Thursday, 21 October 2010

Comprehensive Spending Review Turns Screw Even Tighter

By Michael Burke

The headline totals for spending cuts announced in the Comprehensive Spending Review (CSR) are broadly in line with the ferocious assault on the welfare state as outlined in the June Budget. However, beneath those headline totals there is a further shift away from any spending which provides services or benefits the poor as well as clear evidence that virtually all areas of spending will see excruciating cuts in real terms. The one important exception to this is military spending which, despite claims to the contrary, will probably not experience any real decline at all.

Real Spending Cuts

As the last Tory government began to fracture hard-right keepers of the Thatcherite flame emerged who were too extreme even for John Major’s government. One of those was John Redwood who has recently been pedalling the notion that, because nominal (cash) spending is projected to rise over the course of this Parliament, there are no cuts in spending at all. A measure of how far the ideological terrain has shifted is that this nonsense is parroted by the BBC, especially its economics editor Stephanie Flanders.

George Osborne toyed with this idea too in his speech presenting the Comprehensive Spending Review (CSR). But this notion is demolished by the details of the CSR itself , which shows that virtually every department suffers a cut in real terms, after inflation (Tables A5 and A6 of the review). So, the Chancellor boasted in the section of his speech on education that spending per pupil would be maintained. But this is not true. Real current spending is said to fall by 3.4% in the period to Financial Year (FY) 2014/15, while investment or capital spending will fall by an outrageous 60%. Further, with pupil rolls increasing over the period, the cut in real spending per pupil will be even greater, by over 10%.

Similarly, the Chancellor boasted that NHS spending would rise by £10bn. But an implicit rate of inflation over this period (Table A5) of 9.8% wipes out this nominal rise in real terms. Further, as Osborne acknowledged, the population is ageing (as well as growing), so that real spending per person will decline by around 10%.

These are the areas where the Coalition boasts it has protected spending. In addition, the projected 9.8% cumulative price rise is likely to be highly flattering. The Office of Budget Responsibility has made a series of inflation projections for the same period (Budget Redbook, Table C5) with a range from 13% to 18.4%. The real falls in spending are set to be larger than stated in the CSR, perhaps massively larger.

Winners And Losers

Health and education are areas where the Coalition falsely claims to have preserved spending. The other is International Development, but SEB has already shown to be not about genuine aid at all .

By contrast, the Chancellor was happy to boast that there will be a further £7bn in welfare spending cuts, in addition to the £11bn in cuts made in June. To paraphrase the BBC’s Nick Robinson, this means that 18million households will be £1,000 worse off each year. This is a brutal assault on the incomes of workers and the poor. It will be supplemented by an £11.4bn cut in the cash budget for communities and local government. To give just one example, this will include a 25% reduction in the central government grant for local authorities’ spending on the fire service. This is a wholesale assault on the welfare state and basic services.

Yet not all areas of spending will suffer cuts. SEB has previously argued that military spending was being sheltered by the government, and the CSR clarifies the extent of that. Total military spending is set to rise to £36.9bn from £35.7bn (Table 2.13). It is stated that this is a real fall in spending. However, the Chancellor was explicit; the financial commitment to maintaining the occupation of Afghanistan will be a separate item, funded from reserves.

Crucially, these reserves are set to rise over the period. In fact, there is an entirely new category of spending. In addition to the usual ‘Reserve’ heading, there is also now a ‘Special Reserve’, which will total £15.5bn over 5 years (Table 1). Since no other category of spending has been pre-allocated to this area it is reasonable to assume that the bulk of it is destined to fund the war in Afghanistan. This represents a real increase in military spending, not a cut.

The Economic Consequences of Mr Osborne

The economic impact of these cuts will be severe. The latest IMF research suggests that the negative effects of government spending cuts are magnified when other countries are also engaged in cutting spending, or when there is little scope to cut interest rates further. Since both these conditions apply currently, the IMF estimate of the impact of spending cuts is doubled in the first year alone. That is, every £1bn cut in government spending leads to a £2bn decline in economic activity in the first year. Worse, as there is a long-term negative effect, the cumulative effect after 5 years is a £6bn decline in GDP arising from a £1bn cut in government spending.

These effects are shown in the charts below, with Canada used as an example because it is an open, mid-sized industrialised economy (‘open’ to the rest of the world economy via imports and exports).


