An honest debate about austerity and tax

I first heard the term ‘Candour Deficit’ in a presentation by the Resolution Foundation’s chief economist, Matt Whittaker, shortly before the 2015 election. He was referring to the unwillingness of the main political parties to be honest with voters about the choices the country faces on tax and public spending. He was on the case again last week with a succinct yet comprehensive report Ending austerity?

As Matt’s charts show, the argument that there hasn’t been any austerity falls apart as soon as you look at the detail. It is true that overall public spending fell only slightly after 2010 and will be above its 2010 level by the end of the decade. But the population is rising so, in per capita terms, we are looking at a real terms fall of 3.9 percent.

That might not sound a lot but the balance of public spending is shifting. Public service spending, known in government speak as Departmental Expenditure Limits (DEL), is falling relative to Annually Managed Expenditure (AME) which is made up of less predictable spending elements like social security and debt interest. If overall public spending is flat but AME rises then DEL has to fall.

 The DEL figure includes both investment and the cost of the day-to-day running of public services. If the government decides to increase investment, then the amount left for day-to-day public services falls even further. Per person, it will be around four fifths of what it was in 2010.

But once you protect health spending, which is huge and overseas aid spending, which is tiny, all other services are left competing for a shrinking pot.

As a result, there have already been significant cuts and staff reductions in many areas.

This, then, is how what looks like a fairly modest cut in public spending turns into some major cuts to the provision of day-to-day public services. Because of the continuing upward pressure on public spending, a small overall budget reduction is magnified by the time it reaches the frontline departments.

Still, this is all a far cry from when George Osborne was in his pomp and we were talking about cuts to per capita RDEL of 27.5 percent by 2018-19 or, that December when he went really bonkers, 31 percent. But what looks like an easing of austerity is simply the effect of the government giving itself several years longer to eliminate the deficit. It is now looking at sometime in the middle of the next decade.

Even then, I wonder if it will really happen. I’m doubtful for a number of reasons.

Firstly, the economic outlook has deteriorated. Last week, the OBR warned that Brexit presents a significant risk to public finances. It downgraded its economic forecast after the Brexit vote and then downgraded it again in March. It sees lower than expected growth dragging on, along with trade negotiations, into the 2020s. Might even this might be optimistic, given that we seem to be discovering new Brexit pitfalls by the week? Any shortfall in expected growth will hit tax revenues and increase the gap between government income and spending, which is what happened for much of the last seven years.

Secondly, I wonder whether the government will see the proposed welfare cuts through. As Matt shows, the cuts will fall primarily on those of working age; over 11 million families.

Some of the cuts have yet to be implemented. Those on already low incomes, many of whom are in work, will continue to see their benefits fall each month for the rest of the decade.

The OBR thinks this is a tall order too:

The cumulative scale of these cuts is unprecedented and, on current policy, real per capita welfare cap spending in 2021-22 is projected to be around 10 per cent lower than its 2015-16 level. Roughly half the projected savings come from simple changes to uprating – for example, the four-year uprating freeze from 2016-17 to 2019-20 – while the other half relies on the successful operational delivery of more complex changes to the welfare system. These include structural changes to the delivery of incapacity benefits, disability benefits, housing benefit, and universal credit (UC).

Furthermore, it says, the universal credit rollout isn’t going too well either:

[A]round half the welfare cuts over the five years to 2020 come from more complex reforms. The largest of these are cuts to UC work allowances and payments to larger families, which are taking place while a number of reforms remain unfinished. This type of reform has proven difficult to deliver and is often associated with substantial forecast revisions. Initial forecasts for spending on tax credits, employment support allowance (ESA) and PIP have all been too low. And while the level of savings has tended to disappoint, we have also seen delays in their delivery.

