Was the Budget regressive? Coalition at odds with top think-tank

The IFS's scathing Budget verdict looks bad for Osborne & co. But it could easily be wrong...

by
Last Updated: 17 Jan 2011

Unwelcome headlines for Chancellor George Osborne today: the well-respected Institute for Fiscal Studies think-tank has just slammed his Budget as ‘regressive’, suggesting that the poorest families will end up paying more than higher earners. Perfect ammunition for the Government’s critics, particularly since Osborne claimed the exact opposite at the time. But is the IFS right? The Government says not, because it effectively ignores all the potential positives from the Budget. And although this might seem a bit flimsy and theoretical, it’s undeniably true that any report like this will invariably involve all sorts of assumptions that may or may not come true...
 
The IFS dismissed Osborne’s claims of fairness – that those with the broadest shoulders would bear the heaviest burden – as untrue. In fact, it said, the Budget cuts were ‘clearly regressive as, on average, they hit the poorest households more than those in the upper-middle of the income distribution’. Poorer families will supposedly see the biggest impact, because their welfare payments will fall but they won’t get any benefit from the higher income tax allowance (since they don’t pay it anyway). In fact, their take-home cash will fall by almost 5%, more than almost any other group.
 
Admittedly the only exception is the richest 10% of families, who’ll see their take-home pay drop by more than 6% - technically justifying Osborne’s claim that the richest will contribute the most. And you might argue that since the Government spends most of its money supporting people who can’t support themselves, it’s not surprising that spending cuts affect the poorest most. Nonetheless, this is still a scathing verdict, from an independent think-tank of excellent repute – and it severely undermines the Coalition’s claims to be progressive (which is likely to make life even more difficult for the Lib Dems).
 
Unless, of course, it’s not true – as the Government has been insisting today. It argues that the report is ‘selective’: in particular, it says, it fails to consider the impact of measures to boost employment and growth: for instance, although lower-income families might lose benefits, they could be net better off if the Budget’s policies result in them getting a job instead. The Treasury also claims, not unreasonably, that saddling future generations with huge tax bills by running an ever-greater deficit is not very progressive either.
 
Of course, they would say that. But it’s also true that there’s a huge amount of guesswork involved in calculating the future impact of a Budget – with something as complex as a national economy, any policy changes will have all sorts of consequences, including some unintended ones. Any economists trying to produce a working model have to make a number of (politically-loaded) assumptions, some (or all) of which will almost certainly turn out to be wrong.
 
So while we cast no aspersions on the workings (or the partiality) of the IFS’s pointy-heads, it’s important to remember that its analysis – like the Government’s – is ultimately just a (highly) educated guess. The truth is that nobody really knows; we won’t be able to judge accurately how progressive this Budget was for a while yet.


In today's bulletin:

Was the Budget regressive? Coalition at odds with top think-tank
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Should David Cameron take his full paternity leave?
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