Chart 1. Impact of a 1% GDP Fiscal Contraction

10 10 21 SEB CSR


On this basis, £9bn in discretionary spending cuts this year will lower growth by £18bn next year and by £54bn in 2015/2016. The effects of the £81bn cuts due by the end of this Parliament are proportionately magnified over time.

Any cut which reduces output by a factor of six will of course have a negative impact on government finances. It is inconceivable that the deficit could seriously narrow as a result of this policy.

The social consequences will be equally grave. Literally millions of people will be driven into poverty. The new British-based winner of the Nobel Prize for Economics Christopher Pissarides says he would be ‘very concerned if social benefits are targeted. This risk is that people will sink into poverty’. The effect of raising the retirement age to 66 will exacerbate this trend, with women hit particularly hard and youth unemployed increased further. As Pissarides, Blanchflower and others have shown, early-life unemployment increases the risks of both long-term unemployment and sporadic employment throughout a whole working life.

Not just the government but Labour politicians too need to abandon any notion that welfare cuts are some sort of populist, cost-free means of cutting the deficit. The poor also pay taxes, and tend to spend the entirety of their incomes (often more than their incomes). Cutting those incomes will not only be devastating for them, but for all the businesses, jobs and taxes their spending generates.

Ideological Cover

All of this is done in the name of promoting the private sector at the expense of the public sector, but this completely ignores the real relationship between the two. The public sector is the private sector’s biggest single customer. Cutting the public sector’s spending, and laying off a projected 490,000 workers will destroy large parts of private sector activity, through lost orders, employment and spending.

The notion that the private sector is straining at the leash is also a fallacy - its refusal to invest accounts for 70% of the British recession. Reduced demand from the State is a further deterrent to private investment. So too is the government’s own 29% reduction in its investment (CSR Table 6), which is before inflation and depreciation are taken into account.

Nor is it the case that the private sector can deliver services more efficiently, even if government were simply switching the source of its services, rather than making outright cuts. This FT survey of public sector versus private sector provision in areas such as prisons, welfare-to-work and healthcare shows that the private sector is not a more efficient provider of services . On the contrary, governments, including Labour governments have been often willing to provide additional revenues to both private and ‘third sector’ (private, non-profit organisations), only to find the service provided is the same or inferior.

Conclusion

The Tory led coalition has fulfilled its threat to launch a ferocious assault on the living standards of the majority of society. Children will be making a greater contribution than the banks for a crisis in which the latter played a leading role. Welfare recipients are being driven into poverty in a vain effort to fund continuing Britain’s imperial role.

Clearly, this policy will cause widespread misery and anger. Many will attempt to divert that towards recipients of welfare, when their spending is a necessary component of economic recovery. There will also be attempts to scapegoat minorities, especially Muslims, black people and Eastern European migrants. But the essential truth is that this crisis is one of private capitalism as a system, which could be overcome by the State increasingly directing investment where the private sector remains on an investment strike. The cuts policy will not close the deficit, as many European economies currently demonstrate and as the policy starts to unravel the hunt for scapegoats will only increase. All the inevitable anger at these measures needs to be educated, organised and channelled against the real culprits.

Monday, 18 October 2010

Military spending protected in Tory cuts

By Michael Burke

The BBC has reported that the Defence budget will only be cut by 8% in the forthcoming Comprehensive Spending Review, compared to cuts of not less than 25% for other departments.

This continues the privileged position of British military spending compared to other departments. There were complaints from military leaders that the Strategic Defence & Security Review (SDSR) was in danger of simply becoming a budgetary exercise, which is exactly what virtually every other department has suffered. For example there was no Strategic Housing Review to gauge housing needs over the medium-term, nor transport; the Browne review of higher education funding was solely an exercise in shifting the source of funding from the state to individuals; at no point is there an analysis of the needed level of investment or its consequences.

The immediate post election ‘emergency Budget’ where nearly all areas of spending were cut can be contrasted with the postponement of the decision on renewing the Trident nuclear weapons’ system. It was not included in the SDSR at all even though the costs run into tens of billions of pounds.

In the government, the political debate on this budget was led by extremely pro-US policy, represented by ultra-loyalists to the US such as by Liam Fox - a favoured son of the neo-conservative US Heritage Foundation. The intervention of US Secretary of State Hilary Clinton may have determined the final outcome.

Military Spending in UK GDP

Britain has the highest level of military spending of any G7 country, as a proportion of GDP, after the US. It also had the highest proportion of spending of any EU member state with the exception of Greece - where chronic excessive military spending is key source of the economic and budgetary crisis.

