A number of papers report the warning from the Association of Chief Police Officer over cuts to police numbers. The Scottish Daily Record says, “Tory chancellor George Osborne plans to axe benefits for 60,000 disabled Scots”. Wales Online reports, “Osborne under fire as he targets long-term sick”. Finally, a Telegraph headline outlines that, “Accept cuts or we’ll target pensions, David Cameron warns unions”. But these headlines are not inevitable or, in the words of George Osborne, “unavoidable“.

As the Table below from last week’s Budget shows, the Coalition announced plans to rapidly increase Labour’s plans to “halve the deficit over four years” by cutting an additional £24 billion from public spending by 2013-14 rising to £32 billion by 2014-15. This will see public spending cut by a total of £99 billion by 2015-16.

The alternatives open to George Osborne are two-fold. First, he could revert to Labour’s already eye-watering plans – favoured by the Liberal Democrats before the election – to cut a significant but smaller chunk of public spending. Although details of what would constitute these cuts have yet to be given by the Labour party, the overall reduction levels – which first appeared in the March Budget – had the support of the money markets. Indeed, if the coalition cuts cause the rises in unemployment and cuts to growth predicted by many, they may end up raising rather than reducing the deficit.

Second, he could change the ratio of tax rises to spending cuts so that they reflect the 2:1 ratio favoured by Labour or the 1:1 ratio favoured by Norman Lamont and Ken Clarke in the 1990s and by a number of countries embarking on similar deficit reductions. The Chancellor opted against this route in order to announce tax cuts for big businesses including the banks; cuts to employers’ national insurance; and for the Lib Dems’ regressive tax threshold rise.

The choice facing Osborne is not a trade-off between welfare spending and departmental budgets, it is whether to pursue a responsible deficit reduction programme or a form of ideological masochism.

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.

I am a Liberal Democrat, and have given them my vote since my first General Election in 1997. I hold no special love for New or Old Labour, though like many others I was filled with hope at the 1997 election when Tony Blair promised to usher in a new era of progressive, fair and ethical politics after nearly 20 years of soul-crushingly selfish Conservatism.

New Labour’s fall from grace – the war in Iraq, their deeply authoritarian and intolerant policies of recent years – crushed any hope that they’d be taking the lead in progressive change. I’d been very upset with the Labour changes to the benefits system in 2005 – constant retesting of those who had been tested again and again, driving people back to the dole having done everything the Government asked of them.

The Phil Woolas and ilk war on immigration was a disaster for solidarity. The right wing press war on the working class via their wedge strategy was working. Splitting working class ‘British’ and working class immigrants was knee jerk racist – and Labour fell for it hook line and sinker.

New Labour’s reliance on the city to produce taxation was a continuation of the Thatcherite service economy model which crushed manufacturing. Labour didn’t do nearly enough to create good jobs; in some regions families were trapped in poverty because they were on the third generation of unemployment due to the crippling of mining and manufacturing in the 80s.

The Liberal Democrats looked like the real progressive choice for the left. I voted Liberal Democrat for the change they promised. The rise of the tax allowance to £10,000 was a positive start, especially since they’d planned to pay for it with something that at least appeared progressive – the Mansion Tax.

This budget has made a lie of everything they appeared to stand for in the election. VAT of 20% will hit the poorest hardest. I’m more than a little bit of a fan of the Scandinavian system, where higher taxes for better services appears simple and effective. Where Sweden may have a VAT rate of 25%, at least they acknowledge it’s a regressive tax and make an allowance for it with a reduced rate of 12% on food.

I’m disabled and receive Disability Living Allowance, I have severe arthritis and suffer from Chronic Fatigue Syndrome. I had to jump through hoops, filling out form after form, and now I’m threatened with a medical test. It came as a complete surprise to me. While we’re going to have to wait to see the criteria, the change can only be there to reduce the numbers on DLA, and so I’m in danger of losing a large part of the benefits that allow me to cope with my disability.

Changing Child Allowance was always going to be tricky, removing it for middle and upper incomes might have meant it being completely abandoned for everyone in time – but a freeze? It attacks the lowest incomes and hardly touches the middle and upper income families at all.

A banking levy introduced and more than paid for by a reduction in Corporation Tax? We paid to save the banks from their own mistakes so that the entire system wouldn’t collapse, and now we’re giving them what turns out to be a tax break?

All the tax increases in this budget will affect the poorest first. It isn’t fair and it certainly isn’t progressive. CGT won’t have any real impact and there hasn’t been any increase on the top rate of income tax whatsoever. Those that can afford to pay a little more aren’t – those that can’t afford to pay are going to have to shoulder the entire burden.

