Showing posts with label Distributional Impact. Show all posts
Showing posts with label Distributional Impact. Show all posts

Wednesday 5 January 2011

Dealing with the Deficit (5) - Is the Coalition's Plan "Progressive"? Is it Fair?

On being Progressive, distributional impact, fairness, cabbages and Kings (and why the sea is boiling hot and whether pigs have wings - well, not really.)

This article follows on from previous articles outlining the economic arguments around the Coalition's budget plans, introducing the structure of the public finances and the plans for reducing the deficit, looking at the feasibility of closing the deficit by cutting military spending and an analysis of the taxation changes. This is the final article on the distributional impact and fairness of the government's plans.  I've separated them out to try to keep them shorter.

"Progressive", "Fair".

These are undoubtedly the words that have come to define politics in Britain over the last couple of years. Not necessarily in terms of actual policy enacted, but definitely in terms of the language of our political discussion.  We argue about whether policies are wise, whether they are affordable, whether they are right, but more and more we have come to argue about whether policies are fair or progressive. It has been one of the changes wrought by the 13 long years of Labour rule. Today these terms are thrown around like cheap confetti by almost every party and politician of whatever hue or stripe as basically synonymous terms.  This widespread usage by completely opposing politicians to describe contradictory policies may give you the impression that these terms are largely meaningless. And you would be right. But the question is, can we save any precise meaning at all from this avalanche of linguistic abuse?

'Fair' is one of the first words that any child learns, as any parent or child can tell you.  A sense of things be fair or unfair is one of the most basic of human judgements, and arguably the basis of much of our moral sense.  Like all such terms though it has no clear, definable meaning.  We all think we know fair and unfair when we see it.  Roughly, it means equitable, in proportion with what is right.  It is, in other words, a value judgment. In other words, referring to various policies as fair, is little more than declaring you think they are morally right and/or a good idea, i.e. it conveys almost no actual information, since we generally assume that if someone is pushing a policy they think it is good/right.  It would be bloody odd if politicians were pushing policies they personally thought were a load of immoral rubbish. Referring to a policy as 'fair' is generally useless. But what it can do, at best, is to imply a certain, not only efficient but also, moral judgement about the effects of a policy. But beyond that it's pretty empty.

'Progressive' is a slightly different (but equally annoying) kettle of fish. It has become, if anything, even more prominent than 'Fair'as a political descriptive. It sadly lacks 'Fair's basic and understandable connotations.  It is a technical term, just one with a vague definition. For a while after I heard it first it confused me because I had no idea what it meant. From context I could only tell that it seemed to mean 'good' in a vague sense, but I could not at first work out anymore than that. So I spent some time studying it. Taken literally progressive means to to support progress, but that is little more than a tautology. No politician claims to be opposing progress, any more than motherhood or apple pie. So where did this word come from?  The answer is that it came from America, and it became more and more popular first among Labour supporters and politicians in the 1990's to describe themselves, and then among others. As far as I could tell from some study these people seemed to use it to mean Socialism without the state ownership of industries (since that has been discredited since the 1970's). More generally it has come to mean fluffy and friendly and kind and good, and most importantly: us, as opposed to them.  On which basis it was also appropriated by first the Liberal Democrats and then more recently even the Conservatives, and particularly the current Coalition government.

In defence of some of those who use it though. There is one area where the term progressive can be said to have a precise meaning. That is, in reference to fiscal policy.  In particular, taxation.  A tax is progressive if it hits the rich harder than the poor.  This originally could mean just in terms of the amount raised.  these days however it generally means as a proportion of income.  That is, for a tax to be progressive it must take up a higher percentage of the income of the rich than the poor, rather than just a larger cash amount.  The opposite of this is regressive.  To give some examples: Income tax is progressive, because it is charged at higher rates the higher your income is;  VAT is more or less neutral, because rich and poor pay at the same percentage rate; The BBC licence fee is regressive, because it a flat amount charged regardless of income, and thus obviously takes a higher proportion of the income of the poor than the rich.

