Tough financial plans could be storing up social disaster

Tough financial plans could be storing up social disaster
Stephen Maxwell, TfN
16.07.10

EVERYONE knows it but the government, and much of the media is in collective denial. "We’re all in it together" proclaims Chancellor George Osborne as he defends his budget. ”This is a fair budget which protects the most vulnerable" insists Treasury chief secretary Danny Alexander pointing to the raising of the income threshold which will take £800,000 out of income tax. Meanwhile with the indulgence of the media David Cameron continues to enjoy his tough love honeymoon with the voters.

But the facts are less accommodating. The combined impact of the recession, the budget, benefit changes and public expenditure cuts will hit the poorest hardest. By themselves the budget changes may take more from the pockets of the rich than from the poor, but insulated by their higher incomes the impact on the rich will be much less than the impact on the poor. For the poorest the VAT increase by itself will wipe out most of the gains of the changes in the basic rate tax threshold.

However the real damage to the poorest twenty per cent will be done by the combination of higher unemployment and depressed earnings, benefit cuts and public spending cuts. Unemployment at between 810 per cent in what threatens to be a slow and prolonged exit from recession, particularly in Scotland, will hit all groups – including recent university graduates. The least skilled will be the most vulnerable. The government’s cutting of the Future Jobs Fund and of the "job guarantee" – recently criticised by the Organisation of Economic Cooperation and Development (OECD) will compound the problem. Even among those who keep a job, shorter working hours and frozen pay will make it harder to stay out of poverty.

The process to force people off Incapacity Benefit on to Employment Support Allowance will reduce the incomes of many whose chances of finding a job are remote. Those who continue to depend on benefits will see the real value of the benefits reduced as the RPI is replaced as the standard for the annual adjustment by the more restrictive CPI.

Even more damaging to the near one in five Scots who live in poverty will be the cuts in public services. The government has chosen to fund the reduction of the public deficit, roughly seventy five per cent by spending cuts and twenty five per cent by tax increases; But the lower your personal income the higher your dependence on the "social income" of public services, and the poorest are estimated to be four times more dependent on public services than the rich. Taken together these changes will make the assurances of Osborne and Alexander as froth on the wind.

More importantly, where do they leave all those targets and pledges on the reduction of child poverty made by the previous Labour Government, the Liberal Democrats, the SNP Government and even by the Conservatives in opposition? Did the pledges have a secret clause saying that they should be taken seriously only for as long as the economy was surfing a credit boom? By their choice of strategy for managing the public deficit the Conservatives and the Lib Dems have in effect shredded their pledges. Some may consider that Alistair Darling’s pre-election warning that under a new Labour Government the cuts would be "worse than Thatcher’s" puts Labour in the same camp. But as partners in the Westminster opposition, as well as in their different roles at Holyrood, Labour and the SNP at least have a chance to demonstrate that they still mean what they pledged.

If it is too much to expect a "progressive" SNP – Labour alliance in opposition to the ConDem Coalition’s economic strategy the two parties’ views should converge on a number of fronts. Even if it means Labour recanting on some of their own policies in government, they should share opposition to the implementation of the harsh regime of incapacity reviews. Both parties support the expansion of a living wage through the public sector as a step towards establishing a new minimum wage standard. And the proposal for a minimum income standard nurtured by the Joseph Rowntree Foundation (JRF) for the last several years should attract the supporters of a citizens’ income in both parties.

The extent of the gap between the minimum income standard and the current level of out of work benefits is revealed by the JRF’s recent report – for a single person £95 per week, for a couple with children £145, for a lone parent £77. If the challenge is not taken up we could be facing the worst social disaster since Mrs Thatcher’s monetarist experiment of the mid 1980s.