argument is far from won. Yet if Cameron and Clegg want fair, they cannot credibly choose to raise an additional £3 billion a year from limiting tax credits, rather than removing the existing distortion in the system when it comes to CGT.

However given the daunting size of the UK deficit, there is no point pretending that savage cuts are optional. They are not. But government must reduce expenditure intelligently: for people living on low and moderate incomes there is no such thing as a ‘good’ cut, only a ‘least worst’ cut. In this context, taxing universal benefits is not as regressive as cutting the value of those benefits or tightening eligibility rules.

The report we publish today highlights the potential impact on low earning households of a wide range of tax and spending options. What must not be forgotten amid next week’s debates is just how crucial it will be to retain safety nets for the working poor who have been most exposed to the vagaries of recent economic circumstances. Scrapping Child Trust Funds (£320 million) and cutting house building programmes (£150 million) will not make much of a dent in the structural deficit. But it will certainly undermine the already-fragile economic independence of low earners.

If the government wants to be remembered for a legacy of enabling rather than constraining social mobility, ladders as well as safety nets are needed. While there is certainly scope for significant reform here, cutting spending on skills and training budgets would be a very short-sighted measure. For low earners, it risks kicking away those ladders that enable them to progress and get beyond low-paid and unfulfilling work. And for the UK economy, such cuts put our future growth potential at risk, with obvious consequences.

The best way of protecting low earners is to achieve a return to sustainable growth and a stable macro-economic environment. There remain many unknowns about the impact of cutting too hard and too fast and the government must tread with great care next week. But it must also ensure that any measures taken to cut the deficit do not hit low earning households disproportionately. Everyone must bear their share of the burden. Equally importantly, it must not only be the rich who benefit from a more healthy economy as the UK returns to growth.

What’s the damage? – assessing the impact of fiscal consolidation proposals on low earners is published today and is available at www.resolutionfoundation.org

One Response to “What’s the damage?”

  1. ResolutionFoundation

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