This is a regressive budget – deficit reduction to appease the Tory voters and press, paid for in jobs and taxes, an attack on the on the poor and vulnerable. My father was on the picket lines in the 80’s as a Union rep, my family felt the pain of no income and the real fear of being a household without a primary wage earner. Now another era of mass redundancies has come again.

When the Liberal Democrats joined the coalition I didn’t know whether to feel disgusted because they’d joined the Tories, a party whose policies we’d fought against for so long, or whether I should feel happy because they’d mitigate the damage that the Tory party would do. Now I know that my initial feelings of disgust were correct, any mitigation has been small and completely swamped by the flood of policies attacking the poorest and most vulnerable. The gains we made in the coalition, the scrapping of the more extreme authoritarian Labour policies, were sold in exchange for this disastrous budget.

Progressive Politics is dying, and unless Charlie Kennedy and Diane Abbott can pull a very surprised rabbit from a hat, not a single party shows any inclination in making this country a fair and decent place to live.

The theory that £12 billion in “efficiency savings” could be found in 2010/11 was forcibly challenged by opponents from the moment it was proffered by George Osborne in the run-up to the election. The Conservative efficiency savings model was deemed deceptive by their opponents; conceivable only with the aid of “magic”. Tory spells seemingly forgotten or mis-uttered; cuts on frontline services, rather than efficiencies, have unsurprisingly begun to appear.

George Osborne’s £6 billion of spending cuts just three weeks ago signalled the first assault on frontline areas such as health and education. Danny Alexander’s list of cuts today included the cancellation of projects such as the North Tees and Hartlepool hospital and suspension of the £73 million Health Research Support Initiative. Moves to this effect seem hardly like “cutting waste”, as George Osborne’s pre-election mantra boldly claimed.

As well as combating general national debt, the Conservative strategy of cutting back on wasteful government spending intended to offset Labour’s increase in national insurance. Osborne had called the raise the “economics of the madhouse“.

However, if we cast our minds back to 2008 and consider the Prime Minister’s own assessment of a government “efficiency drive”, it appears that the Conservatives have had a few mental jolts of their own. Cameron cited an episode of Yes Minister, in which one such “efficiency drive” is deployed as a smokescreen for action that is ultimately more “difficult”, more painful.

“[It's] one of the oldest tricks in the book”, Cameron said at the time. Such a trick, apparently, that with the reality of government kicking in, he can’t find the efficiencies after all.

Reform’s report, ‘Budget 2010: Taking the tough choices‘, argues for an immediate fiscal retrenchment which goes further even than the Conservative party’s pre-election plans to reduce the “bulk” of the structural deficit by 2014-15. Due to a series of proposed tax cuts – including reversing the 50p rate and reducing National Insurance Contributions – over 90 per cent of the fiscal consolidation would come from spending cuts resulting in a public sector net borrowing of 0.3 per cent by 2014.

This would be equivalent to a “structural deficit” of negative 1.2 per cent – effectively a “structural surplus”. The Office of Budget Responsibility on Monday set out that under existing plans, by 2013-14, public sector net borrowing would be 5.0 per cent compared to cyclically-adjusted net borrowing (the measure of the structural deficit) of 3.5 per cent – a gap of 1.5 per cent.

In today’s FT, Martin Wolf outlines the case against the process that Reform seek to undertake:

“So how quickly should deficits be eliminated? We must recognise the danger here: cutting public spending will not automatically raise private spending. The attempted reduction in the structural deficit might lead, instead, to a rise in cyclical fiscal deficits, which would be running to stand still, or to a reduction in the private surpluses only because income fell even faster than spending. Either outcome would be grim. Yet neither can be ruled out.

“As long as output remains depressed, the fiscal support is most unlikely to be inflationary. Nor will it crowd out the private sector: it is more likely to crowd it in. The big question, then, is whether deficits can be financed. My answer is: yes. Remember that so long as the private sector runs financial surpluses it must buy claims on the public sector, unless the developed world as a whole is about to move into huge external surpluses.”

Reform’s masochistic report calls for the immediate raising of the retirement age, means-tested benefits, cuts to the NHS budget, phasing out of teaching assistants, scrapping Building Schools for the Future, lifting the cap on tuition fees, and the elimination of VAT exemptions. If the programme were implemented it would see government spending (“total managed expenditure”) fall to 38.7 per cent – lower than under any Conservative government since the 1960s (see Table B2).

“The Labour party has to pick what it thinks is the right size of the public sector. Since 1997, public spending has gone up from 36% of national income to 48%. (Before the recession, it was at 42%.) But tax revenues have always been at around 38%, and during the recession fell to around 35%. The reason we’ve got a structural deficit is because Gordon Brown won the argument for investment in public services, but never took on the argument for increasing taxes to pay for it.”

