Tuesday, June 29, 2010

Clegg’s tax credit claims

I’ve transcribed part of the exchange between Nick Clegg and John Humphrys on the Today programme last Thursday. It raises interesting philosophical questions about whether a government deserves credit for those of its predecessor’s policies that it hasn’t undone, and whether it deserves credit for unspecified policies that it might introduce in the future.

Humphrys had just mentioned the Institute for Fiscal Studies findings that the measures in the Budget would have the greatest negative impact on the poor – whereas the Budget report itself had suggested quite the opposite, but by including measures previously introduced by Labour as well:

JH: It says, perfectly clearly, that it is going to hit the poor harder than it is going to hit the rich. You dismiss their claims entirely, do you?

NC: Well, to be fair to the IFS, look, I’ve actually read the report and it says, very very clearly, that they’re making that claim if you don’t assume that you also carry over and incorporate some of the changes from the previous government: the new 50% income tax rate, the tapering away of the personal allowances for very high earners and the pension system, and also, as they recognise in their report, by not making any assumptions that we will continue to try and instil fairness in everything we do in future budgets.

JH: Well I think you’ve rather turned on their head what they’ve actually said. What they said was that the reason the measures looked so fair, that enabled you to say that they were fair, was because you took into account precisely those measures that had already been announced by Labour: higher taxes on income, the clampdown on rich people’s pension regime and so on. If you take those out then your measures are even less fair.

NC: Well, I actually just simply disagree. If you look at –

JH: That’s what they say.

NC: Well they’re not. They’re saying, they’re using the word regressive if you exclude those other things. If you include them, if you –

JH: The overall impact of the budget’s measures was regressive. That’s what they say. I’m quoting.

NC: If you exclude other measures which we are including, and if you disregard what we’re going to do in future budgets. Can I just –

JH: No, no, sorry, but even that isn’t right, you see. What they actually say is if you include some of the other things you’ve done, it becomes even more regressive, because it hasn’t included some of the things you had. It hasn’t included housing and disability benefit cuts. It hasn’t even included the cuts in public services, which will be enormous.

NC: Nothing is included, of course, future changes which we will make, will show, as we have done in this budget, that we’re going to take very exceptional measures to ensure that fairness is instilled.

Well now.

All incoming governments inherit a set of policies that, overall, they’re not happy with; some they’ll change or abolish ASAP, others later on, and some they’ll be satisfied to leave in place. A first Budget is only ever going to be ‘a step in the right direction’, so in one sense Clegg is quite right to say that the coalition’s efforts are not complete. All the same, it’s ludicrous to argue that we should be giving them credit for the undefined things that they hope they’re going to be able to do in years to come (Sunder Katwala is playfully scathing on this point).

It’s quite reasonable to judge a new set of policies based on their specific effects. Of course they won’t take us straight to the promised land, but are they a step in the right direction or not? In this case, by Clegg-Cameron-Osborne’s declared standard of supporting the poor, they aren’t.

The same approach bears on whether we should include previously enacted policies in our evaluation of the new ones. A government doesn’t write onto an empty statue book: there’s already a large body of policy that the new ones are going to add to. So if we want to know how redistributive a tax and benefit system is, we include all current measures, not just the new ones. But again, if we want to know what’s changed, and whether things are going in the right direction, we look exclusively at the new ones.

So we might look at all policies together, or at the new ones in isolation, but what I can’t see a case for is looking at the new ones in combination with a limited set of others that have been legislated for but are yet to come into force (e.g. the NI rise), as well as some that have already come into force (e.g. the 50% income tax rate). Clegg is cherry-picking from someone else’s tree to sweeten his argument.

The new government looked at the system it inherited, saw that this was becoming more progressive (in the technical sense rather than the woolly ‘nice/caring’ sense), and decided to slow this down. They wanted to save/raise more money, and have done so in a way that steers us towards a system less progressive than the one Labour left on statute.

It’s possible that they genuinely wish to move in a pro-poor direction over the next five years, but their actions so far don’t support this. Are they pulling back a bit to get a good run-up? I don’t think policymaking works that way.

I’ll meet Clegg halfway: I won’t praise the government for not scrapping various pre-existing policies, but I won’t blame it for scrapping them. And I will take into account future policies… but not yet.


Liam Murray said...

I think you're using the 'technical' definition and the fluffy / vaguer one interchangeably depending on which point you're trying to make.

"It’s quite reasonable to judge a new set of policies based on their specific effects. Of course they won’t take us straight to the promised land, but are they a step in the right direction or not? In this case, by Clegg-Cameron-Osborne’s declared standard of supporting the poor, they aren’t"

Why - because they have a greater negative impact on the net disposable income of the lower deciles? That argument hinges on the technical definition alone rather than what you refer to a ‘standard of helping the poor’. There's a reasonable argument that insufficient action on the deficit will in the long-run disproportionately impact the poor also so these things aren’t black and white.

Lots of people have pointed out recently (I think you were among them) how much of an art rather than science economics is – growth projections, revenue forecasts and the like are sometimes trotted out to defend this policy or that with no acknowledgment of how much guesswork is involved or how frequently they’re wrong. The same applies to projected income by deciles – it’s loaded with assumptions about who smokes and drinks and how much based on postcode and background, interests and hobbies etc. and associated impact on spend. All interesting stuff but I welcome a government that isn’t led blindly by those things or that things the only way to advance the interests of the poor is to contrive a way to give them more money.

Tom Freeman said...

Well I only use the word twice: one in the sentence where I note its two meanings, and once in the sentence that follows, in which I'm clearly using the technical sense.

As for 'pro-poor' and 'helping the poor', that was actually my attempt to avoid the reviled word. Am perfectly happy for substitute "progressive in its technical sense" into those places, but its a bit unwieldy.

Of course the coalition are claiming to be progressive in the woolly sense, but then so is everyone. They're also claiming that the Budget is progressive in the technical sense; that's what Clegg and Humph were wrestling over, and that's clearly what Osborne meant when he said: "the people at the bottom of the income scale will pay proportionally less than the people at the top. It is a progressive Budget." Simply not true.

You're right that estimating distributional impact is fallible (especially when certain benefit cuts can't be included), but it's something the govt agrees is worth doing. If they'd said instead 'this may look bad for the poor, but the motivational effects will actually help to make their lives better', then I could at least respectfully disagree.

(VAT goes a lot wider than fags'n'booze and luxuries. You want to wear clothes? Make a phone call? Go somewhere not served by public transport?)

And given the anti-deficit drive, right now it's a question of how much money you take away from different people, not how much more you give them.