Institute for Fiscal Studies says chancellor's plan will cause 10% drop in family living standards

[ttosca]

George Osborne given stark warning on cuts' impact

Institute for Fiscal Studies says chancellor's plan will cause 10% drop in family living standards

George Osborne's austerity programme will cut the living standards of Britain's families by more than 10% over the next three years as those on the lowest incomes suffer most from the tax increases and spending cuts designed to reduce the budget deficit.

A study from the Institute for Fiscal Studies, the UK's leading experts on the public finances, concludes that the chancellor's strategy will result in greater inequality and rising child poverty, throwing into reverse progress made in the final years of the last Labour government.

The bleak picture painted by the IFS will be used by opponents of the chancellor's austerity measures to call for a plan B to generate faster economic growth. There is likely to be further pressure on Osborne on Monday as the head of his independent commission on banking, Sir John Vickers, outlines measures for banking reform.

The IFS analysis, included in a new international study into the impact of the "Great Recession" of 2008-09 on 21 wealthy countries, says the most severe downturn since the interwar years will "cast a very long shadow in the UK", with the poorest 30% of households especially hard hit.

www.guardian.co.uk/business/2011/sep/12/george-osborne-warning-cuts-impact

[ttosca]

"We're all in this together.", remember?

[CogitoErgoSometimes]

After a 13 year global debt & spending bubble, the correction was never going to be pretty. The previous government managed to create greater inequality and lower social mobility in the boom times so the idea of 'throwing into reverse' the acheivements of Labour is slightly ridiculous. The austerity measures may reduce our disposable income short term but they don't mention what effect the 'keep spending' (or rather 'cut slower') Opposition policy would have produced. I'm also suspicious of organisations that are happy to lob brickbats at strategies but don't have any better ideas themselves.

[niceguy2]

I'd be surprised if the deepest cuts since the 1920's didn't affect our living standards. In fact, I'd be worried then that the government wasn't taking our deficit & national debt seriously.

The fact is paying any debt off leaves less money to spend on other things. Being in debt means you've already borrowed money and so artificially increased your "standard of living" whilst at the same time also paying interest on said loan.

[jackstarb]

In case anybody is interested in making up their own mind about the report, rather than just relying on the Guardian -

A link to the actual report:

www.ifs.org.uk/pr/frdb_recession.pdf

[jackstarb]

OK - that's just the press release. The report isn't available yet.

Grrrr.....I hate it when they do that.

BTW - the press release puts the report findings in international context, so worth a read.

[ttosca]

I think some of your missed the point of the article - or at least, one of its main points.

The issue is not just the drop is living standards, but the fact that the poorest are going to suffer disproportionately from government policy.

Secondly, the 'correction' isn't as simple as 'living within our means': we are in the middle of a recession caused by a financial crisis. Therefore tax receipts are at an all time low and people are out of work.

Furthermore, as I've explained a few dozen times, spending on public services in this country is really not that high. Relative to other european countries it is average or below average in many areas, including health.

As for individuals, the fact is that wages have stagnated for three decades due to attack on workers rights and unions and hiring people overshore to do work cheaper than in the UK. In order to keep consumption going (which is what our economy depends on), people were given cheap access to credit.

So the consumption of 'living beyond our means' is the ruling class having its cake and eating it: it gets to reduce wages and increase profit, while at the same time keeping up consumption to keep the economy going. Yes, this was a bubble. That's the nature of Capitalism.

So in any case, if you read the article, it states that the poorest 30% will be hit especially hard. My point was that the poorest should not be victimised to pay for a crisis not of their own making. There is much room here to ensure the poorest are protected while those who can afford to make a higher contribution, do so.

[CogitoErgoSometimes]

The poorest may be disproportionately affected by changes to public services but the biggest impact on household income is coming from increased prices for food, fuel and other essentials.... not something the government has direct control over. Wage restraint is a less important element because many of the poorest households are either on fixed unearned incomes such as retirement savings or benefits & pensions which at least have a degree of index-linking. I don't believe the poorest are being victimised or being asked to pay over the odds. I do believe that they are most vulnerable to the effects of high inflation.