The UK ‘defence’ budget is officially said to be £37bn, but this is an underestimate as it excludes many other outlays, including military research, increased health and other spending on returning military personnel and the fact that military operations, such as Afghanistan are often funded from ‘contingency reserves’. In calculating the cost of the Iraq war, for example, Joseph Stiglitz and Linda Bilmes talk about the US Defense Department ‘keeping two sets of books’, so that the public does not see the true cost of the war.But even that secrecy and obfuscation is outdone by the British authorities, ‘The British system is particularly opaque: funds from the special reserve are “drawn down” by the Ministry of Defence when required, without specific approval by Parliament. As a result, British citizens have little clarity about how much is actually being spent’.

Yet even at the official lower estimate the military is vast over-spending, equivalent to 2.5% of GDP. No-one suggests that a country such as Germany is less secure than Britain and its military spending is approximately half that level at 1.3% of GDP.

In context, a reduction in the military budget to Germany’s level would save half of the UK total and produce a saving of £18bn- equivalent to the VAT hike and all the welfare benefit cuts of the March 2010 Budget which will hit next year.

But naturally protecting the living standards of the population is not the policy of the Tory-led Coalition. Instead, there are simultaneous reports, in reality government briefings, that there is £38bn ‘shortfall’ in the Defence capital budget for military hardware. Leaving aside the nonsense about ‘writing a cheque for which there no funds’ - as all government commitments are made from future cashflows , the political purpose of this is a softening up process, where the government will be able magically to find the ‘shortfall’ through additional funds. In this way, although numerically the armed forces personnel may well decline fractionally total military spending will probably not fall at all, but will actually increase.

International Development

The Tory-led coalition has repeatedly stressed its commitment to international development by ‘ring-fencing’ the budget from Departmental cuts. However, less trumpeted is the significant reorientation of policy, so that the ‘development ’priorities are now Afghanistan, Pakistan and the Horn of Africa – which all ‘coincidentally’ happen to be the priorities of US and UK military action. Real and necessary aid is being reduced elsewhere. For example, to no British Minister attending the Haiti donors’ conference, as, not having made any substantive donations, they would not have been given speaking rights . Instead, the development budget is to be increasingly used to back up military priorities.

In short, in Britain the poorest will suffer financially in order to fund the priority given to military spending. Internationally, the suffering will be much greater as military adventurism continues to dominate US and UK policy. This is a strange 21st century reverse alchemy- turning coppers given to poor into lead, as Britain pursues a global role of aide-de-camp of US imperialism. It should be opposed by everyone with any sympathy for their fellow human beings.

Saturday, 16 October 2010

Joseph Stiglitz and China’s exchange rate

By John Ross

Nobel prize winner Joseph Stiglitz hit the nail right on the head regarding the economically invalid character of most arguments presented in favour of RMB revaluation in a video on the Wall Street Journal site on 9 October. He said: “Changes in the exchange rate can actually increase imbalances. The reason is that if the demand elasticities for Chinese goods are relatively low, then when the exchange rate increases the quantity goes down less than the price goes up. And US spending actually goes up. So the net increase could be an increase in the trade imbalances. So the notion that this is a panacea is clearly wrong.”

Exactly and put beautifully succinctly. To explain the point at rather greater length, less gracefully and in more detail, we would cite this blog on 15 June: “The RMB’s exchange rate is clearly an issue deserving the most precise economic analysis given that it involves the world’s largest exporter, China, and the world’s largest economy, the US. It might therefore seem surprising that a frequent feature of calls for early RMB revaluation are attempts to justify this through what are in a quite literal sense economic 'non sequiturs' - non-sequitur being Latin for ‘it does not follow’.

“Such arguments consist of two sentences. ‘China runs a trade surplus. Therefore to eliminate it China should increase the exchange rate of the RMB.’

“Unfortunately elementary economic reflection will show that the second sentence does not necessarily follow from the first. Consideration of supply and demand reminds us that an increase in the exchange rate of the RMB will only reduce China’s export earnings if demand for China’s exports is elastic – that is any percentage fall in sales is greater than any percentage rise in price resulting from revaluation. Equally China’s imports in value terms will only rise if any increase in their volume is greater than any fall in their price due to revaluation.

“The question of whether China's trade surplus will fall or rise in response to RMB revaluation is therefore a matter of fact, not of logic, which therefore has to be examined empirically - as the paper below notes. It quite simply does not follow that an increase in China’s exchange rate will logically necessarily lead to a fall in China’s trade surplus. Indeed it is quite possible logically, for example if demand for China’s exports is inelastic, and the volume of its imports is not particularly price sensitive, that a rise in the RMB’s exchange rate will lead to an increase in China’s trade surplus.

