progress is not the elimination of struggle, but rather a change in its terms’ - Aneurin Bevan

economic vandalism

For months now, we have heard the Tory-Lib/Dem coalition government's rhetoric about their cuts agenda either promoting recovery or being progressive.

But new evidence from around the world suggests that

* those with the broadest shoulders will carry the least, because the poorest suffer most from public service cuts;

* the timing (in the midst of a global slump in demand) and the scale of the coalition's deficit reduction plan mean that it is likely to result in failure as the cuts weaken the economy and, as a consequence, market confidence in public finances.

As the graph shows, the decision of the Chancellor George Osborne to have a 77:23 split between cuts and tax rises will impact those at the bottom and the squeezed middle.

The Institute for Fiscal Studies has said that Osborne's plans are "clearly regressive":
"Once all of the benefit cuts are considered, the tax and benefit changes announced in the emergency budget are clearly regressive as, on average, they hit the poorest households more than those in the upper middle of the income distribution in cash, let alone percentage, terms."
Contrary to Lib-Dem leader Nick Clegg's claim to have secured a "progressive austerity" budget which protected those on low incomes
The IFS said the poorest 10% of families would lose over 5% of their income as a result of the budget compared with a loss of less than 1% for non-pensioner households without children in the richest 10% of households. It added that the budget contrasted with the "progressive" plans for 2010-14 inherited from Labour, under which the richest 10% of households bore the brunt of the cuts.
The FT has reported research by Professor John Hills, head of the Centre for Economic Performance at the London School of Economics, which shows the distributional impact of public spending between '97-'07:
Real income in the poorest one-tenth of society rose twice as quickly during this period as a result of the boost to health, education and other services – the biggest increase for any group.

Households in the bottom one-fifth of society have more than twice as much spent on them by the state as the top fifth.

About half of that is because low-income groups contain more children and older people, who make greater use of social services. But poor groups receive about 50 per cent more social services spending than the top fifth of households.

The effect is likely to have increased in the past decade, and been more redistributive, as the government slanted directing more spending towards particularly deprived areas.

“It is very hard for cuts to be ‘progressive’,” said Prof Hills.

He estimates that if spending cuts of £1,000 a household a year were made across public services, it would represent about 10 per cent of the income of the poorest and 1 per cent of that of the richest fifth. In fact, the cuts the government is proposing are almost three times that.

By contrast, he estimates that raising £1,000 through tax increases takes 3.4 per cent off the final incomes of the poorest fifth and 3.7 per cent off the richest.
The government has yet to carry out an impact assessment on equalities - how the budget measures affect disadvantaged groups in society. And it's no wonder, because, as the TUC's Nicola Smith writes, the findings of the IFS occur
before the significant impact of cuts in public services has been considered. Research undertaken for the TUC by Landman Economics and the Fabian Society has shown that the cuts the Coalition are proposing will lead to an average annual cut in public spending on the poorest tenth of households of £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 will be £1,135, equivalent to just 1.6 per cent of their household income.
Though talk of fairness and social mobility might be dishonest, the statements of government ministers on the state of the economy are dangerous. Chris Huhne has said the economy was "bankrupt" and "shattered", Justine Greening used the term "basket case". The response by the public at large has been to fear for jobs and living standards - this falling consumer confidence will feed into investment decisions by businesses.

The latest quarterly survey by the Institute of Chartered Accountants in England and Wales shows that business confidence has fallen for the first time since the first quarter of 2009, which was in middle of the recession. As Shamik Das reports
The confidence figures indicate the economic recovery will slow down in the second half of 2010, with the chief executive of the ICAEW saying there was “a degree of uncertainty among business leaders on what the future holds”. 

The group most worried by the downturn are small and medium sized enterprises (SMEs), amongst whom confidence has fallen seven points to +18 [...] an estimated 4.8million SMEs account for more than 50 per cent of private sector employment and turnover – these businesses are the driving force of the economy.
Tellingly, large private companies are the only firms to feel slightly more confident about the outlook for the future. This is reflected in the approval for the coalition from the big business lobby groups, the CBI and the IoD, after the first 100 days.


The most prominent politician calling for an alternative strategy is Ed Balls, currently a candidate in the Labour leadership contest but more likely to be the next shadow chancellor. He has written of his disagreement with Bank of England governor Mervyn King's "Treasury view", which echoes that of Montagu Norman in 1931, and Balls claims that he disagreed with Gordon Brown and Alisdair Darling on plans to halve the deficit over four years, which were outlined earlier this year. On the coalition government's intention to go further, faster - supposedly to assuage investor fears - he says:
What matters to market credibility is not how tough politicians talk, but if their plans can work. They want a credible medium term path for fiscal sustainability and stable growth. What they do not want is uncertainty over whether a sudden fiscal adjustment is deliverable and over the impact it will have on growth.

Time and again in recent years, we have seen the market lose confidence – usually in emerging market economies – because their fiscal adjustment plans may look tough but lack credibility. A vicious circle begins of investor flight, reduced projections for growth, a worsening fiscal position, and further loss of market confidence.
Finally, the FT has reported that the country's leading City and acedemic economists have questioned the Bank of England's optimism about the impact of large scale spending cuts on the UK economy. Some participants at the conference came away with the impression that the King was overly-optimistic about the response of the private sector to public sector cuts. One attendee
said that some economic models, including those used by the International Monetary Fund and the Organisation for Economic Co-operation and Development, suggested the effects of large public spending cuts – with the economy still depressed and banks unable to lend – “are just awful, much bigger than anything Mervyn would say”.

1 comment:

  1. See the Manifestos of the Labour Leadership Candidates - http://dronfieldblather.blogspot.com/2010/08/manifestos-of-intent.html

    ReplyDelete