George Osborne's TINA moment

There’s a chart that comes in useful when you’re reflecting on George Osborne’s 2014 Conservative Party Conference speech today. Buried away in an annex to this year’s Budget [pdf], it shows you how the totality of the coalition Government’s economic policies have directly affected household incomes.

On the far left are the bottom 10pc of the population, in income terms. On the far right but one are the top tenth. You can see that in pure cash terms, the richest families have faced the biggest income squeeze as a direct result of the coalition’s tax and benefit policies.

And in a sense this is what the Chancellor used to justify the new, tough policies he announced today, including a freeze on benefits that will cost 10m households a combined £3.2bn a year after the election. The rationale runs more or less as follows: benefits have actually been uprated faster than real wages since the crisis (working age benefits up by 22.4% since 2007; earnings up by 14%). Tack onto that the fact that lower-income household have benefited most from the increase in the tax-free allowance. So a real-terms cut on benefits will simply equalise things, putting right some of the imbalance in that chart above.

It’s a compelling message for core Conservative voters, as is the other implication of the Chancellor’s speech: that he will try as hard as he can to avoid raising taxes, choosing to deal with the deficit through government spending cuts instead. However, there remain a number of questions:

1. Are the £25bn of cuts really necessary? The Chancellor has opted to try to eliminate the deficit altogether, meaning Britain will have an overall surplus (eg not need to borrow at all) by 2020. That is significantly more ambitious than many economists think is necessary.
2. Is it right or realistic to try to achieve all £25bn through spending cuts rather than tax rises? This is, again, an open question. The Institute for Fiscal Studies thinks departmental cuts of the sort the Chancellor has in mind (£13bn worth in the two years following the 2015 election) would be unachievable. It thinks tax rises might well be necessary.
3. What happened to “we’re all in it together”? The policies announced by the Chancellor today almost all hit the poorest hardest. Pensioners are excluded (indeed they and their families will benefit from his abolition of an obscure “death tax”); those who don’t claim benefits won’t feel the impact. In fact, the only policy Mr Osborne announced that “balanced out” the political impact was a tax avoidance crackdown on tech firms — though this will only generate a few hundred million pounds a year — far below the billions being recouped from welfare recipients.
4. Is it really fair to whack the poorest families at this stage in the recovery? After all, that chart above, showing you the impact of coalition policies, doesn’t tell the full story, since it shows the net benefit/cost in cash terms, not as a percentage of each family’s income. After all, a £100 hit amounts to far more for those with smaller incomes. When you work it out in proportion to families’ incomes, the chart looks a little different:

In other words, while the richest 10% have faced the biggest hit as a result of government policies, the bottom tenth aren’t far off in terms of how they have fared. Now, although the distributional impact of these new welfare cuts haven’t yet been calculated (we’ll have to wait for the Autumn Statement to find that out), one can reasonably expect that after they kick in, those in the bottom few tenths of the income spectrum will face an even bigger hit.

The Chancellor’s response to this is the one delivered frequently by Margaret Thatcher during her time in office: There Is No Alternative, or TINA. His point goes as follows: the economy will only thrive if the deficit is eliminated. That involves either cutting spending or raising taxes. And, the rationale goes, there is really no wisdom in raising taxes any further than they are now — after all, look at what happened to Francois Hollande when he tried to do the same thing in France. So spending needs to be cut.

The problem is that, as the questions above show, not all of those assumptions are set in stone. When Thatcher cited TINA in the 1980s, her point was that there was no alternative to the market economy (as opposed to Labour’s statism). From today’s vantage, that doesn’t seem all that controversial. But the notion that the only way to eliminate the deficit is by squeezing the less well-off is far less palatable — particularly for the swing voters who will decide the next election.