The last gasp of the Labour government

From the IFS:

Clegg vs the IFS: reductio ad absurdum

Via Sunder Katwala, I see that Nick Clegg has reprised one of his greatest moronisms.

Back in June, the Institute for Fiscal Studies reported that George Osborne’s Budget would hit the poorest hardest. Clegg responded by saying that the IFS analysis didn’t take into account the effects of unspecified future policies that the government might introduce. This met with general ridicule.

Undaunted, Clegg has reacted in the same way to the latest IFS report:

It doesn’t cover what we’re going to do in future Budgets to build on the steps that we included in this Budget to make the tax system fairer.

Let me explain, in language that Clegg can understand, why this criticism is wrong.

It doesn’t cover what the IFS is going to do in future Budget analyses to build on the steps that it included in this Budget analysis to assess whether the government is making the tax system fairer.

An Office for Distributional Responsibility?

The Budget in June included a chart showing that its measures would hit the rich hardest and the poorest the least. Within a day, the Institute for Fiscal Studies had demolished this as a farrago of dishonesty (I paraphrase) and that the truth was exactly the opposite.

Now they’ve done a more thorough analysis that confirms and deepens this picture, and the government is getting a deserved kicking all over the media. Its spokespeople are still pathetically clinging to the bar chart George Osborne produced, which included some of Labour’s redistributive policies and omitted some of his new ones.

I would like to protect Osborne from this criticism.

Shortly after the election, in setting up the Office for Budget Responsibility, he said:

We need long-lasting change in the way we put together budgets in this country. The final decision on the forecast has always been made by the Chancellor, not independent officials. And that is precisely the problem. Again and again, the temptation to fiddle the figures, to nudge up a growth forecast here or reduce a borrowing number there to make the numbers add up has proved too great.

It’s obvious that we can’t trust the Chancellor to produce a distributional analysis of his own policies. The temptation to fiddle the figures has proved too great, and the political importance attached to them means that politicians don’t have credibility to speak authoritatively here.

Given that the government has followed Labour in declaring that it wants to fight poverty, and that it has asked to be judged on the impact its policies have on the poorest, it’s clear that we need an independent expert body to do its own, non-partisan assessment here. The IFS is fantastic, but it doesn’t have full access to all the government data.

So maybe the government should set up an independent Office for Distributional Responsibility – not to rule on how much redistribution should happen, that’s a political judgement – but to analyse the financial effects of policies on different income groups and to assess progress towards whatever aims the government might set.

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.

IFS: Labour hit the rich, Tories and Lib Dems hit the poor

Forget the spin that yesterday’s Budget was “progressive”, with policies that make “the richest pay more than the poorest”. Actually, don’t forget it: denounce it as a filthy lie. The exact opposite is true.

It’s been well noted over the last day that George Osborne is guilty of subterfuge in publishing a distributional analysis that ignored policy changes applying after 2012-13, that included Labour’s NI increases, and that omitted some of the new policies in the Budget.

And now, thanks to the Institute for Fiscal Studies, we have a clearer picture. And it’s stunningly different. This chart shows the impact on different income groups, by 2014-15, of the tax and benefits changes Labour introduced since the financial crisis broke and also the effects of the policies announced yesterday:


Labour’s are textbook egalitarianism, hitting the richest hardest and the poorest hardly at all. Yesterday’s Tory/Lib Dem policies are the exact opposite.

The IFS adds that it hasn’t been able to take into account “cuts to housing benefit, DLA [disability living allowance] and reforms to in-year changes to tax credit awards”. But: “These are all likely to hit the poorest half more than the richest half.”

Funny how it doesn’t get called ‘class war’ when you attack the poorest.

“There are far fewer children in poverty”

A timely letter in today’s Guardian explains why I’m voting Labour:

David Cameron has argued that "the evidence as well as our instincts" shows that "Britain is broken" and that our social problems are getting worse. He has also claimed that "the Conservatives, not Labour, are best placed to fight poverty". But voters should be clear that the evidence he cites on poverty, worklessness and social mobility is deeply misleading (Tories discover poverty, 5 May).

Comparing Britain now to Britain in 1997, there are fewer children living in relative poverty (and far fewer – less than half the number – in absolute poverty). Figures relating to the "very poorest", the bottom 3% of the income distribution, are statistically problematic, with the Institute for Fiscal Studies cautioning against their use. The percentage of children living in workless households is also lower than in 1997, despite the current recession. Widely cited negative trends in social mobility refer to the difference between those born in 1958 and those born in 1970, who grew up under Margaret Thatcher. The latest figures, relating to children born in 2000-01, suggests that this upward trend has now been stemmed.

Labour inherited extremely high levels of poverty, inequality and social exclusion. Their ambitious strategy to tackle these problems has had an impact; that the impact was not greater does not indicate a failed strategy, but that more of the same was needed. Conservative plans to cut back on successful government programmes such as child tax credits and Sure Start (while simultaneously lowering inheritance tax for the wealthy) will damage precisely those whom Cameron purports to help.

Dr Kitty Stewart, Dr Ruth Lupton
Professor Anne Power
Centre for Analysis of Social Exclusion, LSE

And then there's this article in today's (Tory-backing) Financial Times:

Life in Britain’s most deprived neighbourhoods has improved during Labour’s time in power, a Financial Times analysis has revealed, casting fresh doubt over David Cameron’s claims that society is “broken”.

The Conservative leader has been forced to tone down his rhetoric about “broken Britain” in the run-up to Thursday’s vote after he was accused of painting a false picture of a crime-ridden country beset by social ills.

