John Hayward Posted: 22 June 2010
Keywords: Finance & the Economy,
The Chancellor claimed that his emergency budget was ‘tough but fair,’ but justifying this claim begs a prior question: ‘What is “fairness”?’ Helpfully, the budget’s executive summary offers its own definition:
‘Underpinning the Goverment’s [sic] approach is a commitment to fairness. The Government will ensure that every part of society makes a contribution to deficit reduction while supporting the most vulnerable, including children and pensioners. The Government will also seek to build over the long term a fair tax and benefit system that rewards work and promotes economic competitiveness.’
So, the Government understands fairness to mean we should all share the pain of getting the public finances back into shape, that work should be rewarded and economic competitiveness promoted, but that we have a burden of care for the ‘vulnerable’—those, apparently, who are not in a position to earn their own salary. Even by this very narrow conception of fairness, it is questionable whether the budget succeeded in being ‘fair’. Consider, for instance, Chart A2 on page 67, summarising the impact of direct tax, indirect tax, and benefit and tax credit changes as a per cent of net income by income distribution:
Evidently, although higher earners will experience the largest absolute losses (the top ten per cent more than ten times as much as the bottom ten per cent) and lower earners will see the lowest absolute losses, the bottom ten per cent of earners will actually face a bigger proportionate drop in their income than all but the highest earners. However, by its nature, government spending is disproportionately weighted in favour of the poorest and so it is inevitable that any cuts will automatically hit them hardest—in fact, the Treasury has remarkably gone a good way to reducing this in-built impact on lower earners through its relative switch of taxation from income (raising the income tax allowance and national insurance threshold) to spending (increasing VAT). This switch also helps reduce work disincentives (whereby people who moved off benefits into employment could be financially worse off).
More broadly, there is also the question of intergenerational fairness and the burden of yesterday’s and today’s debts being shouldered by the workers of tomorrow—a not insignificant issue, since the budget’s own definition specifically mentions children and pensioners. Currently, public sector net debt exceeds £900 billion and each household pays £1,895 per year just to pay the interest on this accumulated national debt. Debt is always a bad thing and can be equated with a form of slavery, so it is right for the Government not just to balance its budget but to strive to reduce the UK's total debt levels as soon as possible. The announcement that total debt will have started falling by 2016 is therefore to be welcomed.
That said, once economic growth is more certain, future budgets will need to be even tougher to ensure government debt comes down. For instance, just last month the International Monetary Fund highlighted in its report Navigating the Fiscal Challenges Ahead how eliminating VAT loopholes could help the UK raise an amount equivalent to 3.3 per cent of gross domestic product—a third of the estimated budget deficit. Yet no such action was forthcoming in this emergency budget. Equally, although capital gains tax is to rise, income will still be taxed more heavily than capital gains, so this loophole remains and additional loopholes have even been introduced. A fair tax and benefits system would be one that simplified the vast complexities that have accumulated and that left little scope for tax avoidance by individuals or businesses. Furthermore, in what way was it fair to protect the NHS and international aid budgets, while imposing a 25 per cent cut on all other government departments?
We should also consider to what extent the budget delivers ‘fairness’ as measured by the Coalition’s promise of promoting a ‘Big Society’. For instance, to what extent is the ‘work’ that we ‘reward’ to be understood as all activity that contributes to a healthy society, rather than simply that which results in a salary being paid? Should the budget not address the nation’s social capital as well as our financial capital? How will we ‘reward’ local community volunteers and mothers raising young children? What would it mean to ‘promote economic competitiveness’ by redistributing power more equally across the six biblical centres of social authority: the individual, family, community, religious bodies, region, and nation?
There was little evidence in the emergency budget to indicate a change from ‘big state’ provision of services and little to encourage greater responsibility by the family or community. Marginal cuts and freezes hardly represents radical welfare reform. Admittedly, some of this detail may come when the Treasury’s Spending Review concludes in the autumn, when we learn how far non-state providers will be permitted to carry out activities that are currently assumed by Government. Nevertheless, if churches and charities are to be expected to take more of the strain of social provision, we might have hoped for some early indications of how this new agenda will be implemented.
Perhaps the best that can be said is that the budget was even-handed. Asking whether it was fair rather misses the point of how we got to where we are in the first place.