Further Complexity in the Equality Debate

John Rentoul

bowties 300x222 Further Complexity in the Equality DebateThe suggestion that income and wealth might be becoming more equally spread in this country, in my article in The Independent yesterday, provoked two main negative responses: denial and cavilling.

Perhaps I should have made it clearer that, if there is any political credit to be claimed for the more equal distribution of post-tax incomes in 2010-11, then it belongs to Gordon Brown’s Government.

This is not quite the Real Labour of egalitarian socialism that Alex Hern implies, in his attempted rebuttal at the Staggers, however, because part of the fall in the income of the richest 10 per cent occurred not because they paid the new 50p top rate of income tax but because they brought forward some of their income to 2009-10 to avoid it.

Still, my point was not that the Coalition is engaged in Real Labour egalitarianism either; simply that it has a reasonable claim to be trying to restore the public finances without widening the gap between rich and poor.

This is controversial and not yet proven, because we do not yet have data for the period since April 2011.

But let me deal with the most important cavil, that I have not taken cuts in state benefits into account.

I had not, for the sake of simplicity, but I know two organisations that have. Both the IFS and the Treasury have modelled the effects of tax and benefit changes on the rich and poor up to 2015. I reproduce below the IFS chart from a series of slides analysing this month’s Autumn Statement, which presents the effect of tax and benefit changes. It is more recent than the chart used by Alex Hern, and shows (pink line) that the richest 10 per cent of households are hit hardest, although the effects on the other 90 per cent of the population are to make them more unequal:

ifsditb1 Further Complexity in the Equality Debate


The Treasury’s own distributional analysis published with the Autumn Statement forecasts the impact of all policy changes over the whole of this Parliament, including not just taxes and benefits but also an estimate for the benefits in kind from public services. Chart 1G shows the total effect of all changes since the Coalition came to power on households in 2014-15. This analyses households in fifths, from the poorest on the left to the richest, and again shows the curious pattern, making incomes more unequal for most of the distribution (the bottom 80 per cent), but hitting the richest 20 per cent hardest of all. My guess is that overall inequality, as measured by the Gini coefficient, would be more or less unchanged.

1G Further Complexity in the Equality Debate


This is hard to believe, I know, but the Treasury and the independent IFS conclude that the tax system will be more progressive under the Coalition than under Labour, and that this will counterbalance the regressive effects of cuts in benefits. The overall effect of Coalition policy will probably be to leave the gap between rich and poor unchanged.

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  • andyholmes

    Except for the fact that your making a false leap between increasing govt. income and acting as money.

    The only increase in government income is effectively having them interest free and is as you say, only in the short term. The government will have to start saving the interest payments again, once re-selling becomes feasible.
    That’s not “acting as money, only recirculating the existing stock.

    This “jabberwocky” is completely toothless, so long as the BoE re-sells all those gilts back into the market.
    There will be a maximum shortfall of around £45bn, which is what the interest payments must cover. Failing that, the Treasury has guaranteed to make up any BoE losses.

  • andyholmes

    You’re the one playing word games. We didn’t “devalue”. That’s what you get from relying too much on Telegraph editorials.

    Devaluation is a permanent move, printing money and issuing it, into general circulation. It devalues the existing stock of currency as the economy backing it, hasn’t grown to accommodate the new liability.

    Sterling was weakened by ZIRP, which is reversable. QE hasn’t had any effect on the strength of Sterling as it’s not issued into general circulation. Gilts are taken as assets to offset the additional liability.

    The extent that Sterling weakened (Iceland also dropped interest rates and suffered the double whammy of a weakened AND devalued currency), bears little comparison to the level that Iceland is dealing with, due to it’s short sighted policies.

    A little knowledge is a dangerous thing.

  • andyholmes

    Nobody can predict what that figure is, and articles that claim
    “MAYBE”, aren’t worth the paper or broadband width that they consume.”

    It wasn’t an article, as I stated quite clearly, it was was the Public
    Accounts Committee”

    Quoting me out of context, and creating straw men doesn’t improve your argument, one bit.

    The point is that these figures represent POTENTIAL LIABILITIES, not costs. You’ve done nothing to disprove that.
    Incidentally, as the findings of the PAC were reported in newspaper articles, your point is invalidated anyway.

    “You’ve mentioned ignorance and deceit a few times. I’m starting to wonder if it is psychological projection.”

    No there’s just so much of it about, that it bears repeating.

    “”I’m glad you brought up the Asset Protection Scheme because it proves my point concisely.””