The point is perhaps best made by this graph from the Institute for Fiscal Studies. Where the black and green lines end up is key to what the future of Britain will look like. The Lib-Cons with their series of tax cutting proposals want a smaller state, less redistribution, and a pared down welfare state. If Labour gets its act together, it can limit this scaling back.

This week’s Economist sets out the key strategic challenge facing the Labour party:

“For nothing will make or break the next leader of the opposition like his response to the government’s austerity programme. Oppose it all, and Labour will look incredible. Back it in grown-up fashion, and the coalition will have an easy ride. The tempting third way—supporting “good” cuts but not “bad” ones—will work only if Labour agrees on which bits of spending should go. Underlying this tactical dilemma is the more strategic question of what the left is for when there is no money to spend. Labour’s narrative was once devastatingly clear: the revenues from a buoyant economy should correct the historic underspend on public services. What is it now?”

The Social Market Foundation are on the right track today with a new report titled, “Axing and Taxing” covered in today’s FT. They recommend reducing the deficit with £39.0 billion of spending cuts and £25.3 billion of tax increases. This protects more public spending than under Labour’s plans to reduce the deficit with a 2:1 ratio of spending to tax. Indeed, if one removes from the SMF baseline the Lib-Con measures such as the £6.2 billion cuts to pay for scrapping the £6 billion employer NICs rise, their proposals would mean £32.8 billion in cuts and £31.3 billion of tax increases - close to the 1:1 ratio used by Ken Clarke and Norman Lamont in the early 1990s.

No doubt the SMF’s proposals to means-test child benefit and raise VAT will concern many on the left. But if not these we have to pick something else instead or say how taxes would go up further. In which spirit, instead of the VAT rise, which would be deeply regressive, I would instead pick a wealth tax. As the Political Climate blog points out, “recent data from the ONS show that the top 10% of households own more wealth than the rest put together”. Right-wing blogger Tim Worstall kindly points out the risks of capital flight. One way around this is to target the tax at land, which is hard to move. In an article for Prospect earlier this year, Philippe Legrain called it the “only efficient and fair way to bring Britain’s finances back into line”. After all, 0.3 per cent of Britain’s population owns 69 per cent of its land.

UPDATE 14.06

Alex Barker at FT Westminster picks out an intriguing graph from the SMF report to argue that a modest rise in VAT would actually be progressive if measure on an expenditure basis. It is certainly true that many in the bottom income decile are not the poorest in society since they are students, those on sabbatical, or self-employed people suffering from a bad year who are able to smooth their expenditure by borrowing or using savings. But there are arguably more people at the bottom of the income scale who bolster their expenditure by borrowing beyond their means. Expenditure rankings also say nothing about miserly Mr Scrooges at the top of the income scale. The SMF graph which caught Alex Barker’s eye is actually from an IFS report. They are careful to say only that the expenditure analysis gives a “different picture” rather than a better one.

And while we’re on the subject, this graph from the IFS shows that whichever way you cut it, removing exemptions to VAT – another SMF idea – would be regressive.

The graph below from the Institute for Fiscal Studies shows how Government revenue and spending has widened since the recession started. It shows clearly that before the crash, current spending excluding capital projects and revenues were virtually in balance. The deficit has been caused by increased spending – primarily due to automatic stabilisers such as unemployment benefits and the financial sector bail outs – but also by falling tax receipts.

In this public finance environment, it is extraordinary that the Coalition Agreement argues for several tax cuts including:

• an increase in the personal allowance for income tax – a Lib Dem priority which does nothing for the poorest families;

• a regressive move to cut to the planned increase in employer National Insurance – dubbed Labour’s “jobs tax“, ironic given the Government’s focus on cutting public sector jobs;

• reductions to the corporation tax rate which will do little to boost private sector output;

• a freeze to Council Tax in England for at least a year; and

• the introduction of a transferable tax allowances for married couples to “recognise marriage in the tax system” – a policy which will discriminates against single parents, widows, and married couples where both couples are in full-time work.

Recent research by Stan Greenberg shows that tw0-thirds of voters believe that “it is not the time to cut taxes” (p.44). Some spending cuts will, of course, be necessary (who really mourns the loss of ID cards?) while the overall level of spending will fall if the recovery is secured. But the Government’s planned attacks on the solidarity and redistributive impact of the welfare state is only one approach to deficit reduction. The alternative is to abandon these tax cuts and push ahead with many of the progressive tax raising proposals in the Compass report, ‘In place of cuts‘.

