The IFS and fairness

The IFS have re entered the political row over the impact of the budget. This intervention will be seen as helpful to attempts to destabilise Lib Dems from the Coalition by claiming the poor will do badly from the Budget at a time when Labour’s main political strategy is to try to detach leftwards inclining Lib Dems from the happy union.

I wait in vain to hear from the IFS on the impact of whether a 50% income tax is competitive when we need new inward investment to the UK, more entrepeneurship and job creation. We still do not know from them what rate of CGT the think would maximise the revenue.

The Budget document covered the ground on the impact on low and high income earners. Much of the Budget debate in Parliament and elsewhere was about this very subject. Chart A1 of the Budget red Book shows that if you take all the budget measures (Labour and Coalition) the bottom 30% by income will be less than £200 worse off. The top 10% will be £1600 worse off, and the second 10% by income will be more than £600 worse off. So far, so progressive.

If you look at the table A2 it shows it as a proportion of net income. That shows once again a progressive pattern, with the top 10% worse off by 2% of their incomes, and the bottom 30% by around 1% of net income. So far, still progressive.

Nor is it just the Labour income tax changes that are “progressive”. The Coalition’s Vat increase is very progressive. The top 10% by income will lose £850 in extra VAT compared to around £50 for the bottom 10% by income, reflecting the zero VAT on many of the staple items in a lower income budget. As the Budget books states, “the top income decile will lose almost fifteen times more” from the indirect tax changes.

I am not sure why we need to have this debate again, or how there can be new shocking evidence about the impact of the Budget measures, when it was all spelt out in so much clear and uncharacteristic detail in the Red Book.

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30 Comments

  1. JimF
    Posted August 25, 2010 at 9:57 am | Permalink

    Not good enough, apparently.
    You need to show fairness for women vs men, old vs young, students vs working vs unemployed, study each ethnic group for the relative fairness factor, north vs south vs east vs west, disabled vs able-bodied, tall vs short, sexual orientation…. equality, dear chap, equality…

    • APL
      Posted August 26, 2010 at 11:31 am | Permalink

      There is a QUANGO that no one would miss.

      The Equalities and Human rights commission. Except possibly the grudge merchants.

  2. John Holmes
    Posted August 25, 2010 at 10:48 am | Permalink

    "Chart A1 of the Budget red Book shows that if you take all the budget measures (Labour and Coalition)…" – Yes but if you take only the coalition measures it shows something very different – almost a mirror image infact.

    "Nor is it just the Labour income tax changes that are “progressive”. The Coalition’s Vat increase is very progressive." – Ignoring the dubious claim that VAT is a progressive tax; what about the other measures? I seem to remember some things about pegging benefits to the lower inflation measure and cutting a range of payments which benefited the poorest in society.

    In fact, have you read the IFS report at all? It says the government failed to include several of its benefits cuts in the charts in the red book and consequently hid the effect on the poor and STILL had to rely on Labour's preannounced measures to make the budget look progressive. It's a regressive budget and the pathetic attempts to justify it on Today this morning, coupled with you selective critique of the IFS, sums up how weak the coalition's defence to that charge is.

  3. oldtimer
    Posted August 25, 2010 at 10:54 am | Permalink

    The Coalition`s 50% tax rate and 28% CGT rate on higher earners are obvious risks to economic recovery. The simple reason for this is that it will encourage people in those groups to vote with their feet and/or their wallets in order to work/invest elsewhere.

    No doubt these measures were introduced in the cause of "fairness". But they will prove to be counterproductive over time by inhibiting or, even worse, reducing economic activity. There is plenty of practical evidence for this as both businesses and people relocate and invest abroad and not in the UK.

  4. GJWyatt
    Posted August 25, 2010 at 10:58 am | Permalink

    Note how the Fawcett Society is also stirring the pot with its legal challenge to the Budget based on Harman's Equalities legislation, which found a voice in the Today programme's interview with Mark Hoban this morning. As the Fawcett challenge to the Budget was launched on August 1st, it seems that the Today editors have been keeping it in their back pocket waiting for a suitable moment to catch out a govt minister.

  5. Dave Bush
    Posted August 25, 2010 at 11:07 am | Permalink

    The one thing you don't say is that the poor pay a far larger proportion of their income as tax than do the 'rich'. The main point being that those with incomes above average can more afford to pay additional tax.

  6. A.Sedgwick
    Posted August 25, 2010 at 1:46 pm | Permalink

    I think that you are missing the point here. Mr.Osborne has shown with one budget that he is little different from his predecessors with the possible exception of Nigel Lawson. Despite all the numbers the poorer have been disadvantaged. "The top 10% will be £1600 worse off" – I am sure that they can cope, whereas those losing £200 may not – last straws……
    My politics are very tradtionally right wing but our tax system needs a root and branch redesign to remove the lower paid from tax and recognise that the cost of living absorbs all the disposal income of the lower paid and is the main contributor to benefit abuse – why work when the state pays more for not working.