The universal credit rollout in Kensington was halted after the Grenfell fire. Piling an additional burden onto already distressed claimants was deemed too great a risk. As the economy slows, and wages stay flat, might a risk assessment conclude that continued social security cuts pose a threat to social order? When George Osborne proposed cuts to tax credits the outcry forced the government to drop the plan. There is no reason to suppose that the reaction to working-age welfare cuts will be any less vocal as the decade wears on. Given the mood of the country at the moment the opposition may be even stronger. The last thing a government mired in Brexit negotiations wants is angry demonstrations and disorder. I wonder whether the welfare cuts might be modified or even quietly dumped.

But without savings to the social security budget, public services would have to take an even greater share of the spending cuts. Which brings me to the third point. Public service providers have already cut all the easy stuff, or the things that people can’t see, like regulatory and support services. The next round of cuts is likely to fall on far more visible areas, like roads, parks and rubbish collection. It’s not just some whinging lefties who are saying this. Earlier this month the Conservative chairman of the Local Government Association warned that councils would be unable to deliver core services by the end of the decade. The NHS, too, is facing rising financial pressure. People are starting to notice and public opinion on tax and spending is shifting. When public opinion shifts, MPs tend to shift too. Even the projected cuts to public service spending, though way short of those planned by George Osborne, may well be enough to push some parts of the public sector over the edge, along with some weary and angry voters.

And finally, over the medium term, pressure on the public finances, primarily from health and social care spending, isn’t going to let up. Health costs run ahead of inflation in any case and with an ageing population, per capita spending will inevitably rise. Projections vary considerably depending on the assumptions made (see previous post) but in all the OBR’s scenarios, spending grows faster than the economy.

All of which makes me wonder whether it’s actually possible to reduce the deficit much further through spending cuts, even over the less ambitious timescale adopted since the departure of George Osborne. Unless people are prepared to accept much lower levels of state provision, and there is little to suggest that they are, cutting public service spending by the amounts suggested by the government is going to be difficult. Sometime before the end of this decade, we may get to the point where a majority of people decide they have had enough.

The question then is what do you do next? The Resolution Foundation calculates that stopping the cuts to public service and welfare spending from next financial year would cost over £30 billion. That either means more borrowing or more taxes. And just taxing ‘the rich’ won’t solve the problem.

Matt’s report concludes:

Because ‘ending’ austerity comes with large price tags, further major taxes rises are difficult and the Chancellor has ruled out significant extra borrowing, we are set for a debate requiring prioritisation of what spending restraints can be eased.

To put it another way it’s time we had an adult debate not just about what taxes need to rise but what ‘ending austerity’ actually means.

Back to that Candour Deficit again. Which is where we came in.



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18 Responses to An honest debate about austerity and tax

  1. gunnerbear says:

    Well, well, spending per head has dropped after the importation of millions of low skilled people into the UK who soak up the benefits of being in the UK but who’ve never paid a single penny towards anything they are using…..

    Imagine that eeh, importing stacks of Third Worlders into a modern economy leaves huge chunks of ’em unemployed and a drain on the UK welfare state…..

    Even the Leftwing, globalist mouthpiece the Economist has noticed the problem…..

    …people flooding – or rather being allowed to flood into the UK….who will never be anything but an economic drain. Think of the cost of that housing benefit bill in London alone, the costs of providing support to children and parents that don’t speak English, the strain on the NHS imposed by ever increasing numbers of people being allowed to stay in the UK, the smashing down of wages for those Brits at the bottom of the pile.

    Once again, New Labour scum policies (carried on by the disgusting Blues) are continuing to wreck the country.

    • Blissex says:

      «Even the Leftwing, globalist mouthpiece the Economist»

      That’s quite inaccurate: “The Economist” is indeed globalist, but far from “Leftwing” internationalism, their political positioning is far-right whig instead of tory.

      «New Labour scum policies»

      New Labour was/is the whig (with a bit of torysm) wing of Labour, also fairly rightist.

