A comment on the ‘regressive’ budget

Channel Four on-line news contacted me about today’s IFS report showing that the Coalition’s budget measures are likely to be regressive. Of course, I wouldn’t say anything to Channel Four that I wouldn’t say to my loyal, clever and beautiful blog readers…..

Last November the RSA/2020 Public Service Trust published a pamphlet called ‘The Fiscal Landscape: Understanding contributions and benefits’. The top lines of this report were that:

* Taking tax, benefits and public services together public spending is very redistributive. One estimate is that on average across the lifecycle low income families with children are net gainers by nearly £13k pa while high income families are not losers by nearly £5k pa.

* The pivot point (the point at which people pay more that they receive) is higher up the income scale than might have been thought. Only between 30 and 40% of people pay more to the state than they receive.

* The pivot point for pensioners is even higher with fewer than 20% of pensioners paying more than they receive.  

This is why it is very hard to reduce public expenditure without impacting more on the poor than the well-off. This is even harder when – as the Coalition has – you have made a blanket guarantee to protect the income levels of all pensioners.

And there is another factor too. If the Government were, say, to reduce the value of free health care to a rich family through cuts to the NHS this would represent a very small proportion of its family income. But the same cut would represent a much bigger proportionate reduction in the social income of a low income family.

 Putting to one side the debate about the June budget, George Osborne will face a difficult choice in the October spending review. Either he genuinely makes the package progressive in its impact (which will mean hammering middle class entitlements) or he accepts that a cuts package is bound to be regressive (which threatens the Coalition’s centrist credentials).

 The classic case in point is the proposed pupil premium which is intended to direct more funds to the poorest pupils. There are already several mechanisms in place which ensure poorer pupils have more money spent on them so the premium will have to do more redistributive work than the existing framework. But if overall pupil funding is flat this either means a generous premium – which will have to involve taking money away from better off pupils – or a small premium – which will be insufficient to compensate for the overall regressive impact of a cuts package.

This is very hard stuff. The Coalition needs to be clear in its aims, its policies and its message (a hesitant spokesman for the Treasury had at least three competing defences on the Today programme this morning).

But whilst sympathising with the Chancellor’s dilemma, there are two things I would advise the Coalition against strongly: don’t over-claim at budget or spending review time (something which dealt a heavy blow to Gordon Brown’s credibility), and don’t slag off the IFS (which is highly respected for its rigor and objectivity).