  7. Derek Buxton
    Posted August 25, 2010 at 2:18 pm | Permalink

    Quote a government figure but ignore the logic. The rate of VAT is to ride by 14%+, and so it will not impact on the poor? I have seen this many times before and it is a total lie. Although some items, food, newspapers, books, are rated at zero VAT it does not mean that those prices will not rise. They will because of the full costs incurred in producing and distributing them. VAT rises impact on everyone in some way irrespective of income, so the percentage of income taken will be greater for the poorer than the rich. This has happened before and will happen again. The poor also have to use various services, building, plumbing etc. all carrying VAT. So the great socialist conspiracy rolls on but Cameron rents out his other house and takes maternity leave. The country has a crisis?????

  8. gac
    Posted August 25, 2010 at 2:37 pm | Permalink

    Meat and two veg to the BBC and left wing media of course.

    Consultants (e.g. IFS) and Focus Groups have learnt to give their clients the answers they want – in this case the End Child Poverty Campaign. By glossing over or ignoring the 'good' news and over emphasing the 'bad' news the Coalition plank of progressive cuts is 'exposed'. If the spin is to be on the positive then the emphasis is reversed.

    Neither groups lie! They are just appropriately economical with the truth.

    In the end of course it is the Politicians who are accused of misleading the public.

  9. Mike Fowle
    Posted August 25, 2010 at 3:43 pm | Permalink

    This has led every news bulletin on the BBC today that I've heard. They can hardly control their relish. Without analysing the figures (again) it struck me at the time that the budget had to be considered as a whole for its overall effect, and a first step in leading the way from benefits to employment.

  10. Brian Tomkinson
    Posted August 25, 2010 at 4:22 pm | Permalink

    I am sick of hearing the word "progressive". Every day we hear it from politicians and the media. It is just another meaningless buzz word. There are many in the media and others who would dearly wish for the coalition government to fail. Ignore them, get on with the job and show them how things can be run better at a lower cost.

  11. Phil Taylor
    Posted August 25, 2010 at 4:53 pm | Permalink

    The IFS numbers are a con in one important respect. The major driver for the disbenefit to the poor that they point up is of course the curtailing of housing benefits. This is largely a disbenefit to landlords and not to tenants.

    Does anyone not want to see cases such as the Acton Afghan case tackled? The Acton Afghan case and thousands like it were the product of Labour’s mad Local Housing Allowance scheme. High council rents are a product of Labour’s rent equalisation scheme which entailed them encouraging councils to raise council rents above inflation to equalise them with housing association rents. Both of these moves would have generated spurious increases in income for the poor. Of course they are in reality increases to the income of landlords with tenants on housing benefit. Clamping down on housing benefit curtails landlords’ income, not tenants’.

    The IFS need to recast their figures to take out the housing benefit changes. Then we will see their argument collapse. Waiting.

  12. simple soul
    Posted August 25, 2010 at 5:53 pm | Permalink

    This question of the alleged unfairness of VAT increases as they affect the poor will come up again and again in future months. Can anyone suggest how we get the elementary facts into the heads of the broadcasters who will be explaining it to the nation?

  13. assegai mike
    Posted August 25, 2010 at 6:11 pm | Permalink

    IFS? Always spell out abbreviations on first use in an article, else renders the whole thing meaningless for me.

  14. Trev
    Posted August 25, 2010 at 7:44 pm | Permalink

    We are having the debate again so the media can follow labour's bidding.

    The report I read was sponsored by a child poverty action group so its no surprise to see it s finding match entirely the desire of the sponsor.

  15. Tim
    Posted August 25, 2010 at 8:15 pm | Permalink

    The IFS are quite right. It's also worth keeping in mind that the poor that the Coalition attacks the most are disabled people, with cynical targeting of ESA/IB and DLA. All without, of course, any serious attempt to help them into work. But that is to be expected from bullies – they target those least able to defend themselves.

  16. Tapestry
    Posted August 26, 2010 at 7:39 am | Permalink

    IFS are another quango that produces nothing of value yet costs us a fortune. Time it was axed. CGT at 28% hurts the poor very badly. We all know that.

  17. robert pay
    Posted August 26, 2010 at 10:54 am | Permalink

    The BBC has been a really effective opposition to the coalition government. They live in the fantasy world in which the only problems are greedy bankers (responsible 100% for the crisis) and the fact that the rich (anyone in the private sector) are not shouldering their fair share.

    I am afraid that until the Tories get a grip of the narrative we are in danger of a never ending parade of bleeding stumps and horror stories about the effect of the "cootz". Alastair Campbell is on record as saying he would lie for Labour because it the ends justify the means…the Tories need to tell the truth.

    My fear is that the government's culture of short term news management and policy on the hoof, so characteristic of the Blair and Brown era drowns out the need for a strategic narrative. Most voters, even Tories, seem to think that the 1980s were a period of savage cuts (rather than regeneration) and the 90s a period of sleaze (rather than benign management of public finances). The last 13 years are seen a period when everything went well until the bankers screwed it up, rather than a time of chronic overspending on the Labour Party's public sector vote bank!