“Given the seriousness of the issue one would have thought that if this matter were being dealt with objectively the US administration would have produced a mountain of material to justify its claim that an increase in the RMB’s exchange rate would lead to a fall in China’s trade surplus - China has certainly produced abundant data, including directly by the Commerce Minister, showing the opposite. But no such material has been forthcoming from the US administration. Instead there is the intoning of a literal non-sequitur.

“The reason evidence has not been produced by either the US administration or by those in agreement with it is that at least as regards the immediate and medium term economic situation their argument is factually false. As is shown in the paper below an increase in the RMB’s exchange rate would immediately lead to an increase in China’s trade surplus and not to a fall – and this is one of the last things which the world requires while attempting to emerge from the international financial crisis.“

For those who read Chinese the article is available in the May edition of International Finance and for details of the factual material readers are referred to the original post. However to show the crucial point, one chart from the original article is reproduced here. This clearly shows that from 2005-2008 as the RMB’s exchange rate went up China’s balance of payments increased - driven by the trade surplus. This is exactly what would happen under conditions of inelasticity of demand for China’s exports and imports and the exact opposite of what would occur if demand for China’s exports and imports were elastic. In short, as the claim that China’s trade surplus would go down in response to an increase in the RMB’s exchange rate depends on demand for China’s exports and imports being elastic the evidence is that this is simply not true - for why they are not elastic readers are referred to the original article.

Figure 1

10 03 19 BofP & ERate


A student of economics learns in roughly week two of that course that what happens in response to an increase in price (in this case an increase due to a rise in the RMB’s exchange rate) depends on whether demand is elastic or inelastic. If demand is inelastic then the amount spent on the good goes up and not down.

That those calling for RMB revaluation are forced to 'ignore' such an elementary point in economics, which they assert with no proof and with the evidence being against, shows their arguments are not coherent. To demonstrate that China’s trade surplus would decrease with RMB revaluation they have to prove that demand for China’s exports and imports is elastic. The don’t do so because the evidence is the opposite. That is why claims are made that someone studying economics for two weeks would know have to be factually justified and are not being – that is, there is a logical hole right in the middle of the argument.

As an economist of Stigltz’s standing has now made the point one might hope that those promoting RMB revaluation as a way to reduce China’s trade surplus would feel forced to attempt to factually justify their arguments instead of merely repeating their economic non-sequitur. Unfortunately, as a large number appear more interested in prejudice than either serious economic argument or dealing with the very serious and real issue of global economic imbalances this is not necessarily going to happen.

Keynes famously wrote: ‘I am sure that the power of vested interest is vastly exaggerated compared with the gradual encroachment of ideas.’ (Keynes, 1936, p. 383) But by ‘gradual’ Keynes precisely acknowledged that this was a long-term process. Nevertheless the fact that an economist of Stiglitz’s standing has made the central point clearly and bluntly may, in a ‘gradual’ way, help put a stop to a campaign based on an economic non-sequitur and instead get down to a serious discussion on a very serious topic – i.e. how to correct current global imbalances.

Addition

A reader has pointed out that the graph reproduced from the original post showed China's balance of payments surplus plotted against its exchange rate - this was used in the original article as it was analysing the full international effect of China's surplus. They asked what about China's trade surplus plotted against the RMB exchange rate, to isolate the specific effect of the exchange rate on trade?

This is shown in the graph below. As may be seen the trend is exactly the same - China's trade surplus went up as its exchange rate went up.The only difference is that at the beginning of the period China had a -0.1% of GDP deficit on income from abroad and by the end of the period it had a 0.7% of GDP surplus, but there is no difference in trend.


10 10 11 Balance of Trade and E Rate


* * *

This article originally appeared on the blog Key Trends in Globalisation.


Notes

Deming, C. (2010, March 31). The Surplus of Promise. Retrieved October 11, 2010, from China Daily: http://www.chinadaily.com.cn/opinion/2010-03/31/content_9665632.htm

Keynes, J. M. (1936). The General Theory of Employment, Interest and Money (Macmillan 1983 ed.). London: Macmillan.