Instead, the Tory high command has trained its fire on the poorest towns, arguing that they are a potent symbol of the government’s failure to create a fairer country. In a speech last week, Mr Cameron said “the evidence – as well as our instincts – shows that our social problems are getting worse, not better”.

FT research shows that even the most deprived local authorities have shown signs of improvement over recent years when looking at figures ranging from crime and truancy to teenage pregnancies and children living in unemployed households.

Redistribution and retrenchment

Two graphs from today’s IFS Budget briefing stood out for me.

First, the effects across the income distribution of all tax and benefit changes since 1997:


This is something I’m pretty pleased with. The Telegraph, hilariously, reports this as showing that “Ten million middle-income households have lost out because of Gordon Brown’s repeated tax rises”. This is the sort of comment that Chris Dillow might describe as “the Middle England error” and that I might describe as a steaming great lie.

Second, the scale of the tax rises and spending cuts to come:


This one, I’m not not so pleased with.

Given the looming fiscal tightening, it’s hard to see how as much direct redistribution as we’ve seen can be repeated any time soon. Clearly, anti-poverty measures over the next decade are going to have to be more focused on getting people into work and making that work pay.

Housing allowance cuts

If this is true… well, I just hope it isn’t.

Gordon Brown is facing a Labour revolt over plans to cut the benefits of the poorest families by up to £15 a week…
Proposals to be implemented next April, a month before a general election, could mean some people losing a fifth of their income. … At the moment 300,000 people on low incomes are allowed to keep up to £780 a year of their housing allowance if they find accommodation that costs less than the maximum benefit.
The Treasury says that the policy costs too much and that the ability to pocket any surplus should be scrapped from April 1. …
The [allowance] was introduced to give tenants greater control over their housing arrangements by paying the rent themselves, and the option to trade quality for extra cash.
The Government believes that abolishing the policy will save £160 million, but Labour MPs point out that the removal of competition means that landlords will raise rents to the allowance maximum. Landlords have been pressing for the change because they want rent to go directly to them.

Poverty: a tale of two and a half terms

The latest figures on poverty and inequality are out, covering 2007/08, and the Institute for Fiscal Studies has crunched the numbers.

Let’s be completely clear about the bad news. For the third year running, a Labour government – a Labour government – has allowed child poverty to rise. Now, these rises haven’t been big, and things are still better than in 1997, but even so – what the hell? This is not what they promised, this is not what we voted for, this is not nearly bloody good enough.

Percentage of children in households below 60% of median income (before housing costs):

And looking at the overall population, the income distribution has also recently shifted in the wrong direction. The IFS helpfully divides Labour’s time in power into its three terms, which have been very different. The first term saw pretty even income growth across the range from rich to poor; the second term was strongly redistributive; and the three years of the third term that we have data for have seen the sort of rich-get-richer-poor-get-poorer that we associate with the Tories.

Annual real income growth by quintile group, poorest to richest:

Across the whole two and a half terms:

Taking the period 1996–97 to 2007–08 as a whole, incomes have grown relatively evenly across the bulk of the income… However, income growth at the very top and very bottom of the distribution looks more similar to the pattern seen under the Conservatives – with the lowest growth at the very bottom of the income distribution over this period and the fastest growth at the very top.
…
broadly, the income distribution became more equal between around the 20th and 85th percentiles, but it has grown more unequal at the very top and the very bottom.

Not nearly bloody good enough.

So what happens next? We have a recession on – what might that do?

There are two main effects to bear in mind when thinking about relative poverty during recessions. First, increasing levels of unemployment seem likely to lead to falls in household incomes, thus leading to greater numbers of individuals being classed as living in relative poverty. Second, these falls in income will also lead to falls in median income, which on its own would tend to reduce relative poverty, as the threshold for classifying people as living in relative poverty will also fall. Therefore, in principle, the likely effects of the recession on relative poverty are uncertain.

But there’s also a third factor affecting the years beyond 2007/08: government policies that have been announced but were not implemented in time for the latest figures.

Another IFS study has calculated that child poverty would fall by 600,000 by 2010/11 as a result of such policies, “even after accounting for likely falls in earnings and employment”. That would make the first chart look like this:

Percentage of children in households below 60% of median income (before housing costs):

The government’s record – particularly their more recent record – is, as I think I may have mentioned, not nearly bloody good enough. They did pretty well for a while, then took their eye off the ball. But stronger redistribution – even given how politically spent the Cabinet seems, even given the recession – seems to be in the pipeline.

Two big caveats. First, these are just predictions. We won’t know the results this side of the general election. Second, with the explosion of the budget deficit, it’s hard to see how much any government will be able to do after that.

The luck you’ve had: how to talk about redistribution

David Lammy thinks that Labour has a lot to learn from Barack Obama.

