From the TUC

Showing the true value of public services

12 Sep 2010, by Guest in Public services, Society & Welfare

Every year at Budget time, we are accustomed to seeing detailed analysis from the Institute for Fiscal Studies and other commentators on how the Chancellor’s tax, benefit and tax credit changes will affect us. For example, the recent emergency budget was subject to fine-grained analysis from the IFS which produced the conclusion that George Osborne’s claim that the tax rises and spending cuts contained therein were “progressive” did not stand up to scrutiny.

However, analysis of the impact of increases or cuts in public spending on services where households do not receive a monetary amount, but instead ‘benefits in kind’ – for example health, education and public investment in transport infrastructure – is pretty much non-existent. Most public spending is of this type, and yet we know very little about how it is distributed among the population or what its effects are. This leads to a very one-sided public debate, with organisations like the Taxpayers’ Alliance clamouring for cuts in taxes while failing to acknowledge that if tax is cut, spending will have to be cut too – and that impacts on the provision or quality of public services.

New research by Tim Horton of the Fabian Society and myself, released today, attempts to fill in the missing side of the debate over tax and public spending by looking at the amount of spending which goes on households of different types. We do this by using data from several household surveys on which households in the UK use different types of public service – such as the NHS, state education, or social housing. By combining this with HM Treasury’s Public Expenditure Statistical Analyses (PESA) dataset – showing the amount of spending on different public services – we are able to estimate how much is spent on households in cash terms and as a proportion of their income, given household demographics (e.g. number and age of adults and children in the household), their housing tenure, the region they live in, and various other information about household circumstances. Elements of public spending which are conceptually difficult to allocate to individual households – such as defence or environmental protection – are allocated on a ‘flat-rate’ basis to households in proportion to household size.

When the calculations are done in this manner, the results are striking. Average public spending per household (including benefits and tax credits) is around £21,400. There is a clear income gradient: the poorest 20% of households receive an average of around £24,000, whereas the richest 20 per cent receive around £14,000. For many catergories of public spending – including education, housing and social care – poorer households receive more in cash terms than richer households. For all the categories of spending we look at, the impact of spending is progressive, in that poorer households benefit more from spending as a share of their net income than richer households.

The upshot of this is that the current Government’s plans to cut spending – which involve cuts to all departments except health and international development which could average as much as 25% of total departmental budgets – are almost certainly going to be deeply regressive. Until the Spending Review on 20th October we do not know exactly where the axe will fall in most cases. But, excluding the impact of tax and benefit changes (which the IFS has already modelled) and assuming uniform cuts in all non-ringfenced departments except education and defence – which the government has indicated will get off somewhat more likely – we find that the cuts will impact the poorest 10% of households over ten times more (as a share of income) than the richest 10 percent of households.

Thus, the Coalition Government’s economic policy is likely to hit the poorest households worse on two fronts. Their chosen combination of tax rises and benefit cuts is regressive – but the impact of spending cuts is likely to be even more so. These findings will provide much food for thought for progressively minded activists in both the current governing parties as we move towards the political party conference season.

GUEST POST: Howard Reed is co-author of the new report Where the Money Goes. He is Director of the economic research consultancy Landman Economics, which specialises in complex econometric modelling work and policy analysis. He is also a research associate for both ippr and Demos. Previously, Howard has worked at the Institute for Fiscal Studies (where he was responsible for the TAXBEN microsimulation model) and IPPR (where he led a project on the impact of immigration on wages and employment in the UK). His recent projects include a publication for Compass, “In Place of Cuts”, which argued for a package of progressive tax increases as an alternative to large scale public spending cuts in the next parliament.

4 Responses to Showing the true value of public services

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  3. Owen Ephraim M.Sc. D.I.C. B.Eng.
    Oct 12th 2010, 5:18 pm

    Your analysis of the impact of changes in government tax and expenditure on households gives me cause to think you may be interested in an economic model which I have produced to improve my understanding of the issues.
    My model is based on the fundamental purpose of economics which individual income and expenditure of money and other resourcess. The model includes institutions which serve to facilitate the flows around the system such as government, banks, firms but allow the inputs and outputs to be recognised continuously for groups of individuals such as non workers or shareholders.
    I hope that you may be interested!

  4. How much do YOU stand to lose from the CSR cuts? | ToUChstone blog: A public policy blog from the TUC
    Oct 21st 2010, 12:13 pm

    […] This tool is based on the detailed economic modelling done by Tim Horton and Howard Reed for our report “Where The Money Goes“. […]