Ross, J. (2010, June 15). The Real Consequences for the International Economy of an Early Increase in the RMB's Exchange Rate. Retrieved October 11, 2010, from Key Trends in Globalisation: http://ablog.typepad.com/keytrendsinglobalisation/2010/06/the-real-consequences-for-the-international-economy-of-an-early-increase-in-the-rmbs-exchange-rate.html

Stiglitz, J. (2010, October 9). Economist Joseph Stiglitz's Take on China. Retrieved October 10, 2010, from Wall Street Journal: http://professional.wsj.com/video/economist-joseph-stiglitz-take-on-china/C3577DCF-EA87-4F29-883E-471C27AB65BE.html?mg=reno-wsj

Thursday, 14 October 2010

Ideology driving the attacks on the incomes of the poorest and universal child benefit

By Anne Kane

Reprising the theme of the June Budget, George Osborne claimed his Conservative Party conference announcement of a simultaneous cut in Child Benefit for higher rate tax payers and an absolute cap on benefit income was ‘fair’. The cuts are not even-handed, let alone ‘fair’: cutting the income of one section of people paying higher rate tax but not others; attacking the living standards of children in families on the lowest incomes. But they do give a flavour of how the fabric of the post-war welfare state stands to be shredded by the scale of cuts this government aims to make.

The Comprehensive Spending Review on 20 October will provide the full taste. The Financial Times urged: “universality is a wasteful principle. Now that Mr Osborne has broken the taboo, he should go further. Free bus passes, winter fuel payments and free TV licenses for the elderly regardless of need look insupportable. Given the brutality of the cuts being demanded of departmental budgets, the coalition could usefully look at other areas of expenditure that have been protected, such as health and overseas aid.” Attacking the poorest while ending not only benefits but services that, while often low in substance, rationed in delivery and of modest quality, have been ‘universally’ available and the hallmark of the post-war welfare state, this is the Conservative-led government’s ‘fairness’.

The “brutality” of these cuts is indeed such that they are invoking a quite Dickensian rhetoric, with David Cameron’s talk of the ‘deserving’ poor and Jeremy Hunt’s moralising about poor people having children they can’t afford. We can expect more of this language encouraging fear, hatred and the delusion that the cuts won’t hit ‘us’. In reality, as the scale of the cuts will hit virtually everyone – except the tiny minority who can afford private health care, school and university education, housing, social care, unemployment protection, income cuts and much more – this fiction will prove impossible to sustain.

Yet, at the same time, those on the lowest incomes will be affected most from a combined attack on public services, jobs and welfare benefits. This will intensify inequality, because social groups are not evenly distributed across the income spectrum: for example, median earnings for full-time male employees in 2009 were £531 per week compared to £426 for women1 (with a much higher gender pay gap in the private sector, at 21%, compared to the public sector, 12% in the public sector); in a study of 17 OECD countries single parent households were concentrated in the bottom of the income distribution2; child poverty is higher than the national average among BME groups3; disabled people in employment are more likely to be low paid.4

Child benefit signals wholesale attack on universality

The decision to means test Child Benefit is made in this context. The proposal to set a cut-off point at the threshold for higher rate income tax, was said by Osborne to mean from 2013 that households with at least one parent earning more than about £43,875 a year would not be eligible. An estimated 1.2 million families in the higher rate tax bracket will be affected (about 15 per cent of taxpayers, covering a range from the threshold of just under £44.000 to the extremely wealthy). The cut will mean a loss of £1,055 a year for a family with one child or £2,500 with families of three. It comes on top of the freezing of Child Benefit for three years, keeping it at £20.33 a week for the first child and £13.40 for subsequent children regardless of cost of living changes.

The website Mumsnet reported seven out of ten respondents opposed the move in an instant poll. Many criticised the logic of the cut: two earner households with both people below the threshold (up to almost £88,000) will be eligible while single earner households (two or single parent) with one person above the threshold will not.

The Conservatives’ apparent attempt to appease criticism by reviving a proposal to introduce a tax break for married couples underlines that the cut is driven by ideology: married couples without children could get a tax break while unmarried couples with them, and with just one earner in the higher tax bracket, would get no tax break and no child benefit. Allowing for a moment that the priority to deficit reduction was reasonable, taxing high earners would be a fairer and simpler way of raising revenue. The government is choosing not to do this, but to use the excuse of deficit reduction to attack universality.

While means-testing has become standard across a range of benefits, a number of universal benefits continue to reflect an understanding of inequality and approach to ameliorating it. If that principle is to be ditched for child benefit, other universal benefits are not safe (as the egging on from the FT, above, indicates), regardless of pledges in the Conservative manifesto (“we will preserve child benefit, winter fuel payments and free TV licenses. They are valued by millions”).

