Note (12:15 11/7/12): Corrected in 2nd paragraph following a communication from the Resolution Foundation – they are focussed on issues rather than party politics (like the E3 Foundation – I approve) and do not “describe themselves” as “centre-left in outlook”, as I said in the initial version of this post that they “might” do.
I wrote last time that I would try to report on events I attend. For once, I’m keeping my word.
This morning, the Resolution Foundation (RF) hosted the latest in a series of meetings making up its “Commission on Living Standards”, which constitutes a large part of the analysis and policy debate around what Ed Miliband loves to call the “squeezed middle”, that is, as RF put it, “the economic decline of low to middle income Britain”. Heck, the Commission even has its own website, full of bells and whistles. Whilst the RF seems centre-left in outlook, they are politically independent and engaged with all three mainstream political parties. Today was the turn of the Tory and Cameron loyalist Nick Boles, with Lord Adonis chipping in as responder.
Many Resolution Foundation events are heavily trailed and reported in the media, and Nick Boles’ pitch on Raising Living Standards this morning was no exception. Trouble is, the mainstream media inevitably focus on whatever aspect they believe will catch the attention of their readers, so we have “Tories plan to axe pensioners’ benefits” in the Independent, “Limit winter fuel allowance and Sure Start, says Cameron ally” in the Guardian, the more accurate headline “Rich elderly should lose benefits, says David Cameron ally” at the BBC, not to mention the A-word again at the Mail: “Axe free prescriptions and bus passes for the better-off elderly, says Cameron ally”.
Clearly the media would rather scare the horses (check out the comments – and the voting on them – on that BBC story) than present some reasoned argument. No wonder we end up with swathes of incoherent policies.
The Independent’s report gives the best summary of the politics of the situation. Cameron doesn’t want to “axe” benefits for the well-off elderly, because he promised not to in 2010. Will he be able to avoid repeating such a promise in 2015? The question was asked this morning. Although Boles made a good point about how none of the parties faced up to the impending fiscal crisis in 2010, I’m not convinced. I reckon Paul McCartney’s bus-pass is safe for some time yet.
But Boles’ talk was not titled “Pensioner’s perks”. It was much more wide-ranging than that. Indeed, there was much more discussion in the Q&A this morning of tax credits, youth unemployment and even the comparative advantages of the German education system (better for technical students) and that in the UK (better for the academically inclined).
If there was a takeaway policy message from Boles, it was not that the government might try to claw back around £1.5bn/yr from well-off pensioners, it was that they want to find £8.5bn of savings (at 2012 prices) from the welfare budget as a whole by 2016 (by which time that £8.5bn will have inflated to £10.5bn). And my impression was that if it was up to Boles most of the saving would come from child-related benefits, especially those paid to parents (i.e. Child Tax Credits and Child Benefit), as opposed to schools, and Sure Start, which Boles seems to have it in for.
Since the hard-working families demographic is up there in electoral importance with the pensioners-who’ve-earned-the-right, it’s hard to see where any of the £8.5bn is coming from.
The strength – and weakness – of Boles’ approach is that he aims to be ruthlessly analytical. So he laid down 4 principles:
(1) Only those areas of spending that measurably increase the competitiveness of the economy should be allowed to increase faster than GDP.
(2) As implied by (1), spending on other areas (police, defence, environment etc) must fall relative to GDP.
(3) Areas of recent public-spending growth must decline relative to GDP.
(4) There should be no new areas of spending.
This leads to some overly-rigid thinking, in my opinion. For example, principle (4) seems to preclude a resolution of the elderly care issue, which has revived this week (apparently all-party talks broke down some time ago – like Adonis, I despair at the Westminster political process). And principle (1) relies on measurements, which are not simple in practice – this seems to be why Boles doesn’t like Sure Start.
During the Q&A though, it became clear that Boles has another principle:
(5) Public spending must decline as a proportion of GDP.
Boles said he didn’t go as far as David Laws, who has apparently called for a reduction in public spending as a proportion of GDP to 35%, from 45% after the financial crisis, but implied 40% was a ceiling (Osborne is trying to get it back down to around 39%, similar to the level under New Labour).
Of course, as Adonis pointed out, growth is key, and could reduce the tax-take percentage simply by increasing the denominator (GDP).
But the real weakness in Boles’ thinking is that it ascribes a cost to money that is simply paid to the Exchequer and then paid back out again. This is illogical. A perk is still a perk whether it is a free bus pass (counts towards the public spending percentage) or preferable tax treatment (doesn’t count). You could save money by taking away free bus passes for well-off over 65s or by requiring over 65s to pay National Insurance (NI). Now you or I would weigh up the pros and cons of both these measures. But Nick Boles doesn’t look at it that way. He’s wrong – the public only care about the rate of tax they pay (and to be honest even that’s irrational – they should only care when it changes, as pay rates adjust to the tax regime over time). People certainly don’t give a monkey’s whether UK public-spending is 29% or 45% of GDP – or 25% or 50% for that matter.
So Boles would be wise to reflect on the last question asked this morning, by Gavin Kelly, the RF CEO and Chair of the meeting. Gavin reckoned that the £8.5bn could be saved by requiring over 65s to pay NI (which all agree should be consolidated with income tax – it would be a bit illogical to pay insurance for when you can’t work when you’re over retirement age!) and (probably the biggie) reduce tax relief on pension contributions to basic rate tax only.
I suspect there are other tax allowances that really apply only to the better off that could be looked at – some of those for buy-to-let landlords look rather generous to me, and do we really need to allow new savings to be added to ISA tax shelters every year? Are we really serious about reducing the deficit?
It would seem to be less painful to reduce tax allowances than cut public spending. Consideration should at least be given to tax measures that don’t commit the political cardinal sin of raising headline rates of tax. Come on guys, even Brown was bold enough to raise the NI rate!
Let’s hope ideology doesn’t trump pragmatism in the Coalition’s forthcoming Spending Review. Perhaps they should start by renaming it a Budget (or even Deficit Reduction) Review. Or simply reclassify tax allowances as “spending”!