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.

Two reports on who is being affected by the Cuts: One extremely unjust message

Today sees the publication of two important reports about who will be affected by the cuts and by how much. As a nerd who enjoys graphs this is a reason for joy; as someone with a care for social justice there is absolutely no joy to be found at all.

The Institute for Fiscal Studies (IFS) shows conclusively that the poorest will be hit hardest. The bottom fifth of earners will lose about 6% of their income in lost benefits and government services and around another 6% in real terms wage cuts – a 12% hit. Taking a 12% cut is bad for anyone, but for those already facing hardship - how can this be just? 

Well maybe it could if we were all in this together but we most definitely are not. The top fifth of society (basically all higher rate tax payers) are facing a 4% reduction. The highest 1% (£150,000+ tax band payers) are facing higher taxes, due mainly to changes in pension tax relief, but a combination of high pay rises and tax avoidance strategies will probably mean their real incomes will actually increase. 

The second study released today is from the Children’s Society and looks at the effect of the arbitrary benefit cap of £500 a week on any household. The sad but unsurprising fact is the poorest are disproportionately affected, and the poorest children even more so. Here are just the headline findings.

• Children will be 9 times more likely to be affected than adults.
• 69,000 adults and 206,000 children will have their household incomes reduced (by an average of at least £92 a week).
• 27,000 adults and 82,400 children will be made homeless.
• Children in poverty will move into severe poverty – an internationally recognised definition of poverty where lack of resources leads to serious impacts on children’s health and wellbeing.

There is a lot of interesting detail given in the study which I won’t go into but it is important to realise this work takes as its base the rather optimistic Department of Work and Pension estimates of the number of households affected, and uses very optimistic assumptions to avoid exaggeration. The related housing benefit cap will be introduced for everyone in January, and the total benefit cap will be introduced in April 2012.

These are all choices and do not let the Government rhetoric on deficit reduction fool you into thinking there is no other choice. The rate at which the deficit is cut is a choice, the proportion of cuts and tax rises is a choice, who will be most affected by the cuts and tax changes is a choice. 

Alison Tomlin stated on the eve of the Comprehensive Spending Review to Westminster Central Hall full of TUC and social justice activists, that the Government should be judged on the choices it made around how it treats the poorest and most vulnerable. My own judgement on the direction of government policy in general and the arbitrary benefit caps in particular is clear: - Unjust, unfair and unacceptable.

"Doing the Right Thing" - the new deserving poor

The quest to identify those impoverished people who are not to blame for their poverty from the other poor people - who by inference are receiving the poverty they deserve- is as old as the hills. Rowan Williams wrote last week of “a quiet resurgence of the seductive language of ‘deserving’ and ‘undeserving” poor’” within the political debate. He was right to do so.

The phrase “deserving and undeserving” is no longer used but there are many codes in its place. The new acceptable discriminator is to talk of “people who do the right thing”. The phrase crosses the political divide, David Cameron used the phrase 7 times in one pre-election debate; Ed Milliband used it last week when suggesting some deserving people should have preference in going up housing waiting lists. It is an obvious phrase, which tests well in focus groups, but its implications are, in my view, both socially damaging and profoundly contrary to Christian teaching.

The Government has now begun to haphazardly convert the rhetoric of the “those who do the right thing” into policy. Initially Benefit Caps – limiting the total amount of benefit which could be received - were to apply to all. As time has passed those “doing the right thing” have been exempted - the old, the disabled, the war widow(er)s, and other special cases. Every Housing Benefit claim will be reduced by mathematical formula but now a discretionary £200m will go to those considered to be unjustly affected, to be determined by individual local authorities – these will be the old, the sick.... The welfare cuts are gaining similar grossly underfunded exemptions on a daily basis.

The problem is that it is easy for the Department of Work and Pensions (DWP) to supply examples of the feckless poor to be derided in the pages of the Sunday Telegraph – but it is much harder to define a group as undeserving with any degree of justice or accuracy. Whole categories are labelled so that the majority of the public believe them undeserving (alcoholics for instance) but talk to your minister or others who work with addicts and very quickly it becomes much harder to use words like “undeserving”.

The hunt for the undeserving poor, despite many attempts, has never found large enough numbers of people to save significant amounts of money. This enthusiastically publicised scrounger hunt has served to stigmatise people who least deserve it and have little opportunity to fight back. The unjust sigma is also used to penalise those who clearly have “done the right thing”. The reason being if you just take money from the “undeserving” it doesn’t save much and don’t be fooled into thinking it does. But even if making moral judgements on past behaviour was a fruitful exercise I would argue for a benefit system focussed on meeting needs rather than judging behaviour.

Some of the most compelling Gospel stories are of Jesus’ encounters with people as he went about his ministry. My reading of these encounters show Jesus to be profoundly disinterested in someone’s past commitment to “doing the right thing”. Jesus was unimpressed by the Pharisees - who made a fetish out of “doing the right thing” – yet those who society judged harshly - those who hadn’t “done the right thing” eg - Zacheaus or the Woman at the Well – seem to emerge from their encounters with Jesus much better. Jesus seemed much more concerned with meeting the needs of the person he met than judging them on past behaviour.

Our liturgy says we have “all sinned and fallen short”. In past times Christians would describe themselves as “wretched” or “sinners” or other colourful words to acknowledge the fact that even the best of us have not always “done the right thing”. The very heart of the Christian faith is the acknowledgement that although we do not always “do the right thing” we are still loved, still valuable and still acknowledged as made in the image of God. A Christian who wishes others the full consequences of “doing the wrong thing” should really ask themselves if this is a rule they would be happy to see applied to themselves.

My view is that Christians should not set themselves up as the uninvited judges of others behaviour, nor ask the DWP to judge others’ behaviour. Christians instead should be focused on ensuring that people’s needs are met – irrespective of how they came to be in need.

Ask the Chancellors?

Perhaps strangely for someone in my job I really can’t abide political debates on television. I have never even managed to watch Question Time all the way through. I find these debates merely serve to reinforce my existing prejudices, and the shallow point-scoring makes me wince. I was convinced that the recent decision to televise a debate between the three main party leaders was a step backwards for democracy.

Or that was the case until I watched Ask the Chancellors on Channel 4 last night. Alastair Darling, George Osborne and Vince Cable lined up to make their pitch to be the next chancellor. There was nothing revolutionary about the format and I admit I initially watched it out of duty. But it made for fascinating television.

So why the change of heart? The point-scoring was still there, and I haven’t changed my mind about how I’ll vote. But it started to mine the complexities of some of the political debates around the economy and the faultlines between the parties. The leaders’ debates won’t be so “free”, but will hopefully be equally compelling.

But most of all the programme reminded me where so many of the voters’ concerns lie. Whilst the post-Crunch/pre-election messages of the Churches are focused on inequality and the need to ensure that those who didn’t benefit from the boom are not the ones who are made to suffer most in the bust, the studio audience appeared almost wholly concerned about the impact of economic decisions on individuals’ and businesses’ income. It was left to the moderator, Krishnan Guru-Murthy to ask whether the government was responsible for tackling inequality.

I still believe that the Churches are called to go to, in the words of John Wesley, “not to those who need you but to those who need you most”. But how should we meet the challenge to get these messages across to politicians and voters alike?