In extension to this financial system or policy of spending and taxation is progressive if it enhances the opportunity or chances of the least advantaged in society, generally in terms of redistributing money from the rich to the poor in society, or at least hitting the rich harder than the poor in percentage terms.  And is in this sense that we can analyse whether the Coalition's deficit reduction plan is progressive, as the Chancellor claimed, first at the June budget, and then at the CSR. This was an important point, after the Conservatives campaigned claiming Progressive credentials, and also to the Lib Dems

This is a big question.  Is it possible to have  major deficit reduction plan of tax rises and spending cuts that is also progressive, in the sense of hitting the rich proportionately financially harder than the poor?  Or, in other words, how does the government's deficit reduction plan impact people differently across the income distribution.

On the one hand the government has raised taxes on the rich and taken efforts to protect core areas of progressive spending on health, education, welfare and international aid, as well as for children and pensioners.  On these grounds it claims its plan is progressive.  But this has been strongly contested, to say the least, by other groups.  The analysis of the government's plans has been divided into two separate sections.  We have had distributional analyses of the impact of the changes in terms of taxes and benefits, and then separately the estimated impact of the spending cuts.  These can then be combined to give the over-all impact of government's deficit reduction program by income decile of the population (the poorest to richest tenths of the population).

My personal view has always been that the government has tried quite hard to make sure that we are "all in this together" in the sense of the pain of deficit reduction being shared across the population.  But that it would be almost impossible for any significant deficit reduction plan to actually impact the rich harder than the poor, without being mostly consisted of crippling tax rises.  If I had to guess I would say that the government's plan will likely hit the poor two to three times harder than the rich.  Because our system is so progressive anyway, meaning that the least well off benefit more from welfare and rely more on public services, and pay less in tax, pretty much any attempt to reign back what the state does will hit the poor harder in proportion to the rich.  That is, although the rich will contribute more to the deficit reduction plan in terms of cash this will still consist of a smaller portion of their income, due to the disparity in income, and the extent to which government spending is slanted to benefit the less well off, and that raising taxes on the rich is actually quite hard because they pay high taxes already.

Analysis of the distributional impact of the government's spending plans breaks down into two sections: Welfare and Tax changes, i.e. direct cash transfers, and departmental spending cuts i.e. estimated value lost from services received.  The first of these is relatively easy to estimate, as it involves actual cash transfers, whether in terms of welfare or taxes.  The second is somewhat more dubious, as is involves estimating the value people receive from public services in terms of a cash value, and then guessing how spending cuts may have affected this cash value.

The first off the blocks to attack the government's claims of the progressive nature of its deficit plan was the IFS.  The Institute of Fiscal Studies has actually been around for 35 years, but has recently seemed to appear into the media consciousness.  It is a think-tank that produces work looking at the details and effects of the financial and distributive effects of policy.  Since the Coalition took government its pronouncements on the impact of government policy have, for some reason, been received by the media with a degree of trust and authority generally reserved for Holy Writ. This slight oddity to one side though, it is true that the IFS' research is generally very good. And an excellent starting point.

The IFS produced a report on the distributional impact of the Tax and Welfare policy changes by income decile, but not the impact of the public spending changes.  The most relevant graphs is below.  It shows the impact of all the the tax and welfare changes proposed by the government up until the CSR in October, apart from the CGT rise and the Child benefit changes.

That means by income decile from poorest to richest the changes will mean a hit on income of:

DecileImpact (£/year)Impact as % of net income
1(poorest)-£600-5.5%
2 -£750.00-5.0%
3 -£800.00-4.5%
4 -£850.00-4.3%
5 -£800.00-3.5%
6 -£900.00-3.6%
7 -£1,000.00-3.2%
8 -£1,000.00-2.8%
9 -£1,200.00-2.6%
10(richest)-£3,750.00-4.5%

From the graph it is clearly visible that by income decile the changes are somewhat regressive across the income distribution from the 1st-9th deciles, though the richest 10th do take a particularly large hit.  It is solidly progressive in reference to the amounts involved, but not progressive enough to make it progressive in terms of the percentage hit to income.