      «people flooding – or rather being allowed to flood into the UK….who will never be anything but an economic drain»

      That’s ridiculous: being mostly young and cheap they usually make a lot of money for both their employers and the government (in lower social insurance spending and higher taxes).
      They just drive down low-end wages, because they come from low-wage areas, while the numerous immigrants from rich EU countries, like France or Germany, will go back if they are offered wages lower than what they can get in those countries.

      • gunnerbear says:

        If the masses of immigrants flooding in are all such hard workers and pay such high taxes why is the tax take dropping through the floor and the CotE being forced to scrabble around looking to raise taxes of the Self Employed sector.

        “They just drive down low-end wages, because they come from low-wage areas..”

        Glad you admit that the immigrants do smash down wages to the detriment of native workers…..seems like you’re pleased about that.

  2. Jim says:

    Good luck with that then, the public are firmly of the opinion that yes tax rises are needed, but just not on them, wherever they are on the income scale. There’s a reason politicians won’t be candid with the electorate, its because the electorate is utterly in denial as to what needs to happen, either harsh spending cuts or harsh tax rises on ordinary people. And some people (cough Corbyn cough) seem to be stoking that denial by pretending that everyone can have a pony and no-one earning less than £80K need pay a penny more for it. So any politician who was honest would be slaughtered at the ballot box when faced with the ‘free stuff for everyone’ alternative.

    We get the politicians we deserve. Don’t blame them, they are just a mirror of us, the electorate.

    • gunnerbear says:

      Chop immigration for starters or do you think we should wasting taxpayers cash on unemployable third world Somali’s or the dross of Eastern Europe. Most of the severe strains currently facing the UK can be traced back to when Blair threw open the doors of the UK to all and sundry.

      Even now, we’ve got white hating Labour MPs saying that illegals who lived in Grenfall ought to be given housing – no they need to be booted out of the UK as they’ve no right toi be here.

      • Pete W says:

        But immigrants on average pay more tax per head. So your argument is rubbish. Plus you’re a moron.

        • Jim says:

          If they do, why is spending per head dropping? Tax rates are the same they have been for ages. If every immigrant generated more tax than they consumed in spending, why is revenue static and the deficit proving to be so intractable? Surely bringing in millions of immigrants should have solved the lack of tax revenue problem by now?

          Or could it be that the line we are sold about immigrants being net contributors to the country’s finances is pure BS? I wonder how many inhabitants of the Grenfell Tower were net tax contributors?

          • gunnerbear says:

            Well said!

          • Simon says:

            you obviously didnt read the article. Spending per head is dropping because of austerity and low productivity (and an ageing population). Without immigration it would be worse.

        • mez123uk says:

          I recommend The Strange Death of Europe by Douglas Murray to get a clearer understanding of what has been happening.
          The ‘immigrants pay more tax’ is deceptive, focussing on a small section of an otherwise damning report on the effects of immigration on the economy

      • Malcolm Scrawdyke says:

        The ordinary English worker hates the Irish worker as a competitor who lowers his standard of life. In relation to the Irish worker he regards himself as a member of the ruling nation and consequently he becomes a tool of the English aristocrats and capitalists against Ireland, thus strengthening their domination over himself. He cherishes religious, social, and national prejudices against the Irish worker. His attitude towards him is much the same as that of the “poor whites” to the Negroes in the former slave states of the U.S.A.. The Irishman pays him back with interest in his own money. He sees in the English worker both the accomplice and the stupid tool of the English rulers in Ireland.

        This antagonism is artificially kept alive and intensified by the press, the pulpit, the comic papers, in short, by all the means at the disposal of the ruling classes. This antagonism is the secret of the impotence of the English working class, despite its organization. It is the secret by which the capitalist class maintains its power.

        Karl Marx March 28, 1870

  3. An honest debate about tax would start from the observation that the tax base is imbalanced between cyclical income and consumption (i.e. income tax, VAT etc) and wealth (land, capital assets, dividends etc), which makes deficit reduction in a period of weak growth self-defeating. This is not a poor country by any measure, but it is one in which the burden of taxation has become ever more disproportionate between the very rich and the rest.