One thing worth learning is how to frame the debate about redistribution. (The near-silence from the Government last week when the OECD reported positively on the narrowing gap between rich and poor suggests they lack the confidence to tlak about it.) Linda Hirshman explains:

[Obama’s] idea is that people who are now successful should care for the ones left behind, because they were once the left-behind themselves.
Obama floated this idea for the first time in the exchange with the now-infamous Joe the Plumber. Why should he pay taxes just as he became successful? Joe asked. When Obama suggested the tax increase, at $900, was fairly small, Joe was having none of it: "I mean, I've worked hard. I'm a plumber. I work ten to twelve hours a day and I'm buying this company and I'm going to continue working that way. I'm getting taxed more and more while fulfilling the American dream."
… [Obama] made a deft move, telling Joe that he should consider his extra taxes like a transfer not to some stranger, but to his own, former, less successful self: "Over the last fifteen years, when you weren't making $250,000, you would have been given a tax cut from me, so you'd actually have more money, which means you would have saved more, which means you would have gotten to the point where you could build your small business quicker than under the current tax code.... Put yourself back ten years ago."
This is a brilliant strategy because it takes a middle ground between asking people to act from pure altruism toward others--as any redistributive scheme must ultimately do--and the purely selfish individualism that fueled the conservative movement. While former selves are not exactly us, they are linked to us through the chain of common memories that makes our life story. …
Framing the appeal as sympathy for your former self also invokes the idea of equality of opportunity, rather than equality of result, which conservatives have so effectively rendered illegitimate. Rather than take money from someone who finally made it and give it to people who will never make it, Obama's "former Joe strategy" suggests liberals are actually making opportunity for the striving would-be plumbing contractors to get to the rich (taxable) place faster.
… So what if the argument doesn't work with voters who were always rich (and who will be the majority of people taxed under Obama's scheme)? Trust fund babies, suck it up. There are, of course, people who will not entertain any progressive taxation, regardless of how it is framed. But framing is the business of political revival, and Obama just made a good, fresh move.

Yep. People (on the whole) strive to improve their lot in life. Along the way, everyone has good luck and bad luck; some have much more bad than good. Redistribution may not in itself make anyone more talented or hardworking, but it can smooth out some of the bad luck.

The flip side of ‘taxing success’ isn’t ‘rewarding failure’ but ‘reducing misfortune’. There can’t be many self-made people who couldn’t have gained from a bit less bad luck at some point in the past.

(This is just a way to frame the issue – there’s no one particular policy that it suggests.)

How to boost the economy, fight poverty, reduce crime and make yourself feel sick

Well, it looks like we’re having a recession. Anything we can do to soften the blow?

Maybe.

The Tories are suggesting a small cut in national insurance payments for very small businesses, lasting six months, as well as allowing small businesses to defer VAT payments for six months. It doesn’t seem like much, and it isn’t. Does anyone think the economy will be peachy again by April?

But they can’t propose anything significant in the way of fiscal stimulus – they’ve been pushing the too-much-public-borrowing line very hard, and have been insisting that “the cupboard is bare”. They have to say that, give or take a morsel, we’ll have to tough it out. And, indeed, even this modest, short-term NI cut is to be funded by cutting business tax reliefs and allowances elsewhere.

Labour, conversely, is planning to bring forward some public infrastructure projects a couple of years. This will have a bigger effect, but will be slower to enact.

A US study [PDF] of a range of different fiscal stimulus policies is telling here. Will Hutton sums it up:

Douglas Elmendorf and Jason Furman show that by far the quickest and most effective means is to put cash into the hands of the unemployed by raising unemployment benefit, increasing temporary cash payments to them for specific items such as food and clothing, and making benefit unconditional for longer. It is not just they need the cash; they spend it fastest.
The next most effective measure is to increase spending on the national infrastructure - housing, roads, ports, hospitals, schools. The trouble is that there tends to be such a long time between the decision to spend and execution, so that too frequently spending kicks in not during the recession but the upturn. Tax cuts are the least effective. None act quickly, although reducing the tax on employment - payroll and employer national insurance contributions - does moderately well.

So, boosting unemployment benefit, eh? On that subject, another study [PDF], by Stephen Machin and Olivier Marie of the LSE, has something to report. They looked at the effects on crime of introducing job seekers allowance in 1996, a less generous and more conditional system than its predecessor:

We study crime rates in areas more and less affected by the policy before and after JSA introduction. In the areas more affected by JSA introduction, crime rose by more. These were also the areas with higher outflows from unemployment and particularly to people dropping off the register but not into work or onto other benefits. Studying the relation between crime and sanctions after introduction also confirms that areas where more people were sanctioned were those where crime rose by more. As such these results seem to reflect that benefit cuts and sanctions in JSA shifted people off the benefit system and raised crime.

So there we are. More generous and less conditional unemployment benefit is a very cost-effective way of stimulating the economy, as well as the fact that it alleviates poverty among those who can’t find work, and it may also help to fight crime. Oh yes, and I said it could make you feel sick. Well, see what happens when you phrase it this way: increasing public borrowing even further so that we can pay feckless workshy scroungers with criminal tendencies not to nick stuff. Got the stomach for that?

Another thought is that similar effects (bar the nausea) might be achieved by introducing a citizen’s basic income.

This week’s poverty news

On Tuesday, the Households Below Average Income survey for 2006/07 was released. As ever, the Institute for Fiscal Studies went over the small print with a magnifying glass, a hefty dollop of brainpower and astonishing speed, producing on Wednesday morning a thorough report.

Later on Wednesday, Gordon Brown took PMQs in the Commons, where nobody mentioned the poverty figures. On Thursday, Brown held his monthly press conference, where nobody mentioned the poverty figures. I feel lonely sometimes. Oh well.

The headlines, you may have noticed, reported a small rise in child poverty as well as overall poverty from 2005/06, which makes the second year in a row we’ve had some bad news from these figures. Also there was a surprising (to the IFS) rise in pensioner poverty, which it puts down largely to the removal of age-related payments for pensioners in that year, as well as partly because of increased under-reporting of pension credits by recipients in the HBAI survey.