[ttosca]

Cogito-

The government does have control over prices of food and fuel. It has at least two mechanisms at its disposal: regulation and taxation. There is no good reason, for example, why public transport in the UK is three times more expensive than mainland europe, while corporate profits in that sector are souring.

Wage restraint is a less important element because many of the poorest households are either on fixed unearned incomes such as retirement savings or benefits & pensions which at least have a degree of index-linking.

I was referring to the working poor. Those in low incomes. These are the people who have had their wages depressed - what your euphemistically called 'wage restraint'.

There is no need for 'wage restraint' when the income of top earners has increased 10 or 100 times in two decades, while those in the middle and bottom have stagnated. 'Wage restraint' needs to happen at the top, so that regular working people's wages can keep up with inflation.

I don't believe the poorest are being victimised or being asked to pay over the odds. I do believe that they are most vulnerable to the effects of high inflation.

The economy isn't a natural phenomenon like the weather. Like any political and economic decision, there are winners and losers. Reducing the deficit could be done by asking the richest to pay for the greatest share, or by putting the burden on the poorest. At the moment, as the report shorts, the burden is lying on the poorest.

[FreddyG]

My point was that the poorest should not be victimised to pay for a crisis not of their own making.
Why?

There is much room here to ensure the poorest are protected while those who can afford to make a higher contribution, do so.
How? and Why?

Has it occured to you WHY those "who can afford" to do that are in that position? Could it be because they have worked hard, and used their brains? Or do you just think people get rich doing nothing?

The poorest are paying very little, the rich paying a lot, we are in this together. It's just that a lot of people's idea is that the rich should pay for everything, and the poor just left to live fecklessly.

[ttosca]

Has it occured to you WHY those "who can afford" to do that are in that position? Could it be because they have worked hard, and used their brains? Or do you just think people get rich doing nothing?

Oh I see. You're going to pretend that we live in a meritocracy, right? In fact, the biggest indicator is social outcome for an individual is the family and wealth in which they were brought up; if you are born into wealth, you will remain wealthy. If you are born poor, you will remain poor.

The reasons for this is obvious: rich people have connections, get better schooling, get better healthcare, have a better diet, and are less likely to be victims of crime.

Of course there are always rags-to-riches stories, but in general, background determines wealth.

The poorest are paying very little, the rich paying a lot, we are in this together. It's just that a lot of people's idea is that the rich should pay for everything, and the poor just left to live fecklessly.

As a portion of their income, the rich aren't paying a lot, in fact. That's why wealth inequality is greater than it has been since Victorian times. We bail out the banks, while they continue to award themselves billions (£14 Billion last year) in bonuses.

Finally, I think you should rethink the use of the word 'feckless'. Considering it also means 'irresponsible', I think you'll find that it applies more to the casino gamblers who brought the world economy to its knees than the average mother working 40+ hours per week on less than £20K.

[CogitoErgoSometimes]

'Burden' is relative. The person earning £10,000 per year pays £837 in tax and NI.... less than 1% of their income. The person earning £100,000 per year pays £35,391... 35.3%. We are already, therefore, 'asking the richest to pay for the greatest share' and have done for a long, long time.

[niceguy2]

I agree with Cogito.

If you earn a middle income then you may well find the loss of tax credits and at very least a 10% reduction on childcare element.

If you are a higher rate tax payer you lose child benefit soon.

If you earn £150k or more you'll be paying 50% income tax. In that context you could argue that the "rich" suffer the most because they pay the most and are continually asked to pay more.

[jackstarb]

The report states that the bottom 30% are hardest hit. Followed by the top 10%. Interesting since we are always hearing about the 'squeezed middle'.

FWIW - any recession is bad news for the poorest. They have little financial cushioning. And are most likely to suffer when public services are cut.

I know Ttosca isn't a fan of 'trickle down' but it's sadly often the low skilled whose jobs go when middle-class belts are tightened.

When the report is actually published - it'll be interesting to see how the UK has done compared with other countries.

[ttosca]

'Burden' is relative. The person earning £10,000 per year pays £837 in tax and NI.... less than 1% of their income. The person earning £100,000 per year pays £35,391... 35.3%. We are already, therefore, 'asking the richest to pay for the greatest share' and have done for a long, long time.