  4. Danny A says:

    An honest debate needs to start with “why do we need or want to reduce the deficit?”.

  5. Dipper says:

    The Tories were conspicuously refusing to rule out a ride in taxes during the election campaign. i suspect the plan goes something like this:
    2018 budget – tax rises – no increase in public sector pay
    2019 – leave the EU and simultaneously declare the deficit dead (due to previous tax rises).
    2019/20 May leaves, new leader comes in and increases public sector pay.
    2022. Post Brexit bounce and growth spurred by increasing pay delivers electoral victory.

    Although as we all know plans have a habit of not becoming reality.

  6. rogerh says:

    Any fool can make cuts to this or that service, the real problem is that we don’t earn enough. The British seem to be doing too much stupid-work. So the question is can the British work more and more profitably – probably yes, so the question then is why is this not happening and why has it not been happening for many years.

    Manufacturing is alleged to be unattractive in the UK, too high cost. But that does not seem universally true, we do well in car making and aerospace. Services are alleged to be our greatest asset but we seem to be doing our best to screw that up.

    Housing seems to be a problem, we seem terrified to build anything like enough. I feel this translates into social problems and a feeling of hopelessness that leads to a lack of ambition. Maybe not all the problem but some of it.

    The the British are not especially well educated and we are cutting back on public education, hardly a preparation for the sunny uplands in a few years time. Why, because we know those sunny uplands do not exist.

    Perhaps the idea at the root of Brexit is to run a much smaller economy. One with a wealthy upper class and then an increasingly desperate series of classes as we move down the pecking order. Rather like the Regency period but without the Empire, wars or the benefit of an industrial revolution. No real need for more housing, no more need for public education and cut cut cut until nothing is left. Those DM and DT readers don’t know what is coming, but I’m going backwards for Brexit and so are they.

    • Blissex says:

      «the root of Brexit is to run a much smaller economy. One with a wealthy upper class and then an increasingly desperate series of classes as we move down the pecking order. Rather like the Regency period but without the Empire, wars or the benefit of an industrial revolution.»

      That’s the “Britannia Unchained” model, and the inspiration is Dubai, where affluent english expatriates are vowed by how cheap the hired help is and how much the managerial positions in money-laundering banks are. The idea is to turn London into Dubai, and the rest of the country into a reservoir of cheap servants for Londoners.
      The Conservatives actually have two different nostalgic models, which somehow get merged into the dream of Dubai-fication: both are about going back to the 50s, one is about going back to the 1850s (the whig dream), the other about going back to the 1750s (the tory dream).

  7. Pingback: Weekly Roundup, 25th July 2017 - 7 Circles

  8. Blissex says:

    «As Matt shows, the cuts will fall primarily on those of working age; over 11 million families.»

    The cuts in public spending have been skilfully targeted at Labour voters, not generically at “those of working age”.

    «Unless people are prepared to accept much lower levels of state provision, and there is little to suggest that they are»

    That’s a ridiculous argument: if they vote Labour, and there is a Conservative majority, what can they do? In a democracy election winners do win and election losers do lose.

    The overall point is that talking of “austerity” is playing loose with words, because it means using it to mean “fiscal squeeze”. But the overall stance of government policy is not “austerity”, but it is quite loose, because a very loose monetary policy, targeted at benefiting Conservative voters, more than compensates overall for tight fiscal policy aimed at Labour voters.
    “Austerity” used to mean an overall squeeze, usually aimed at inducing an economic slowdown to reduce imports, but that is certainly not happening: a large minority, Conservative voting, of the population are seeing much improved living standards, while the majority, Labour voters and abstainers, are seeing falling living standards because of higher prfoperty prices and rents and lower government support. This is not “austerity” it is upward redistribution.

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