Something really did go wrong
On the rise in the number of children below the poverty line, Cassilis says that “we're looking at relatively small movements around an entirely arbitrary point used to define poverty”, and that “this sort of micro-management based on arbitrary poverty definition isn't really about impacting peoples lives - certainly not on any significant scale”. I almost wish this were right.

Yes, the Government’s headline 60% median income target is an arbitrary line, and when you have a target based on such a threshold, it can distort what you do. But Labour’s progress in reducing poverty – and then the setbacks in the most recent two years’ figures – are much broader than that. You can look at eight different ‘poverty lines’ (here I’m talking about the whole population) and see that the numbers below rose between 2004/05 and 2006/07 – these lines are 40%, 50%, 60% and 70% of median income, each measured either before or after housing costs (BHC or AHC).

If lines, however many, aren’t your thing, then look at it this way: dividing the population into income quintiles, from 1996/97 to 2004/05, the poorest fifth experienced (slightly) faster income growth than either the middle or the richest fifths; but from 04/05 to 06/07, the fastest gainers have been the top fifth and the real incomes of the bottom fifth have actually dropped.

This is a broader phenomenon than precision-targeting followed by target-missing. Alas.

Why have things gone awry over these two years? Unfortunately the IFS gives less detail than I’d like to corroborate this, but it does appear to be largely to do with benefit levels:

given that the majority of net income of individuals in the second and third deciles (roughly those just below and just above the poverty line) comes from state benefits and tax credits, this is a key determinant of what happens to relative poverty.
…
it is notable that child poverty has risen in the two years with particularly small rises in entitlements to benefits and tax credits.

If so, then redistribution works. And less redistribution works less well.

Things can only get better
Yes, my tongue was in the vicinity of my cheek as I typed this heading. But only in the vicinity. Given that rises in benefits and tax credits have been reducing poverty, and that slowing these rises had the opposite effect for two years, we can consider what’s to come given policies that have come into place since 2006/07 and those that will start in the next year or two:

IFS researchers predict a fall in the numbers of children in poverty [from 2.9 million in 2006/07] to 2.2 million (using incomes measured BHC) in 2010–11

That’s not far off double the average rate of fall over the preceding eight years. And yes, this is looking at that arbitrary poverty line, but I say again that it’s just not possible to get that many families across a line without having significant real improvements to their living standards and those of many others. Labour’s campaign against child poverty stumbled, needlessly, but it hasn’t collapsed; in fact, it looks like it’s already back up and running again. However, we won’t know for sure what progress is made until the figures come out in late spring 2012. That may not be much political use to Gordon…

It’s also worth mentioning that the Government isn’t simply trying to chuck ever-increasing amounts of taxpayers’ money at poor people. Just as the Tories aren’t really going to cut all the poor off without a penny, so Labour hasn’t exactly been avoiding more punitive and pro-active measures to get people into work. There are big differences in emphasis, of course, but more solid comparisons are hampered by the facts that the Government supertanker turns slowly, and that the Tory polices are still often elusively vague.

One contrast: in 2006/07 a workless lone-parent household had a 57.5% risk of being below the 60% BHC poverty line. Moving into part-time work takes that risk down to 19.4% and full-time work down to 7.4%. Becoming a two-parent household, though, takes the risk down to only 46.6% if either or both parents work part-time, and 20.2% if one works full-time and one not at all. It seems that promoting employment is a better way to cut poverty than promoting marriage.

Some are more unequal than others
‘Inequality’ is a tricky beast to define, and the IFS looks at a number of different measures of it. It finds that the ’90:10 ratio’ – the income of the 10th richest percentile to the 10th poorest – has varied a bit but is basically unchaged under Labour. Likewise the 90:50 and 50:10 ratios. So income inequality for the middle 80% has remained pretty constant. It’s actually quite an achievement for Labour to have engineered continuing economic growth where the bulk of the population participate equally – under the Conservatives, periods of growth involved a general rise in inequality right across the spectrum.

On other measures of inequality, such as the Gini coefficient, there have been slight rises under Labour. What this means, in combination with the steady 90:10 ratio, is that the very richest are speeding away from the rest of us, and the very poorest aren’t keeping pace (although in absolute terms they’re mostly better off).

The IFS recently published a study (noted here) of the super-rich and how they get their income; a future paper, looking at the ‘super-poor’, was hinted at. Soon, I hope. It’s important to know what’s going on in these people’s lives that prevents them from getting more income – indeed, whether they’re even the same people years after year (see below) – and how things could be improved for them.

Poverty is becoming less of a trap
One other silver lining from the figures [PDF, table 7.1] is that regardless of the number of children in poverty in any given year, there’s more ‘churn’ than there was under the Tories – that is, fewer of those who are poor are staying poor for long periods. One might think that as the proportion of people below a given poverty line falls, you’re left with a ‘core’ who are harder to shift at all. That’s not supported by this data.

This graph (using my calculations from table 7.1 here and table 4.1tr here [PDFs]) shows the percentage of children in households below 60% of median income who have been in that same position for at least three out of the preceding four years, starting with the period 1998-2001 and running to 2002-05 (BHC in blue, AHC in red):


Child poverty (at least on this measure) has not only fallen, but those who still below the threshold are spending less time stuck there.

Clegg’s incentivising incoherence

Ah, Nick Clegg. All the gravitas of Charles Kennedy, all the panache of Ming Campbell. But hey – he’s young and he’s southern and he’s dry! And he’s definitely not David Cameron (although if you squint…)

Clegg’s been having fun this week. First, he lets it be hinted to the Telegraph that he’d support the Tories in a hung Parliament – which of course is to position his party rightwards and to align his party with theirs.

