21 October 2010

The Impossibility Of 'Progressive' Spending Cuts

Only the very most stupid continue to argue that large spending cuts to address the dreadful black hole that the Coalition government inherited in May are unnecessary. However, the main line of argument against the spending cuts is itself a nonsense. Left-wing critics argue that low income groups will be most affected. But is there a permutation of government spending cuts which would not be regressive?

Of course, many elements of government expenditure are targeted at the poorest, but for illustrative purposes let's assume that the benefit of government spending is evenly distributed.

Let's imagine that in this theoretical nation, the highest earning half of the population segment have average take home pay of £30,000 and the lowest half £10,000. Say there is £10,000 of government spending per head and an across the board of 10% reduction is announced. The £1,000 cut in government expenditure represents 3.3% for the richest and 10% for the poorest. As it is obviously the case that poorer people have more spent on them by the government, a large scale expenditure reduction is always going to have a bigger percentage effect on the poorest than the richest.

Speaking on TV, Carl Emmerson, the acting director of the IFS suggests on the one hand that the cuts may not be sufficient but complains that the cuts are regressive. You can't have it both ways. To support spending cuts but argue against regressive cuts is demanding the impossible.

1 comment:

Mark Wadsworth said...

That's theoretically correct, but factually not true.

UK govt spending 2009-10 (from memory)
Cash welfare and pensions £217 bn
Public sector salaries £169 bn
Payments to private sector £281 bn
Debt interest £30 bn
Other bits and pieces +/- [forgotten].

It would be quite easy to maintain welfare and pensions and 'frontline services' while chopping back payments to the private sector, having a 75% income tax rate on public sector salaries above £50,000 etc.

To cut a long story short, government payments to 'wealthy' people (i.e. 'regressive spending') is far more than welfare and pensions etc ('progressive spending').