For the sake of argument, I won't dispute your figures, though I would like to see your source for these amounts...

I think you meant less than 10% of their income for the person earning 10K. A person earning only 10K shouldn't be paying anything in tax at all. They should be receiving aid from the state. Furthermore, the minimum wage should be raised to a 'living wage' whereby they can afford to pay for the cost of living.

The Lib Dems want to abolish income tax under 10K, and on this I agree with them. Not only is this fair, but it will put money in to the hands of the poor who will necessarily spend that money to support themselves.

Raising the threshold to 10K will also benefit everyone else earning an average income, as they will pay slightly less overall as well.

--

Secondly, a person earning 10K is subsisting. They are literally struggling to survive. They use all their money on food, rent, bills, and clothes. They often fall short. This is poverty. Paying £837 yearly is a big difference for them. It can mean the difference between eating or not eating, between getting dental treatment or not, between being able to afford the commute to work or not.

Someone earning 100K paying and £35K still earns 65K - which is 2.5x the median (the most common amount). They are still thriving.

I think the have to look at this in context, though. It's not just about the richest paying more, it's about the fact that there are so few of the rich and so many of the poor. Income inequality is staggeringly high in this country. It is now higher than it has been since Victorian times.

I don't think that progressive taxation is a quick fix for this. I don't think you can just keep on taxing the fewer and fewer rich people at higher and higher levels. There is a bigger problem here - so many people are struggling to make ends meet and keep up with the cost of living.

So a more holistic approach needs to be taken which includes reducing prices and the cost of living, and making sure lower earners earn (and keep) more money.

[niceguy2]

For once Ttosca i find myself agreeing with you. Raising taxes on the rich alone isnt going to fix anything and certainly will just make an already bad situation worse.

Ditto with just slashing taxes, that won't work either. Personally I'm in favour of a flat rate of tax along with a decent (say £15k) tax free allowance. Whilst i think £10k is certainly a start, I agree that £10k isn't a lot in the grand scale of things.

We also need to sort out our welfare system which currently just does not incentivise people to work at all. I'm hoping the universal credit will be better.

[jackstarb]

Has anyone been listening to R4's 'Class Ceiling' with Polly Toynbee? It is actually pretty good.

There was one explanation of rising 'income inequality' on the program (although I think Toynbee missed it's significance).

This chap explained that over the last 20 years the structure of work has changed. There has been an increase in the number of highly paid jobs and an increase in low paid, low skilled jobs. With a large decrease in the number of middle income jobs (which used to be stepping stones upwards).

If this is right - then it could be an explanation for reduced social mobility and growing income in-equality.

But if the problem is structural - what can be done?

[niceguy2]

Actually its not something I've thought about before but my gut instinct says there could be an element of truth here.

Let's face it, skilled manufacturing jobs are being done abroad now. Where are our TV's, fridges, etc. all made nowadays? South Korea, Japan, China. Cars, generally Germany, Japan, again South Korea. Yes we have some capacity here but generally its in assembly.

Skilled office jobs are more and more being offshored. IT was a prime example. Nowadays more back office jobs such as finance/admin and human resources they are often offshored to India. My company's HR is done out of Hungary.

At the top end, the bosses of these companies who have grown big in the western world are able to pay themselves big bonuses by a mixture of company growth and reducing costs via offshoring. So they're fine.

All the unskilled manufacturing was lost decades ago to China.

So what remains? Well the only things that seem to still being built at an unrelenting pace are supermarkets! Seemingly every other street nowadays, there's a Tesco or Asda. And that's never going to add wealth to our country. Workers are always going to be at the lower end of the spectrum.

What can we do? Well personally I think we have to start looking at things like tax breaks for companies to hire onshore staff. Tax breaks for companies who invest in new UK jobs. Perhaps subsidies for setting up new offices or training staff.

Yes, in the short term it will cost us and companies will be seen to "get away with paying taxes". But bear in mind these staff then pay income tax and once the breaks run out, companies will pay corporation tax.

All the above are tactics other countries use to lure my company into setting up shop in their country.

We have to stop assuming that the UK is some panacea for companies to invest in. The world has moved on. We haven't enough.