This can only be part of an ingenious strategy to make the Lib Dem vote collapse in the Crewe and Nantwich byelection, and – cleverly thinking longer-term – to make rightish Lib Dem waverers drift over to the Tories and push leftish ones away to Labour. Smart.

And then, Clegg gave a speech on tax:

We already have a radical tax package, cutting the basic rate of income tax to just 16p, to make work really pay for everyone.
And scrapping the unfair council tax, which hurts the poorest the most. … Removing this unfair tax and replacing it with a fair local income tax will massively shift the tax burden away from the poor…
It’s absolutely vital that we make these tax changes if we want to make work pay.

Hmm. I happen to think there’s not a bad case for some sort of local income tax, although given that wealth inequalities are greater than income inequalities, this may not be the pro-poor no-brainer he imagines. But my point is that he contradicts himself. He wants to cut income tax to “make work pay” – but is it only nationally levied income tax that affects work incentives? Why would a local income tax not have exactly the same effect?

Piffle.

He also discusses tax credits. These are a real curate’s egg of a policy. They do achieve a lot of redistributive good – neither the Lib Dems nor the Tories dare to talk of scrapping them – but they’re far too complex both to claim and to administer. And as they’re means-tested, there’s also an issue of work incentives, which is Clegg’s point:

At the moment, for every pound you earn over and above six thousand, at least 31p is lost in tax and National Insurance. But for many, because of the loss of tax credits and means tested benefits like Council Tax benefit, much more is lost. 1.8 million people face an effective tax rate of more than 60%. For the worst affected, the tax rate can be 90p in every pound.

So the Lib Dems would do… er… he doesn’t quite say. In the middle of a passage on public spending and waste, he suggests in an offhand way that they’d “scale back tax credits”. For a little more detail, we need to look at the policy document the Lib Dems approved at their last conference: “Better targeting of tax credits to those on low incomes, by increasing the taper rate.”

Hmm. The taper rate, if there’s any doubt, is the rate at which tax credits are withdrawn as income rises. So what the Lib Dems would do to deal with the high effective marginal tax rates would, yes, make them affect fewer people. But those people taken out of the taper rates will be the better-off ones; the ones who remain will be those lower down the income scale. That’s all well and good if you’re focusing on giving money to them – but it does mean that and the marginal rates these poorer people face will be increased.

This is the trade-off of means-tested benefits: the more people you give them to, the less you can target them on the poor; but the more you concentrate on the poor, the higher the withdrawal rate has to be. And the chief bugbear of Clegg’s speech was not the level of credits received by the poor, but the effective marginal tax rates they pay – which this policy would worsen.

Double piffle.

A ten-pence piece: (2) the policy

(See here for part 1 – the politics.)

Not all that bad, actually. It’s simple to implement and to understand. It gives a lot of people a bit of extra income just as the economy could do with some stimulation. It doesn’t throw any of this money at the rich. While it doesn’t make up for all the income lost by all the people affected by the 10p abolition, it does cover 80% of them fully and the rest on average have their losses halved. Among the gainers, indeed, will be the hard-up working families with children who were the target of the tax credit rises that the 10p abolition paid for.

(The Institute for Fiscal Studies judged that the measures in the 2007 Budget would overall take 200,000 children out of poverty, the autumn 2007 Pre-Budget Report another 100,000 and the 2008 Budget a further 250,000 {click through to the PPT presentations]. Politically, the Government has been all over the place and it’s made some serious policy blunders but underneath all that its anti-child poverty zeal is undimmed.)

But it costs money: this week’s changes will be £2.7 billion this year. As Peter Riddell puts it: “This means either higher taxes or lower spending since higher borrowing cannot be continued.”

Chris Dillow, though, disagrees, saying that this can, will and should come from higher borrowing:

Mr Darling is striking a blow against the tired cliché that chancellors must be fiscally prudent. …
This would take Mr Darling's planned borrowing this year to £45.7 billion. That means net debt could get very close to the 40 per cent of GDP limit that Mr Brown set back in 1997; the Treasury forecast in the Budget that it would be 39.8 per cent of GDP in 2010-11.
Isn't this reckless? Many commentators say it is. But there is only one man whose opinion really matters. And he doesn't care.
That man is Mr Market. Long-term real interest rates - longer-dated index-linked gilt yields - are less than 1 per cent. The market is therefore content to lend to the Government at rock-bottom rates. And if the market is offering Mr Darling the chance to get out of trouble cheaply, why shouldn't he take it?

I can’t say I’m quite so sanguine as Chris – better for public debt to be lower – but at the moment, given the choice between a couple of extra billion of higher taxes, spending cuts and raised borrowing, I guess I’d take the borrowing. £2.7bn is less than 0.2% of GDP.

But there’s something else on this point. Mentioned towards the end of an FT piece on the policy comes this:

The Treasury seems to be counting on the economy staying strong and on September’s scheduled large revision to the measurement of financial services in national income, which will raise the measured level of GDP by close to 1.7 per cent, making its [debt] rules easier to hit.

This was news to me. Quick, to the bat-web! According to the Office for National Statistics [PDF]:

European regulation instructed EU member states to introduce the allocation of ‘Financial Services Indirectly Measured’… into their GDP statistics… The effect of doing so raises the level of GDP. The UK… plans to introduce FISIM into the GDP series… [in] September 2008.

Another ONS paper suggests that making this change would increase GDP by about 1.7%. Not a statistical trick to make things look better than they are, but a genuine reassessment so that we can see the economy is bigger than we thought it was.

