Tuesday, 2 November 2010

The IFS, the buts and the maybes - questions of fairness and the CSR

This is a cross-posting. It was originally published on 27th October here and was based on my previous couple of posts here and here.

I'll offer some thoughts on the discussion it raised (50 comments) below.


Last week Nick Clegg and the Institute of Fiscal studies squared up over the issue of whether the cuts proposed in the Comprehensive Spending Review are fair.

It is a debate which strikes at the heart of Lib Dems in the coalition government and it will determine the shape of politics in this country for next decade.

For the first time ever the Treasury included an impact analysis of the announced changes within the CSR, the effect of pressure from Lib Dems. These were calculated according to the sections of society that will bear the burden of the changes (ie how ‘progressive’ it is).

But it is a question subsequent events show it has singularly failed to settle.

It came after years of urging from left-wing think-tanks (such as the Fabian Society) that the Office of National Statistics annual evaluation of the effects of taxes and benefits on household income [pdf report June2010] was insufficient.

The controversy begs two questions:
1) why didn’t Labour force the Treasury to include an impact assessment in 13 years of government under Brown or Blair?
2) if the established measures didn’t enjoy support, why wasn’t a review of the impact analysis methodology introduced earlier?

After the election the IFS attempted to do just that with a report timed to coincide with the coalition’s post-election emergency budget. The IFS argued that “assessing the impact of government activity on the distribution of household living standards is essential to the evaluation of public service provision,” but offered the warning that this “raises challenging conceptual issues” and cited sources claiming that the then current methodology provided by the ONS was too simplistic [pdf report July2010].

The IFS were then charged with developing new criteria to determine a more accurate impact analysis. Their new calculations informed the basis of Chancellor George Osbourne’s speeches to the House of Commons on the spending cuts which the Government could recommend on the basis that the cuts were indeed ‘progressive’.

Following the Chancellor’s speeches on the Budget and CSR, the IFS gave their widely reported counter-briefings arguing a diametrically opposed conclusion [pdf press release August2010, pdf opening remarks October2010].

This is the corresponding graph presented by the IFS:

Can you spot the difference?

The former shows a representation of the impact measured as a percentage of net income by decile. The latter includes a representation measured as a percentage of net expenditure, using projections from two years later to exaggerate the effect. The former explains that the cuts are generally progressive, but the latter that the cuts are massively regressive.

So when Nick Clegg intervened to denounce the IFS briefing as ‘distorted nonsense’, besides the attack the more astute reader would notice that this supported the July review of the need for more accurate assessment of fairness, as written by none other than the IFS.

Clegg stated that he “fundamentally disagreed” with this month’s IFS analysis of the biggest losers in the welfare spending cuts, arguing for a more accurate analysis including welfare spending inputs from services such as childcare and social care which are targetted and taken up by more the most vulnerable lower-income groups and families with children, but who the IFS said would be hit hardest in cash-only terms by the changes to tax and benefits.

As it was the IFS had effectively rewitten the sums devised by the ONS without challenging the ‘conceptual issues’ they had identified – and the standard bearers of the left (Labour, Trade Unions, Fabian Society et al) have swallowed their conclusions whole!

So why the turnaround by the IFS on the issue of fairness?

At last December’s pre-budget report the IFS recommended 13% cuts to departmental budgets to deal with the budget deficit problems, a view which was subsequently taken up as Labour policy on the grounds that deeper cuts risked a double-dip recession. This which was followed by 25% cuts proposed in the budget and angrily rejected by the IFS.

Advocates of a smaller-state might argue that a respected, impartial and independent think-tank actively tendering for projects formerly undertaken by a government quango is a good example of encouragement the private sector needs to make the desired productivity gains and fill the gap left by government cuts.

A sceptic, however, might point out that the IFS report was funded by the Economic and Social Research Council, which is staffed by appointments made under the previous government, is itself dealing with cuts and agreed to ‘strongly communicate’ the implications of any changes to its financial allocation which it recieves from the Department of Business, Innovation and Skills. Consequently ESRC board members decided it would “quickly respond to questions raised by rapid changes of events” and this may have mitigated against deeper investigation into measures of fairness, possibly causing the IFS to rely too heavily on the previous sums devised by the ONS and which critics had deemed ‘insufficient’.

The coalition has now revised the cuts to departmental budgets down by a quarter to 19%. It has done this by making additional savings elsewhere, such as by postponing capital spending, and it has done it in order to reach its stated aim of reaching budget stability by bringing nominal growth in budget growth back into line with longer trends in 4-5 years. Yet the vehemence of the IFS opposition is undiminished and appears to be growing as they get drawn into the political arena.

It should be no surprise that this timescale coincides precisely with the period Nick Clegg and David Cameron have promised to remain in coalition before going to the country for the next general election.

