There has been a lot of media coverage today for a new IFS report claiming that the Government's fiscal adjustment is regressive. Unfortunately, it is going to be difficult for the coalition to shake this one off, given how much weight they placed on Chart A1 in the Emergency Budget report, which they used to bolster a claim to be making "progressive" cuts.
But that chart and the findings announced by the IFS this morning are actually far less significant than they have been made out to be. The IFS report is based on an assumption that the fortunes of the poor add up to the amount of Government money spent on them. In a blog for the TaxPayers' Alliance, I raised a hypothetical example to show how that could produce absurd results:
"Suppose you invented a policy, some kind of economic miracle, which doubled the incomes of the poorest ten per cent of families without the Government spending a pound. That would reduce benefit spending. It would also increase tax revenues from the poorest. The same method that the IFS are using in their reports would show the effects of that policy as horribly regressive, cutting spending on the poor and shifting the fiscal scales against them."
Of course, that example is an extreme one. But the IFS method does mean recording dependence on government as success. Allowing it to dictate policy would lead to disaster as it would stop us dealing with the problems created for the poor, and poor areas, by too much government.
There are more practical examples of how this sort of distributional analysis could lead to policy choices that actually hurt the poor. In my blog, I gave the example of regions where the state dominates the economy, with state spending in the North East over 60% of GDP, crowding out private enterprise and locking in economic stagnation:
"On that measure at least, parts of the country are closer to the Soviet Union than the South of England. An economy so dominated by government spending always tends to economic stagnation which ultimately means misery for the people who live there."
In an excellent blog this morning for the Telegraph, Neil O'Brien - Director of Policy Exchange - provides another example:
"A couple of years ago I found that between the mid 1990s and the mid-2000s, the incomes of the poorest 10% of the population had grown eight times faster in Ireland than in Sweden (and six times faster in Britain) – mainly the result of faster growth overall. As a result, so-called Anglo-Saxon economies like Ireland and the UK had a smaller proportion of their population below the absolute poverty line than Sweden. Growing the pie matters as much as how you slice it, and equality doesn’t really capture everything we mean by fairness."
The IFS do some very important statistical legwork. They have exposed some egregious claims made by politicians over the years. But there is no simple graph which will tell you if a Government is doing the right thing for ordinary Britons, or the poorest. It is dangerous for politicians to show too much respect to such a simplistic analysis.
Dealing with a fiscal crisis brought on by a decade of irresponsibility will be difficult. But the way to help the poor is to embrace radical reforms in areas like welfare and education that will allow them and their children to better stand on their own two feet. Not making more vain attempts to bury deep seated problems in piles of taxpayers' money.
