Osborne isn’t pillaging the poor to help the rich – but IDS is right to attack protection of pensioner benefits
It's all about fairness, that slippery, subjective term which dominates so much of our political discourse. Following his resignation from the Cabinet on Friday, Iain Duncan Smith spent much of the weekend claiming it was unfair that the government had intended to cut disability benefits in a Budget in which taxes on higher-earning households were being reduced. He also said it was unfair to be cutting further from the working-age welfare budget at a time when vast swathes of pensioner welfare spending was protected or increasing.
The fallout has been unsurprisingly sensational. The government is in disarray because this critique is so powerful and threatens to engulf them – marrying the central claim by Labour since 2010 that the Conservatives are a pressure group for the rich with the widely-held criticism that, on welfare spending, the Tories have protected their pensioner voters at the expense of working families. And yet, while containing grains of truth, as an overall narrative the idea that the Conservatives are pillaging the poor to benefit the rich is highly misleading.
For while last week’s Budget did indeed raise the 40p income tax threshold and cut capital gains tax while proposing cuts to disability benefits, overall the Institute for Fiscal Studies says that its effect on the income distribution was minimal.
Cutting corporation tax to 17 per cent, the top rate of capital gains tax to 20 per cent and, in the past, the top rate of income tax from 50 to 45 per cent certainly catches the headlines, but there are good economic reasons for doing all three. It is well established, for example, that corporation tax is the most damaging tax for productivity growth, which matters much more for the living standards of the poor in the long run than redistribution. Income tax receipts from top-earners have gone up substantially since the 50p rate was cut and the rich pay a greater share of income tax than ever. And I highly suspect the lower rate of capital gains tax will bring in more, not less, revenue.
Not that taxes should be used as a distributional weapon. A good tax policy should seek to raise funds for government spending in the least distortionary way. But even that aside, the idea that Conservatives have had a pro-rich tax agenda is more myth than reality.
High earners have seen child benefit tapered away, huge reductions in pensions tax relief, and are much more likely to be affected by new punitive stamp duty rates and changes to taxation affecting buy-to-let. The 40p tax threshold has, up until this Parliament, been largely stagnant overall since 2010, ensnaring almost 5m people into a higher rate band that was originally the domain of the very rich (and which only 1.7m paid in 1990).
Perhaps this is why Duncan Smith talked a lot about the “perception” of fairness between rich and poor rather than citing figures. For while it is easy for George Osborne’s opponents to link the £1.3bn cut to disability benefits as “costing” the same as new tax cuts, the bigger picture is that overall the chancellor has raised taxes substantially, particularly on the well-off, with the projected tax-to-GDP level of 37.5 per cent by 2020 being higher than in all but one year of Gordon Brown’s decade at the Treasury.
Spending cuts, therefore, do the donkey work to eliminate the deficit. Where IDS has a point is that the real reason ministers are having to even contemplate cutting disability benefits, surely one of the last things one would consider, is the constraints they have imposed on themselves by ring-fencing vast swathes of government spending and implementing an arbitrary cap on remaining welfare spending.
In particular, the egregiously generous triple-lock on the state pension (already estimated to have cost £6bn) and the protection of universal pensioner welfare benefits, at a time when working-age welfare is being squeezed tightly, looked and look unjustified and unjustifiable. This is particularly true given what really matters fiscally is the long term, and the cost of these policies will spiral given an ageing population.
Yet this is an intergenerational question more than a rich-poor trade-off. If the consequence of IDS’s resignation is more obsession with short-term distributional conditions between rich and poor rather than setting the conditions for growth, the fallout from this resignation could be very damaging for economic policy-making indeed.