In the case of child benefit, it is paid to women, and universally available, because it is recognised that women take the lion’s share of domestic and child-rearing responsibilities, lose out financially for doing so and, within heterosexual couples where the man is earning, often cannot be assumed to have access to a shared income. These facts have an impact on children and child poverty. The realities of household financial dynamics often become brutally clear upon divorce.

Does the change in women’s economic position over the last few decades make child benefit to higher earners unnecessary? While more women overall are in employment, the positive meaning of this is offset by the reality of unequal pay, mothers having to take part time and lower paid jobs to juggle two ‘jobs’, or having to leave the labour market altogether when employers and the logistics of work don’t adapt to the demands of children. In any case, the cut is taking place regardless of the economic position of the woman in a household.

The case for keeping child benefit universal is strengthened by other government plans: such as the threat to Sure Start and affordable childcare.

In practical terms, a household with an income of just under £44,000 and dependent children while not poor, is not rich, and certainly not in London. Among respondents to the Mumsnet survey 38% said they used it for necessities and 28% said they would have to rethink their lives. One, in a household in the income bracket to be affected, but who does not go out to work herself said: ‘we use the money for things like nappies and milk. We have budgeted the money – it is built into our grocery bill and pays for one and a half weeks shopping each month.’

The Child Poverty Action Group have condemned the cut is a ‘child penalty’ which is irreconcilable with reducing child poverty: ‘It's difficult to see how the Government is going to meet its target of ending child poverty by 2020 through undermining the most popular, widely understood and targeted benefit helping families.’5

Despite such protests, the CSR may introduce an even deeper attack on Child Benefit than that announced at the Conservative conference.6 This may link to Ian Duncan-Smith’s ‘universal credit’.

Duncan-Smith has said: ‘We have identified that there is a problem here ... come the spending review, this will be brought into context...We're bringing in a thing called the universal credit, which will actually be a device which brings together all this stuff and we'll be able ... to rectify and ameliorate some of these points because of the way it tapers and all that.’7 The ‘universal credit’ has been spun as a concession to Duncan-Smith, with the intended implication that it is something progressive. There is no reason to believe this is that case and every reason to believe it is aimed at reducing cost, assisted by losing the focus on specific need that lies behind individual benefit and tax credit calculations.

Benefits cap signals attack on the poorest

Disdain for child poverty was underlined by Osborne’s other announcement – to cap income from benefits at £26,000 from April 2013. This attracted far less media comment – unsurprising as it hits the poorest people, with the least voice, and who are already fairly heavily demonised. It will particularly hit children.

The cap will be on the basis of median earnings after tax and is given an indicative Treasury figure of £500 a week. It will take into account income from unemployment, income support and Incapacity Benefit (ESA), plus other benefits such as Housing Benefit, Council Tax Benefit, Child Benefit and Child Tax Credit, Carer’s Allowance and Industrial Injuries Disablement Benefit. So, regardless of need, the number of children a family has and the costs derived from their household size, or other basic costs, there will be a flat cap on income.

The Treasury roughly estimates 50,000 families will be affected. Many of these will be in London where high housing and other living costs drive up benefit levels, entirely out of the control of recipients. High benefit levels don’t mean high incomes, they just mean high rents. As the FT puts it: ‘They will be larger families, probably with three or more children, living in higher-cost urban areas, and are more likely to be receiving housing benefit for privately rented rather than social housing’.8

The Treasury is uncertain about the spending that will be saved, estimating it at ‘hundreds of millions’ a year. The BBC’s Stephanie Flanders quotes £300 million. As she says, ‘not big bucks: for reference, Mr Osborne is expecting to save £3.9 billion...in 2012-14 simply from uprating benefits to CPI rather than RPI’ .

One reason, as Flanders puts it, is that ‘most of the families who now earn a lot of benefits will see their payments cut long before 2013 as a result of the housing and other benefit cuts already in train’. By 2013 these will amount in a spending cut of £8 billion a year. However, the second reason is that many of those who will be affected by the broad sweep of government benefit and tax credit cuts will anyway be on incomes under £500 a week.

