From the TUC

Why Lib Dem criticisms of “Where the Money Goes” are wide of the mark

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

Guest post by Tim Horton and Howard Reed

Earlier this week our TUC report “Where the money goes“, which shows that the coalition government’s planned spending cuts are likely to impact much more heavily on the poorest UK households than the richest, was subject to robust criticism by Simon McGrath at Lib Dem voice.

In this article we respond to these criticisms.

Simon claims that “the methodology is ingenious because it is bound to produce the results [we] want” because, for the 30% or so of public spending for which we have no information on how the use of public services varies across the population, we assign the value of this spending to households on a “flat rate basis”. So, for public services such as defence or environmental protection, we assume that households receive the same benefit from this spending regardless of their income (with some adjustment for family size).

It’s true that this kind of approach will always produce the result that spending cuts to the “flat rate” allocation leave the poorest households worse off. But if we think about what it would cost to provide the service privately instead, this makes sense. For example, if the police force was abolished and households had to employ private security guards to protect themselves and their property, the price of a security guard (of a given quality) would be the same no matter what the household’s income was. From this perspective it seems obvious that public services provided to all households on an equal basis involve redistribution from rich to poor. We make no apology for including this assumption.

Simon argues that by our logic, money spent on ID cards and IT systems in the NHS increases equality. To the extent that they represent spending that households place a positive value on, that logic is correct. Of course, it is quite possible for the government to spend money on things that people don’t actually want. Indeed, one of us argued in a publication for Compass in November 2009 (“in Place of Cuts“) that ID cards were an obvious candidate for a painless spending cut. However, if it is that easy to identify huge amounts of spending which are unwanted by the public, why did the first £6 billion of cuts by the Coalition, back in June, contain cuts to core services like the Future Jobs Fund and Child Trust Fund, which were clearly valued? We would argue that the vast majority of public spending is spending that people actually value rather than white elephants.

But there is a deeper point here. The poorest households are also getting hit harder from the cuts in cash terms. This is because many of the services being cut (education, housing, social care, etc.) have spending that is pro-poor – and which our model does not allocate on a flat-rate basis. As the graph on page 48 of our report shows, the poorest fifth of households lose about £700 a year in welfare services like these by 2012, whereas the richest fifth lose services of about £400 in value. In fact, our model allocates about 70% of public spending in an income-related way, and only 30% on a flat-rate basis – which we think is the most sensitive of any such analysis in recent years. Part of the overall patter of the impact of the cuts is therefore down to this non-‘flat rate’ component of public spending, which is even more progressive than the flat rate part.

Simon also points out that Labour had committed to £25bn of cuts which would have resulted in an impact of inequality of a similar shape to the Coalition’s cuts of £42bn by 2012 (although not quite as severe). In fact, the comparable figures once reduced debt interest payments are taken into account are £39bn coalition cuts (including benefit cuts) versus £23bn cuts inherited from Labour (not £34bn versus £25bn as Simon claims). So, including benefit cuts, the coalition are making around 70% more spending cuts by 2012-13. This is because the coalition have chosen a path a fiscal consolidation that is faster than that which they inherited, and they have chosen to rely more heavily on spending cuts to do so.

If Labour had won the election and then implemented their £23bn of cuts, we would certainly have criticised them on much the same grounds. However, the other side of the coin is the tax and benefit measures which Labour introduced to help reduce the deficit, which were unambiguously progressive; whereas the additional tax rises and benefit cuts, and the income tax allowance increase, introduced in George Osborne’s emergency budget were (as the IFS has shown) unambiguously regressive.

Here, the Lib Dems played a very important part in making these changes regressive, since it was their policy to make £3.7bn income tax cuts in the June Budget – which were not only regressive, but made the corresponding spending cuts that much deeper.

We certainly do not assume that if Labour had won the 2010 election, no cuts would have had to be made. But the Coalition did not have to choose this precise balance of spending cuts and tax increases; it could have relied more on tax rises and less on spending cuts, as Labour planned to. And it certainly didn’t need to resort to regressive tax changes to help close the deficit.

GUEST POST: Howard Reed and Tim Horton are co-authors of the new TUC report Where the Money Goes. Howard is Director of the economic research consultancy Landman Economics, which specialises in complex econometric modelling work and policy analysis. Tim is Research Director for The Fabian Society.