We have to start competing for multinational corporations to invest just like any company needs to compete with others for their business.

[CogitoErgoSometimes]

"I would like to see your source for these amounts..."

No problem... this simple income tax calculator isn't a bad one. I wasn't saying that £10k is living wage. Naturally, someone on that low a wage will qualify for tax credits and other benefits to bring their total income up. I was using the example of the relative difference paid in tax between people on £10k and £100k to question the argument that the 'burden' falls solely on the poor. Yes, the person on a high income has quite a lot left after paying their tax, but I think there needs to be some perspective.

[AlpinePony]

A 10% drop is absolutely awesome ! How have they managed to only get living standards to drop by 10% considering the country and the masses have over-spent for decades at a considerably larger value? Well done GO!

[jackstarb]

NG2 - interesting ideas.

If the problem is mainly structural, then this has wide-ranging implications:

So, perhaps restribution of income via tax, achieves little real equality as the highly skilled rich just negotiate even higher wages and companies can pay the low skilled even less, knowing it'll be topped up in benefits.

High tax allowances [10k Plus] and a widening of 'the living wage' movement would help. But, we need to raise 'low skilled' workers into 'semi skilled jobs'.

Now I'm going to get controversial. IMO our education system has concentrated on educating pupils for this decreasing 'middle space' of the workforce. e.g Schools have been 'rewarded' for getting pupils 5 GCSE's at c grade.

But what we need is a significant number of very highly educated, highly skilled people. And the rest numerate and literate with excellent practical skills (including basic business and ICT).

Manufacturing isn't dead by a long shot - it just replaced it's low skilled workers with technology and a small number of skilled workers.

Also, the service industry continues to grow and we still need: plumbers, electricians, builders, child carers, hairdressers......

[ttosca]

For once Ttosca i find myself agreeing with you. Raising taxes on the rich alone isnt going to fix anything and certainly will just make an already bad situation worse.

I didn't say that, so don't agree with what I didn't say. I said that in order to fix our problems, the answer isn't just to keep taxing the fewer rich more and more amounts.

Ditto with just slashing taxes, that won't work either. Personally I'm in favour of a flat rate of tax along with a decent (say £15k) tax free allowance. Whilst i think £10k is certainly a start, I agree that £10k isn't a lot in the grand scale of things.

Cutting taxes for the poorest means that, not only will there be less poverty, but more money circulating in the economy, since poor people by definition have less disposable income. Unlike rich people, they won't keep it in a savings account or tie it up in big investments.

We also need to sort out our welfare system which currently just does not incentivise people to work at all. I'm hoping the universal credit will be better.

You should stop reading the Daily Mail. It's poisonous. The welfare system in this country is not particularly generous, and is about the european average. Unlike what you read in the Daily Mail, the vast majority of people don't want to be on benefits. They would rather earn their own money with a good job.

If you want to 'incentivise' people to work, ensure that working for the minimum wage pays substantially more than being on the dole. And no, the problem is not that the dole is too generous. The problem is that the minimum wage is too low.

[crazynanna]

[ttosca]

Has anyone been listening to R4's 'Class Ceiling' with Polly Toynbee? It is actually pretty good.

No, but it sounds interesting.

There was one explanation of rising 'income inequality' on the program (although I think Toynbee missed it's significance).

This chap explained that over the last 20 years the structure of work has changed. There has been an increase in the number of highly paid jobs and an increase in low paid, low skilled jobs. With a large decrease in the number of middle income jobs (which used to be stepping stones upwards).

Yes, that's possible. I just think that most jobs have decreased in pay. It is well known that salaries in the West in general have been stagnating for decades. So, for most people, they're poorer off. It's only the very few at the top who manage to command ludicrous salaries. Most of these people are in the finance sector.

If this is right - then it could be an explanation for reduced social mobility and growing income in-equality.

But if the problem is structural - what can be done?

Of course the problem is structural. What else could it be?

[aliceliddell]

crazy get your filthy paws off ttosca. S/he's mine. The future mother of my children. Together we will enjoy a golden future of gin drinking funded by child tax credits. ttosca - btw are you male or female? I don't mind either way.

[ttosca]

Haha!

Thanks guys. I'm male.