  18. Mike Stallard
    Posted August 26, 2010 at 10:55 am | Permalink

    "Robert began his career as a reporter and columnist on the Independent and the Independent on Sunday and was named Young Financial Journalist of the Year in 1993. He moved to the Financial Times to become Economics Editor in 1995. Between 1999 and 2002 he served as an adviser to the senior management of the International Monetary Fund in Washington DC."
    The leftie trick of branding everyone who disagrees as a Tory can be played both ways, not so? Robert Chote, is of course, Director of the IFS. Leftie? Oh no – heaven forbid! No wonder the BBC treats his winged words as Holy Writ.

  19. Steve
    Posted August 26, 2010 at 11:21 am | Permalink

    Perhaps the IFS should examine the 'fairness' of the BoE's current policy of zero interest rates and high inflation, evidently implicitly approved by both Mr. Osborne and the Treasury? This is desperately unfair to anyone in their fifties who was expecting a decent pot of savings and a personal pension plan or two to see them comfortably through retirement. Why should these people, many of whom will have been self-employed and paid a great deal of tax during their working lives, be less worthy of consideration and compassion than young borrowers who still have their whole lives ahead of them? Many if not most of these people, who have taken responsibility for themselves all their lives rather than rely on the government, will be staunch Conservative supporters, but not for much longer I suspect. It's bad enough having the incompetent Mervyn King and his gang of MPC cronies conspiring to steal our life savings, but for a Conservative Chancellor and Prime Minister to callously sanction the continuation of such policies is unforgivable.

    • M.A.N.
      Posted August 27, 2010 at 11:30 pm | Permalink

      Cameron will destroy the tories. Life long conservative voters will NEVER vote for them again. Time for a proper right wing party to emerge?.

  20. Steve
    Posted August 26, 2010 at 2:34 pm | Permalink

    John,

    How about bringing Peter Schiff over here? He is the best communicator of free market ideas extant. He uses analogies to put over even the most complex and heretofor seemingly boring economic principles in a completely understandable way. He accurately prediced the financial crash on all media and is exactly what we need here to start to roll back Socialism's deadly grip.

    • Stuart Fairney
      Posted August 27, 2010 at 3:17 pm | Permalink

      Yep, I agree entirely, if nothing else, a libertarian yank would give the luvvies palpitations.

  21. John
    Posted August 26, 2010 at 6:41 pm | Permalink

    It was both interesting and aggravating last night to hear the BBC reporting that the VAT rise would add £850 per year to the weekly shopping bill of the poor and most vulnerable.

    I found myself wondering when it was that VAT was introduced on food (“The weekly shop”). It’s outrageous that such obviously lazy (or deliberate) statements are allowed to be made.

    • Keith
      Posted August 27, 2010 at 1:06 pm | Permalink

      Presumably increases are in the supply and distribution network not the cost of food itself, increase will result in oveall prices?

    • Stuart Fairney
      Posted August 27, 2010 at 3:16 pm | Permalink

      If you are quoting the maths correctly, that would mean at 17.5% the tax on "the weekly shop" would be £5,950 already?

      I don't want to repeat myself, but why the hell do you (JR) tolerate and indeed fund this nonsense?

  22. Frank
    Posted August 27, 2010 at 9:15 am | Permalink

    The is what happens when society chooses social engineering rather than markets to allocate resources. Everyone loses, no matter how well intentioned the process. The complexity of our tax and benefit system makes it impossible for us to know who the poor are. Since those living on full benefits are inflation linked, they cannot be worse off, no matter how much VAT rises or how much their rents rise.
    We are, I think, talking about the 'working poor'. These can be couples on low incomes or even the middle classes with just one income earner, or single, working people or working couples with large families. These are the people I feel for. The Coalition said they would concentrate on cutting public expenditure, with a small increase in taxes. So far there is little in the way of cuts but huge rises in tax. The working poor have to be worse off when taxes rise, The rich will be able to hide their money or leave the country. It was ever thus, but it serves as a reminder that in general, lower taxes benefit the working poor most. Hence, you can forget the Red Book and the IFS, the economy is in ruins and no amount of politicking will save it. Since the working poor avail themselves less of public services than the non working poor, it would be in their interest to campaign for lower taxes and less public services. If they had a voice…

  23. Bill
    Posted August 27, 2010 at 1:09 pm | Permalink

    Back to the BBC. The sooner the licence fee is cut back, the better for all. That surely would be a progressive move since the fee is a greater percentage of the income of the poor than the rich. I would be happier if we had a broadcasting field that looked much more American or much more like newsprint i.e. we had left wing journals/broadcasters and right wing ones and you could listen to the one you wanted – and they could fire salvos at each other. The 'balance' of the BBC is one of our problems.

  24. THE ESSEX GIRLS
    Posted August 28, 2010 at 1:56 am | Permalink

    Whatever happened to therumoured 'imminent appointment of Robert Chote to take over from Alan Budd'?

    Did they all go off each other? Well they have now!

  25. Lindsay McDougall
    Posted August 29, 2010 at 9:09 pm | Permalink

    The IFS went further in its comments. It suggested that the June 2010 budget was illegal because it violated two laws passed by the late, unlamented Labour government in 2006 and 2009.

    Now that we have rebutted the IFS's arguements, I suggest that we repeal the relevant two Acts. We need to re-establish the constitutional doctrine that no parliament can bind its successor.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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