UPDATE 13.10:

Paul Krugman has an excellent blog outlining why the “fiscal austerity” of Cameron, Merkel and others is affecting the rest of the world:

We do have a framework for thinking about this issue: the Mundell-Fleming model. And according to that model (does anyone still learn this stuff?), fiscal contraction in one country under floating exchange rates is in fact contractionary for the world as a hole. The reason is that fiscal contraction leads to lower interest rates, which leads to currency depreciation, which improves the trade balance of the contracting country — partly offsetting the fiscal contraction, but also imposing a contraction on the rest of the world. (Rudi Dornbusch’s 1976 Brookings Paper went through all this.)

At the press conference, Gordon Brown said, “The Big Society means big cuts in public services”. Alistair Darling presented a slide pack showing how the Tory’s £6 billion of efficiency cuts could cost “20,000 to 40,000 job losses” including 14,200 fewer teachers, 2,400 fewer police officers, and cuts to family friendly policies like the child tax credit and child trust fund.

The pack went on to detail George Osborne’s £38 billion election tax giveaway over five years including a number of areas that Left Foot Forward has examined including their proposed marriage tax break, inheritance tax cuts, National Insurance cuts, freezes to council tax, and the tax rises they opposed during “wash up“.

The pack ends with the warning “If you vote Tory in May, you’ll be stung in June”.

UPDATE 11.34:

Related to Labour’s press conference this morning, a Comment is Free article by Howard Reed details how “National Insurance is not a ‘tax on jobs’”. It goes on to outline that:

“A paper published this week by the Progressive Economics Panel adapts work by top US academics, the Federal Reserve and the IMF to the UK situation. Applying the paper’s calculations to the current debate suggests that an immediate £6bn cut in UK public spending could lead to job losses of around 75,000 across the whole economy.”

A press release accompanying publication of the new report, ‘What do people want, need and expect from public services?’, outlined that “the public are either not facing up to, or are not aware of, the hard choices facing the country, with public borrowing due to hit around £170bn this year.” The report outlines that:

“The key priority for the public is ensuring that a good basic standard of services is available locally. Fairness is seen as important in delivering this, but this does not preclude greater help being available for those more in need. “

The report shows that:

• only 21 per cent believe that “too much money is spent on public services” compared to 48 per cent who disagree;

• 50 per cent do not think that “there is a real need to cut spending on public services in order to pay off the very high national debt we now have”; and

• 75 per cent believe “making public services more efficient can save enough money to help cut government spending, without damaging services the public receive”.

A slide show prepared by Ben Page, Chief Executive of Ipsos-MORI, outlines that the public have a “strong belief in universal provision – and anxiety about postcode lotteries … [and] Like the idea of greater control and localism”. It goes on to outline that “Most will need more than a ‘nudge’ to go further on individual responsibility/co-production”, a reference to the Conservative party’s fascination with the governing philosophy of Richard Thaler and Cass Sunstein.

When thinking about bringing “the nation’s debt under control”, the most popular tax rises are taxes on business (25 per cent) and inheritance tax (24 per cent). A significant 82 per cent of the public favour protecting the NHS and health care from public service cuts, 58 per cent want schools’ spending protected, and 46 per cent see protecting care for the elderly as a spending priority. In a blow for internationalists, only 5 per cent want overseas aid to be protected.

Politics Home interviewed 1,082 voters over the weekend who were “asked to say whether their greater worry about the next government was that it would cut public spending too deeply, or that it would fail to reduce the budget deficit quickly enough.” The website found:

“Forty per cent of people were more concerned that state services would be cut back too deeply. Meanwhile, only twenty five per cent said that their greater fear was that the deficit would not be tackled with sufficient speed.”

Floating voters were particularly sceptical about prioritising paying back the deficit quickly. According to Politics Home:

“Only sixteen per cent were more worried that debt reduction would be too slow. Meanwhile, more than double – thirty six per cent – are more concerned about the effect of a spending squeeze on public services.”

The finding corroborates polling by Ipsos-MORI last year which found that the public disagree by 48 per cent to 21 per cent that too much is spent on public services. Ipsos-MORI’s CEO Ben Page told Left Foot Forward last year:

“The public are not convinced that there will need to be massive cuts in front line services in order to balance the books. In fact, 50 per cent deny that the debt situation needs addressing in that way.”

Other surveys covered by Left Foot Forward show that, when pushed on bringing down the deficit, the public is split on tax rises versus spending cuts while another poll showed that 60 per cent favour tax increases to help close the budget deficit.

Rachel Reeves, Labour’s PPC for Leeds West and a leading left-wing economist, told Left Foot Forward:

“People want more than an age of austerity. We are one of the richest countries in the world with fantastic people and businesses. The age of austerity that Cameron and Osborne prescribe once again seeks to talk Britain down. It’s not surprising that voters are turned off.”