A 1.7% revision of GDP would mean that the 40%-of-GDP debt rule effectively becomes 40.7% of what we thought GDP was. Not a big change, but a little more breathing room. Handy, as the IFS reckons there’s a 50-50 chance of the 40% rule being breached, in which event the sky would fall in the Government would be criticised. For context, public debt was nearly 44% of GDP back in 1997.

What lies beneath

Greg Clark, Tory front-bencher, says that “tax credits are masking the extent of underlying poverty in Britain today”.

This concept of underlying poverty he defines as covering those people “who either are in poverty or would be without tax credits”. Hmm. So that’s those people who are in poverty plus some of those who aren’t but would be if not for a particular government policy.

But why, among all government policies, just tax credits? Why not child benefit and jobseeker’s allowance too? I bet they’re masking some poverty. Or the minimum wage? There must be plenty of poverty underlying that. Or the Sure Start childcare provision that allows parents the chance to go out and earn money? Or state education? That must help a few people get decent jobs who otherwise wouldn’t. Or Bank of England independence? Without that, the economy would have done less well these last ten years…

It’s almost as if Clark has it in for tax credits. Although he swears he doesn’t:

Let's be clear: tax credits are an essential part of a modern welfare policy, because it is obviously better to increase someone's income in work than to see them either in poverty or out of work.

But there’s a but:

But, surely, something has gone badly wrong with our economy - and our society - when more and more people every year are unable to earn enough to keep themselves and their families off the breadline.

By “unable to earn enough” he really means “unable to earn enough in the absence of certain government policies, namely tax credits”. Has something gone wrong with our economy – and our society – if this is true?

Well, that’s two questions. The point of the economy is to… actually, there isn’t a point to the economy. It’s the aggregate of the buying, selling, working, hiring, producing, consuming and other such activities that we all carry out. We carry these out to advance our own interests. If the untrammeled workings of the market would leave some people badly off, that’s no fault of the economy per se.

But most of us don’t want an economy with no government intervention. We expect our governments to do just that, in various ways and to various extents. Our society thus affects the working of the economy. One of the key reasons it does this is to ensure that those who’d lose out from laissez-faire are in a better position. There are many ways of doing this.

Clark mentions skills, and of course the government can make itself useful there. But there will always be a lot of low-skilled jobs. For every office block full of well-educated professionals, you’ll need catering and cleaning staff. If we want these people to be able to keep their families off the breadline, then we can’t imagine that the free market will do that. Society – via government – will have to compel employers to pay them more or will have to add to their wages directly. Or both.

As we do.

‘Underlying poverty’? The notion seems to treat anything achieved by government as somehow illegitimate and even unreal. Perhaps we should also have figures for underlying crime (counting those that would be committed if there were no prisons), underlying child mortality (including those deaths that the NHS prevents) and underlying school league tables (showing what exam results would be if schools stopped getting public funding).

Inequality, tax and spending

Can we reduce inequality without tackling the super-rich?

Yes, apparently. An interesting analysis by Lane Kenworthy (via Chris) suggests that redistributive government spending plays a much bigger role than progressive tax in reducing economic inequality.

He compares the Gini coefficient (measuring the degree of inequality) for household incomes in ten rich countries, but he does so both before and after tax, and both before and after government transfers. The amount of inequality reduction that the tax and redistribution systems achieve is shown here:


Two things are clear: income transfers reduce inequality by much more than tax does; and there is much more variation in the amount of equalisation that results from redistribution than in that from tax.

Lane also observes that the degree of inequality reduction does depend on the overall level of government spending, which of course depends strongly on the total tax take. These taxes need not be strongly progressive, though, in order for equalisation to take place.

I have two thoughts to add to this, by way of possible explanation.

First, increasing tax rates on the highest earners will only reduce their income by a proportion above the given threshold – it won’t put a cap on it. (And, as Vino says, the wealthy may be able to avoid many taxes, so reducing the scope for higher taxes on them to have real bite.) But redistributing to the poor guarantees their income won’t drop below the level of the benefits they receive. So the latter would seem likelier to have an effect on overall inequality.

Second, a recent Institute for Fiscal Studies study looked at high-income individuals in the UK. They found that the average income for all taxpayers (in 2004/05) was a little under £25,000. To get into the top 10% of earners, you needed to earn over £35,000. To get into the top 1%, you needed £100,000. And to get into the top 0.1%, you needed £351,000.

Clearly, the most striking inequalities are those appearing in the steepening curve at the top of the income scale; however, these inequalities involve a fairly small number of individuals.

To substantially cut inequality by taxing these people more, you’d need quite a large number of income tax bands at the top end of the income scale, each covering fewer and fewer people with higher and higher rates (a single high rate for the top 1% would ignore the huge inequalities within that group). Quite apart from whether this would be politically feasible or what economic effects it might have, it seems pretty impractical.

Conversely, though, to promote equalisation via benefits, you’d need to give the most to the poorest – which administratively (and politically) is much easier. There’s far less variation within the bottom 10% than there is in the top 10% – or even the top 1% – so precision targeting is far less of a problem.

What’s more, my own view is that the ‘poor people falling behind’ side of inequality is more troubling than the ‘rich people zooming ahead’ aspect. The Gini coefficient doesn’t distinguish between the two, but I think the former is obviously bad while the latter is very debatable.

(None of this is an argument against higher taxes on the very rich; it’s just to caution that this would not in itself reduce inequality by nearly as much as government redistribution could – whether the money comes from the top or across the board.)