Making a feature of this cut in his party conference speech was a purely political act by Osborne, part of setting an atmosphere receptive to the severity of the cuts to follow in the CSR and to encourage the belief that cuts will simply shake up a shiftless underclass of benefit scroungers. Hence David Cameron’s follow up: ‘Fairness means giving people what they deserve – and what people deserve depends on how they behave.’ Those who will get what they deserve include low paid workers in London upon whom the cap on Housing Benefit will provoke what one Conservative minister called a ‘Highland clearances’ in London. 9 One to be ‘cleared’, a single mother in central London, explained that the benefit cap will leave her with a rent shortfall of £180 a month, forcing her to move out of the area where her family live and who provide childcare and domestic support.10

Disabled people not exempt

George Osborne said that ‘Unless they have disabilities to cope with, no family should get more from living on benefits than the average family gets from going out to work’. This suggestion that disabled people will be exempt from the income cap is false.

Disability Living Allowance claimants will be exempt. So also will be War Widows and working families claiming the working tax credit. But income from Employment Support Allowance (ESA) (Incapacity Benefit) will be included. That means that disabled people unable to work will have their benefit levels capped, potentially losing income, their homes and adding to the poverty that disabled people are already disproportionately likely to experience. The process of transferring all Incapacity Benefit recipients to ESA is also intended to cut the number of recipients.

Industrial Injuries Disablement Benefit will also be included in the benefit cap. Other specific benefits available to disabled people, such as Mortgage Aid, have already been cut.

Additionally, income from Carer’s Allowance will be included: this is a weekly benefit, worth a measly £35, that people may be able to get if they care for a disabled person at least 35 hours a week. Poverty among carers is intense: research shows that 72% are worse off since they assumed significant care responsibilities, with 30% cutting back on food or heating and 10% unable to pay their rent or mortgage.11

As far as Disability Living Allowance (DLA), there would have been a huge political storm if this universal benefit had been included in the cap. DLA makes a (small) contribution to the costs of disability and supports disabled people to be independent and exercise a greater degree of personal choice. However, it is not safe: the emergency Budget announced a push to cut the number of people receiving DLA by a fifth. Related benefits, such as the Independent Living Fund, which supports disabled people with high support needs, has already run out of money and is accepting no new applications until at least the new financial year.

There is no doubt that these cuts will intensify poverty among disabled people. They will come in alongside cuts in social care and local authority budgets which threaten to evacuate programmes for ‘personalisation’ of care of progressive content.

Crossing the Ts

Alongside all this, the government is in the process of weakening the safeguards that people may otherwise have found under equality legislation. The government is considering not bringing into force parts of the Equality Act 2010, such as in positive action, equal pay reporting and disability accessibility in schools. Their proposed equality duties for the public sector, currently out for consultation, will allow public authorities to take much less action on equality. If successful, the proposals reverse the impetus created by the MacPherson Inquiry and the disability rights campaigning of the 1990s.


Notes:

1 ASHE 2009, Office for National Statistics

2 The Contribution of Women’s Employment and Earnings to Household Income Inequality: A Cross-Country Analysis, Harkness, June 2010, Centre for Analysis of Social Policy, University of Bath

3 Child Poverty in Black and Ethnic Minority Groups , Willis, CPAG, http://www.cpag.org.uk/campaigns/articles/CPAG_article_child_poverty_in_BME_groups.pdf

4 How Fair is Britain, EHRC October 2010

5 http://www.cpag.org.uk/press/2010/041010.htm

6 ‘Lord Freud also suggested that the government may be planning to undertake a wider reform than simply removing child benefit from higher rate taxpayers as announced by the chancellor’, Guardian 12 October 2010

7 Fairness means giving people what they deserve, Cameron to tell Tory conference, Guardian, 6 October 2010

8 Financial Times 5 October 2010

9 http://www.telegraph.co.uk/comment/columnists/benedict-brogan/8047179/Conservative-party-conference-2010-Let-battle-commence.html

10 Benefit cuts: 'I cried when I heard about the changes. What will I do?' Guardian 6 October 2010

Saturday, 2 October 2010

Local Impact of the Coalition’s Policies

By Michael Burke

Opposition to the Tory dominated coalition government’s economic policy is already growing, with just 22% supporting their programme of cuts. This is well before the majority of this year’s cuts of £9bn are implemented, which are themselves overshadowed by the £41bn in spending cuts due next year. The Comprehensive Spending Review on 20th October will spell out in greater detail where spending will be axed. The unpopularity of current policy seems set to grow.

One of the key areas targeted by the coalition is spending in the devolved authorities, regions and local authorities. Local government spending was cut almost immediately after the election, £2.8bn slashed from the devolved administrations, local government and Transport for London in the first £6.2bn package . Other cuts, such as to transport projects and flood defences will have a specific impact on local spending and services.

