Welfare Spending Cuts – IMF data undermines the case

Welfare Spending Cuts – IMF data undermines the case

Christine Lagarde Director of IMF

This month the IMF has published its latest report into the world economy -  the  IMF World Economic Outlook . News stories talked of the report’s lowering of UK growth predictions, but much more importantly the IMF report contains a finding that undermines one of the central assumptions of UK’s economic policy. It provides substantial evidence that Government spending cuts do much more damage to the economy than had previously been thought

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When the Government cuts its spending everyone agrees that the UK’s economic output (GDP) will be reduced – the question is by how much. The Government has underlying its policy and predictions the assumption that for every £10 of spending cuts only £5 will be lost to GDP. What the IMF report says is that for every £10 of spending cuts somewhere between £9 and £17 of economic output is be lost. In the jargon the fiscal multiplier is not 0.5 as previously thought but varies between 0.9 and 1.7.

The implications for economic policy are huge. Many counties, the UK included, are reducing their levels of borrowing by rapidly cutting government expenditure. Slow economic growth reduces government income and reduces the government’s ability to service its debts. So borrowing less can make a nation worse off if it hurts economic growth too much. If the effect of spending cuts is 2 to 3 times more than anticipated then policy needs revised - and quickly.

As can be expected a number of people have challenged the data, and it will take time to reach a new broadly accepted position on the effects of cuts. What is fascinating is the extraordinarily poor evidence base for the previous consensus and the numbers that underlie the Government’s current forecasting. Moreover the Government numbers for economic multipliers are based on the data of the past 30 years unaltered since the economic crisis. It is not surprising that the current climate has changed the effects of government spending dramatically. What is surprising is that many economists and politicians are unwilling to even contemplate the possibility that the facts are changing – even in the face of the new IMF data.

The driving force behind huge swathes of the austerity policies which are causing pain to the poorest all round the world  appears not to be strong evidence but worryingly inflexible ideology. As someone who in my previous career designed new vaccines it shocks me that the level of evidence necessary to test a new medicine on ten volunteers appears to be several orders of magnitude greater than the level of evidence required to impose a potentially catastrophic economic policy on billions.

Welfare spending makes economic sense.

Economic case for further £10Bn of Welfare Cuts undermined

The economic multiplier story has a further twist as everyone acknowledges that different types of government spending have different economic effects. If the money government spends goes to a person or company that in turn spends the cash quickly, then this will have a good economic effect (or high fiscal multiplier). If the money is put into savings or spent abroad, this is economically inefficient government spending (with a low fiscal multiplier).

Poor people have no choice but to spend their money quickly. Poor people have no choice but to spend their money in the UK. For this and a number of other reasons welfare is an economically efficient way to spend government money. Moody’s, a stalwart of the US financial establishment as well as the world’s largest credit ratings agency, in a US study estimated that for each $1 spend on welfare the economy $1.73 of economic growth was generated. The study was performed in 2008, pre-crisis, and all indications are that performed today, the benefit of increasing welfare spend would be considerably more. They also noted that the methods of stimulating the economy preferred by the UK Government – tax breaks to business and people higher up the income spectrum - were much less effective at generating growth, with $1 of government money adding only $0.34 to $0.50 to the economy, largely because the money is not spent by the recipients quickly.

The Effects of Further Welfare Cuts.

You can forget the maths and the jargon if you want but the implications of the data should be remembered. The Churches have argued that hurting the poorest most in public spending changes is morally wrong as well as being socially divisive. The IMF and others have now produced strong evidence that hurting the poorest is also economically damaging.

It is now difficult to find any evidence for the view that the £10Bn of further welfare cuts as announced last week would be either morally, socially or economically wise. Let us hope the evidence reaches the policymakers before further harm is done to the most vulnerable communities in this country.

A brief guide to obscuring child poverty

As I write this Ireland are losing to Spain in the European championships – but only because we insist on measuring success by how many goals are scored. Football is about entertainment, excitement, lots of money and according to my more lecherous friends the sexiness of the players. Why insist on only counting goals?

When Sepp Blatter stands down as FIFA president Ireland should vote for Ian Duncan-Smith as his replacement. We know that poverty especially child poverty is now rising. Thursday’s announcement of reducing child poverty figures describes the situation as it existed 2-years ago. It is acknowledged probably the last positive set of figures for child poverty maybe for a decade. The solution proposed by Ian Duncan-Smith today is to change what we count. Don’t count incomes and levels of deprivation as we do now but instead count other factors he believes are important to poverty, such as addiction, “worklessness” etc.

Ending poverty by changing the definition of poverty is not an original idea, but what makes this variation particularly worrying is that it is openly driven by the need to justify lowering the costs of benefit payments – and even worse it seeks to measure factors that have been consistently used by the press and politicians to blame the poor for poverty.

Should the proposal go through, every-time that the political poison of rising child poverty figures are released they will be accompanied by the political antidote of an itemised list of the failings of parents in order to divert the blame.

Ian Duncan-Smith, when making the announcement on the Today programme, chose to tell a selective story of poverty and welfare spending during the 2000’s as a justification for the change.  The story goes that by focusing on incomes the Labour government spent huge amounts of money on benefits, which meant that 4.5 million people stayed on “out of work benefits” because it was better for them to stay on benefits than work. At one moment of revealing hyperbole he suggested that that was what caused deficits and was bankrupting the country!

Let’s leave aside the fact that enough money to pay all unemployment benefit for a quarter of a century was created on Thursday by the Bank of England in order to lend to banks suggests some more substantial causes for our economic problems. The 4.5 million workless people he talked of were not the unemployed – they were not people unable or unwilling to work – they were those on sickness and disability benefits. Their barrier to work was not that benefits were too high but that they were assessed by independent agencies to be unfit to work. I have blogged on this repeated inference that [workless = unemployed = lazy] before – and how it has been repeatedly used to stigmatise people who are least able to defend themselves.

Child Poverty and Tax credits

During the years of economic growth the labour market polarised with increasing low paid employment and vast increases for those near the top of the income scale. This created a large number of families in work but also in poverty. These families as well as those unable to work were left far behind. New Labour’s solution was to focus government money on pensioners and on families with children. It worked in reducing pensioner poverty and child poverty. This ameliorated the problem that the economy does not give the poorest any of the money generated from economic growth – but did not address the underlying problem. It also meant that the poor single and childless were in a great deal of trouble. 

The price of ameliorating this problem will continue to rise if economic growth is unfairly shared. It is obvious but worth saying this is not a trend that was caused by the poorest – it has been driven by the market demands of those with money.

Ian Duncan-Smith’s announcement neither recognises nor wishes to deal with the underlying problem, and it also rejects New Labour’s amelioration plan because of its cost. Instead it seeks to identify the “flaws” in the poor implying, contrary to the evidence, that it is these “flaws” that are driving poverty. 

Government and independent analysts recognise that without increases in benefits or radical change in the labour market the Child Poverty Targets will not be met. The new proposals will set new targets - maybe ones that can be met – but which will inevitably add more stigma to the poor while drawing attention away from the underlying problem that even when the economy is working well the proceeds do not reach the poorest.