Child poverty: swimming against the tide?

Never mind discs. Forget about donors. Ignore Gordon Brown’s difficulties in speaking like a human being. There’s a potential crisis for the government brewing, although depressingly few people seem to think it’s much of an issue.

According to the Joseph Rowntree Foundation’s annual report [PDF] on poverty and social exclusion:

the strategy against poverty and social exclusion pursued since the late 1990s is now largely exhausted. … ‘Doing nothing new’ no longer means, as it did a few years ago, slow but steady progress. Instead, it essentially now means that nothing changes.

Child poverty rates have been more or less stagnating since about 2003; the latest figures are for 2005/06, which recorded a fall of 600,000 children living below the official poverty line (60% median earnings after housing costs) since the 1998/99 baseline.

Tax credits, though, continue to have a substantial effect:

tax credits have been lifting a million children a year out of poverty since 2003/04. The comparable figure for the early years of the decade was around 0.6 million a year. In the late 1990s, the predecessor benefit Family Credit lifted about 0.3 million a year above the poverty line.

This figure of a million fewer in poverty is larger than the 600,000 I mentioned because the latter is a simple comparison of numbers across years, while the former is comparing against a calculation of what things would be like now without tax credits.

The trouble is that other economic factors are pushing more families into a position of pre-redistribution poverty:

At the same time, however, the number of children in working families who either are, or would be, in poverty but for tax credits, has risen steadily… In short, as the number of children helped by tax credits to escape poverty has increased, so too has the number needing tax credits in order to do that.

Another new report, from the Commons Treasury Select Committee, suggests that there is some recent progress that hasn’t yet showed up in the figures:

The Government's proposals in the 2007 Budget… are expected to mean that child poverty will be 200,000 lower than it would have been had no changes to tax credits or benefits been announced in that Budget.

The committee adds that the Chancellor expects further measures, announced in the pre-budget report this autumn but obscured by the inheritance tax idiocy, to lift 100,000 more children out of poverty (I’ve not seen an independent audit of this claim).

Barring a surge in employment (particularly among lone parents) or a big rise in benefits, the target of halving child poverty by 2010/11 would seem beyond reach.

True, this deadline and the 60% poverty line itself are arbitrary, but stalling progress is stalling progress. It can be argued, though, that focusing on such a threshold may lead to perverse results, with a focus on those just below it rather than those in the direst poverty.

In light of this possibility, the committee recommends that the Government should prioritise “measures concerned in particular with the very poorest households”, and I think they’re right.

Looking more broadly at the income distribution, the JRF notes (figure 6A) that, from 1996/97 to 2005/06, the richest 10% of people have done well in terms of income rises. The second- and third-poorest deciles have also done well, with those in the top half (barring the top tenth) doing progressively less well. An equivalent graph for 1979-97 would show a very straightforward ‘the more you start with, the richer you get’; there is very substantial redistribution going on.

However, the bottom 10% have had, by a good distance, the smallest income rises over the decade. These people are where attention is most desperately needed.

For me – and I glumly know I’m in a minority on this – child poverty is the single most important political issue there is. I’m proud of what Labour has achieved here, and I’m frustrated by what it hasn’t yet achieved. I don’t want to end up growing less and less proud, and more and more frustrated.

Brands and cultural redistribution

Richard Chappell notes: “Advertising makes us want stuff.” He’s right. So what?

The most obvious thought is to see it as a bad thing: marketing manipulates our preferences, effectively brainwashing us into wanting things that don't necessarily cohere with our most deeply-held values. On the other hand, it might be argued that advertising "creates value" by increasing the satisfaction we get from advertised products. …
Marketing aims to shape the cultural meaning of a brand. If someone wants to associate themselves with a particular lifestyle, buying an appropriately advertised label may be an easy way for them to send the desired signal. Advertised consumer goods thus serve people who want to brand themselves, perhaps to affirm their cultural identity or to gain status. Does this make advertising worthwhile after all?

But no. Richard thinks that even if we grant that branding helps to create the kind of cultural meaning that people value, “there's no reason to think that this meaning is best shaped by advertisers. A far more attractive alternative would be for such meanings to emerge from the distributed contributions of cultural citizens… We don't need advertisers to impose cultural meanings from On High.”

I agree, but there’s more to say. Let’s accept that advertising (of the cultural/lifestyle aspiration branding type rather than the ‘Smith’s Sprockets are guaranteed to last ten years’ type) does generate more opportunities for consumers to acquire cultural meaning along with their sprockets.

You still have to buy the damned stuff to get the real cultural value out of it. And you need money for that. So the lifestyle branding of products and services redistributes cultural value from poor to rich. It takes people’s material poverty (or wealth) and connects it more strongly to social poverty (or wealth).

You doubt me? Then ask yourself this: if someone uses supermarket own-brand shampoo, are they really ‘worth it’? Would you trust someone wearing unbranded trainers to ‘just do’ anything?

(But don’t worry. Eventually consumer capitalism will overreach itself and make resistance culturally attractive. Then the system will collapse under the weight of its own internal contradictions and ultimate victory will go to the downtrodden workers, or at least to the advertisers who are best at branding their tat as anti-consumerist. Ah… Oh well. All together now: The people’s flag is a lifestyle choice/ Buying it means I don’t need a voice…)

Brown vs Cameron: redistributing power

David Cameron today makes what the Telegraph bills as “the most important speech of his leadership” (and if it’s even more important than his speech on ‘why grammar schools are bad, except the ones that actually exist, and we won’t create any more, unless we do’, then you can expect a treat).