Reactionary “Localism”

This is a political choice. The coalition’s aim is twofold: to deflect criticism away from central government and to co-opt others, especially those outside the coalition parties into supporting or defending the programme of drastic cuts. Floundering for a contemporary or historically important example of where spending cuts had actually reduced the deficit, the coalition has met with the BBC”s approval in alighting on the Canadian cuts of the 1990s. Ignoring the five-year domestic recession and rising debt level the Canadian federal government policy caused, even while benefitting from the “Clinton boom” to its South, the main mechanism Ottawa chose was simply to choke off the very large transfers to Canada”s provinces, which were responsible for huge budget items such as healthcare and welfare provision.

Now a host of reactionary commentators, such as the Centre for Policy Studies are urging a new “localism” on the coalition, a call which is echoed by Guardian columnists including Simon Jenkins, who cynically argues that Cameron can “spread the blame on cuts” by devolving welfare budgets to local authorities, and cutting them. This has nothing to do with increased local democracy, but is merely a self-serving attempt to avoid the political consequences of a reactionary and deeply unpopular policy.

Local Effects of the Cuts

That cynicism is widespread, with many local political leaders attempting to blame coalition cuts for their own policies which had pre-empted them. This is true of Boris Johnson in London and the Tory-LibDem coalition in Birmingham, both of which cut spending before their government funding was reduced. Yet the power of local opposition to cuts is demonstrated by the postponement of the measures for one year in Scotland- even if the cynical motivation is the same, with Tories, LibDems and the incumbent SNP all hoping to soften the expected backlash at the May 2011 Assembly elections.

The actions of the mini-coalition leadership of the council in Birmingham are perhaps the most brutal. Almost 26,000 local authority staff (all the council’s non-teaching employees) have been threatened with redundancy and issued with legal notices informing them that their pay and conditions have been cut.

The impact of either redundancies or pay cuts will be severe, not only for the workers and their families and all those who rely on the services provided. But it will also have a direct negative impact on the local economy.

These can be measured in terms of employment and incomes. There are both direct and indirect effects of reducing employment in the public sector. The indirect effect falls mainly on the private sector. This is shown in the table below, from analysis of the Input-Output tables, and is published by the Scottish government . Type I effects in this table are the direct impacts of a change in the employment levels or incomes of the sector. Type II effects include the indirect effect from those changes on other sectors (arising from changes in demand for supplies to the sector, and in demand arising from changes wage totals, etc).

Table 1

10 10 01 Table 1 Local Effect of Cuts
Therefore, if 1,000 jobs are cut in public administration the direct effect will be to create 1,410 total job losses mainly as private sector activity is also hit. As jobs are also hit in those sectors the total job losses arising from the initial job losses of 1,000 rises to 1,760.

Likewise, if incomes (pay) are cut by £1mn in public administration, the direct effect will be to reduce incomes by £1.35mn as the loss to spending power multiplies through the economy. But, as incomes in other sectors are also adversely affected, this total loss of income rises to £1.6mn. These losses mainly take place in the locality where the initial cuts are made, since middle and lower income workers spend the overwhelming bulk of the pay locally.

Outsourcing, Privatisation

In the case of Birmingham, any redundancies will cause private sector job losses, and any reduction in pay will have the same effect. The actions of Suffolk county council also directly impact 26,000 workers, although here the mechanism is to cut 30% of the budget and outsource the entirety of its current service provision- in all areas. Community groups, volunteer and charities are supposed to fill the gap. But in reality, the bulk of all outsourced services will go to the private sector, where the compulsion to secure profits will mean either a worse service and fewer jobs, or higher costs than via council provision.

In both the Birmingham and Suffolk cases a policy of reducing public services and jobs in order to boost the profits of the private sector is being dressed up with the rhetoric of “fairness” and “democracy”. There will be more dishonest rhetoric, and greater damage done to the wider economy as the programme of cuts deepens.

As I have already shown in Tribune, the alternative approach, investing to boost the economy, already had a limited but definite beneficial effect in the UK, due to measures taken by the Labour government, and has already shrunk the budget deficit. The fall is a modest one, but that is a function of the very small boost to the economy from the 2009 Budget. The general proposition is that cuts lead to a disastrous slump and deficit-widening, while government spending focused on investment increases wider activity, which reduces the deficit. This is very clear from the different trajectories of Irish and Spanish economic activity and their public deficits – an issue I have looked at in detail on the Guardian’s Comment is Free.