Were the total cuts to be smaller this would take longer and therefore require a new mandate to complete the programme, but for the governing coalition to survive until a point after the next election it would demand some form of electoral pact between LibDems and tories – something activists in both parties see as poison – and especially with the prospect of a positive referendum on proportional votes looming, which should be a given as Ed Miliband has stated his support for AV on the grounds of fairness (what else!) and must back to the hilt the item in the coalition agreement LibDems have described as a ‘deal-breaker’ and a ‘game-changer’.

So Labour strategy to attack LibDems over fairness in cuts is three-fold.

The easy solution for them is to undermine LibDems sufficiently to break the coalition and force an early election before government by coalition is effectively locked in by an AV referendum.

Labour’s second option is to weaken resolution within the coalition in order to delay the point at which it can be dissolved amicably in preparation for an AV election where an electoral pact would paint LibDems as ‘tories in disguise’.

And thirdly it deflects from Labour’s own cuts agenda which it needs to maintain any economic credibility.

Maybe this explains why Labour must stoke an argument over fairness to stand any chance of returning to power within the foreseeable future.

But if anyone is in any doubt about Labour’s commitment to fairness, we only need to consider their track record and how growth in economic inequality under Labour carried over from the 1980s and 90s throughout their 13 years in office, according to the Equalities Office [pdf report Jan2010] (this is particularly important here as continuing growth in inequality suggests any calculation of the impact of tax and welfare changes on income or expenditure by decile becomes less relevant over time as the effect of spending on services increases in relevance).

Maybe we should ask, “where were you in the Labour government, Mr Miliband?”

And therefore maybe we should also question the emphasis given to the opinion of the ‘respected’ IFS regarding the progressiveness of cuts when it is only the most well-known of a range of equally respected bodies producing reports into fairness.

A balanced and pluralist perspective undoubtedly gives a fuller picture than a single independent view, however impartial the people giving it – and surely you can’t say fairer than that!


Regular readers will know how I enjoy occasionally entering into controversial territory, and on a fundamental current debate such as this it was to be expected that my piece would draw the usual selection of opposing views.

I originally hoped this article would simply challenge the prevailing orthodoxy, following the model of media narratives thriving on confrontation to dramatise their subject.

Yet it initially seemed several of the readers refused to get drawn into contemplating the complexity of the issues.

As a consequence it was somewhat inevitable that there were strongly positive and negative reactions - the content was disregarded, supported and generally misunderstood; I was blamed and held responsible for making 'dangerous' and 'odious' implications bordering on a conspiracy theory - all within the first handful of responses!

While it may be obvious that those who can least afford it will suffer most from the cuts in the CSR I think the strength of the responses indicate that I was at least partially successful in opening up some daylight between what is meant by 'progressive' and 'fair'.

Indeed, I don't think they are the same thing at all, even where they overlap.

So the problem, as Ian Sanderson rightly explains, is the lack of an accepted definition for 'fairness'.

But in the course of the discussion my main thread - that there is a political and electoral reality which must be accounted for - all too quickly became smothered.

And this is particularly marked where Anthony Aloysius St says, "It’s entirely the government’s decision how fast the deficit is reduced."

As much as the opposition is seeking to paint it as one single stripe, the fact of coalition has forced all practical economic planning in the CSR to be encompassed within the timeframe of the current parliament.

Equally this has a bearing on my supposed attack on the ESRC, where the reality of an interlinking and fluid state of human relationships and interests quickly becomes misrepresented as supposition of bias.

Anyway, after I entered the comments thread it strikes me that the tone changed and the commenters accepted we each have to have a perspective in order to be able to give an opinion.

I can admit here that I do tend to adopt a somewhat provocative stance, but life would be boring if everyone simply agreed all the time, so it is at this point that the discussion enters more interesting territory as Sen and others consider where they are coming from (thereby tacitly accepting the post had a particular intent, even if it was obscured by my spaghetti-like weaving of ideas).

So you can imagine that I was almost dumbstruck (I know!) with George Kendall's comment:
"I can’t think of another debate on LDV where serious discussion has led me from disagreement to agreement. If only this kind of civilised discussion were more common on the internet!"
And when Chris Riley pops up to enthuse that mature political debate should avoid tribal sniping
because the full picture must involve the contributions of all sides despite the "caricatures and imperfect information" we form our impressions under, I started to feel more confident that my mischief-making had actually drawn some real light onto the matter.

So, if you've already made your mind up about the government, the CSR, or even this humble author, I'll recommend you read through the full contributions.


Matt Wardman said...

My head temporarily hurts,now.

Oranjepan said...

haha, thanks - imagine mine as I tried to compose this into some kind of order!