So I’m going to contrast Cameron’s speech with a speech by Gordon Brown just over eight months ago. I think you’ll agree that Cameron embodies the Shiny New Politics and Brown the Clunking Old Politics.

Valuing people’s responsibility

Cameron, 18/6/07:
Social responsibility means that every time we see a problem, we don’t just ask what government can do. We ask what people can do, what society can do.

Brown, 12/10/06:
challenges can best be met only by bringing out the best in people, and in their individual potential, and we do so by rediscovering… ideas of liberty, responsibility and fairness
…the state is not master, but serves the people; and remember, also, that we will meet the challenges ahead best when individual, civic society and the institutions of government work in partnership.

21st century boys

Cameron, 18/6/07:
It’s the twenty-first century. It’s the age of “people know best.” … We’re living in an age where people want to control their government, not have their government control them.

Brown, 12/10/06:
The fact is, you cannot master the challenges ahead the old way with… a political class believing they were born to govern and a passive electorate.
…the 21st century insight is that each challenge needs not just investment by the community but also the active involvement of citizens, and so we need not just new policies but a new politics, starting from an active national engagement of the British people: the responsible citizen, empowered communities and an enabling accountable state.

Power to the people

Cameron, 18/6/07:
[People] want and need a government that’s on their side, that trusts them, that positively wants to put power and control in their hands.

Brown, 12/10/06:
We are now embarked upon transforming the culture of government from controlling to enabling, from directing to empowering, work in progress - work to be stepped up in the years to come.

What’s Top-Down Gordon ever done for us?

Cameron, 18/6/07:
That’s the big difference between us and Gordon Brown. His answer to crime, his answer to education, his answer to everything - is a top-down government scheme.

Brown, 12/10/06:
In developing policy for children’s centres with my colleagues I and others insisted that voluntary associations, parents and charities not only be involved but help run the new services, in other words that we formed a partnership of parents, civic society, and local and national institutions of government. …parents and the local community are at the centre, in the driving seat.
…
But Sure Start and children’s centres could not have happened without the investment and the catalytic and coordinating role of local and national government. And so, the way forward in encouraging the flourishing of the individual potential of children is not to assume a divorce between community action and government nor to assume that if you enlarge the civic space you need to diminish the contribution of the public realm, but a partnership where each helps the other: the active parent, the empowered community associations and an enabling government.

There are basically four differences between them. First, Cameron uses shorter words, and fewer. Secondly, Cameron is behind the curve. Thirdly, Cameron ignores the government’s record and talks in general terms, whereas Brown has a stock of examples to draw on.

Fourthly, Cameron thinks that all government involvement is top-down controlling statism, whereas Brown thinks that as power and resources are distributed unevenly within society, the public sector’s involvement is crucial for allowing people a real chance to shape their lives and communities. As Brown said (back in December 2005): “Our voluntary organisations should neither be captured by the state nor used as a cut price alternative to necessary public provision…
 [F]airness… cannot, in the end, be guaranteed by charities, however benevolent, by markets, however dynamic, or by individuals, however well meaning, but guaranteed only by enabling government.”

Cameron’s priority is to give ‘responsibility’ to people. But to do so without giving them power as well – a redistribution that only the state can enable – would just create more and more ways for the strong to outpace the weak (at the taxpayers’ expense). Brown knows better, having a sense of social justice that stretches back decades; Cameron’s compassionate conservatism is a recent piece of expedient positioning.

The IFS on child poverty

I love the Institute for Fiscal Studies. They can produce a 51-page document [PDF] with a mass of tables and charts, and then call it, with a straight face, a ‘briefing note’.

It looks at, among many other things, the detail of the rise in relative child poverty from 2004-05 to 2005-06 (see table 8 on p. 33 and the discussion on p. 34). This breaks down into a rise in child poverty rates in two-parent families (most significantly in ones where income comes from self-employment), which is partly offset by a fall in child poverty rates among lone-parent families:

“The pattern of incidence effects across family types shows us that the rise in child poverty in 2005–06 is chiefly due to a rise in the risk of poverty for children in couple families: the risk of relative poverty fell for children in the three types of lone-parent families but rose for children in all two-parent family types except those with two full-time earners.
“… On average, children in lone-parent families have a higher risk of poverty than children in couple families, but the continuing rise in the proportion of lone parents who work – a factor that acts to lower the risk of poverty – more than outweighs the former factor.
“…the fraction of children in poverty who live in couple families rose from 57.4% in 2004–05 to 60.3% in 2005–06, and the fraction in families with someone in work rose from 48.4% to 49.9%. Both changes may well increase the desire to introduce income tax or tax credit reforms that direct more support to couples with children or to working (rather than non-working) parents.”

Elsewhere, they use simulation methods to judge whether the small rise in overall income inequality (measured by the Gini coefficient) in the last year was due to tax and benefit policies. They find that policy changes were redistributive, but only just:

“Tax and benefit reforms affecting incomes in 2005–06 appear to have had very little impact on overall levels of inequality, but what effect they had was to reduce inequality slightly: our simulations suggest that had the 2004–05 tax and benefit system remained in place in 2005–06, the Gini coefficient for net income would have been very slightly higher than actually observed”

And on last week’s Budget, they say:

“We agree with the assessment made by HM Treasury that the measures in Budget 2007 mean that child poverty will be 200,000 lower than if they had not been introduced.”

Make of that, and the rest of the ‘briefing note’, what you will.