    You highlight this quote of mine, then launch into an argument over undeclared losses, which have nothing to do with the APS, which netted the Treasury £5bn, without a single claim.
    Your insinuations and the facts, just don’t tally.
    By last summer, when this “report” was written, RBS announced its
    withdrawl of the final £106bn of assets held in the APS.
    “The bottom line is, that for the government to make ANY money on the shares it bought for us, the share price will have to rise to OVER500 pence a share. Fat chance. They are about 280/share at the moment. But maybe they’ll go up? After all aren’t the banks healed and the recession over? For the banks I refer you back to the report on the banks’ £40 Billion in still undeclared losses.”

    Just look at the current revenues of the banks to see how ridiculous that statement is.
    Between 2009 and mid 2012, RBS alone repaid the Treasury, £163bn in loans and interest payments, under equally difficult trading conditions as today. £40bn in undeclared losses across the industry is easily recoverable over a reasonable timeframe.

    The decision on when to sell should depend on the balance of probability of the investment price rising faster or slower than the interest payments (currently £4bn a year). At the moment the potential rise in asset value is far greater so the stakes should be retained.
    Selling before that balance point is reached, or retaining it after that point, would be a political not economic decision, and the loss resulting, criticised at the time, NOT preempted now.

    “No, YOU are ignoring the BoE’s own figures on lost out put – again,
    between £1.8 trn and £7.4 trn over the decade following the crisis. That’s lost output (and the taxes on that) of between 180% and 740% of current GDP, and we are already four years into that projection.”

    No, your trying to pass off potential liabilities as costs – again.

    You’re also only showing one side of the coin. How much additional debt would be needed to retain that output in the light of reduced global demand. Not only would we have to finance our own reduced demand, from both private and public sector, but also the far greater reduction in external demand.
    Your argument revolves around government cuts being the sole cause of lost output, which is far from the truth (deceitful or ignorance springs to mind :) )

    Your final error is blaming the banks for this lost output. This is now a debt crisis, not a banking crisis anymore, which largely dissipated in 2009. The only likely way that the banks could be put in crisis again, is by a large scale default on public debt.

    In a very real sense, this isn’t really lost output anyway, because the pre-recessionarylevels were grossly inflated by unsustainable debt, both private and public.
    It’s ironic that people blame the banks for lending irresponsibly (quite
    rightly), but then blame them for lost output, because they learnt their
    lessons and started lending more responsibly, at rates that more accurately reflect the risks involved.

    “How can you possibly claim one minute that the bailouts are accounted for separately and then claim they were a minor contribution to the national debt?!”

    This conclusively PROVES that you don’t know what you’re talking about.

    It’s simple. Bailout costs that are borne by the borrower, loans, APS and guarantee insurance schemes funded by policy holder contributions are accounted separately. These account for the vast majority of the amounts bandied around.

    The money borrowed to purchase assets (Northern Rock et al, together with stakes in RBS and Lloyds), which can only be recovered by selling those assets, are included as net debt, together with the interest payments on that debt.
    This amounts to just over £100bn, at an annual cost of £4.5bn.

    You’ll need to research far deeper than newspaper articles if you want to understand what’s really happening out there.

    “There. It is there in black and white. These private debts MUST be
    written off.”

    Rubbish. I have no idea what you think you’re reading into that extract, but it doesn’t mean anything of the sort. Maybe you like to explain how your theory reconciles with the Debt Management office figures that clearly state that as of Dec 31, 2010, there are *only*£1271bn of outstanding gilts in circulation which is a far cry from £2147bn as you summised.

    You really should understand more about accountancy practices before making such outlandish claims in future.

    “”The vast majority of the debt, and almost all of the current deficit is

    due to government spending on everyday public services, massively
    outstripping tax revenues.”

    So quite clearly, as demonstrated above, you are fundamentally wrong. We have been forced to under-write a trillion pounds worth of credit created out of thin air.”

    So quite clearly, as demonstrated above, you don’t understand a fraction of what you think you do. This conclusion is as deeply flawed as the rest of them.

    “Quite. The Tories are and they have deliberately induced a double dip recession. They talked down the economy from day one.”

    More rubbish.

    As I pointed out above, you falsely claim that government cuts is the ONLY reason for reduced growth, which even the most ardent Labour supporter has given up trying to defend. The Eurozone crisis can be easily demonstrated to be the largest factor. Even Labour (grudgingly ) accept this. They’ve gone from recession “made in Downing St” to cuts unhelpful to growth. As with much of your arguments, it’s way behind the curve.

    “”Blaming the banks for Labour tearing up Keynes central tenet in 2000 is ignorant and deceitful.”

    And slashing spending in a recession is tearing up a Keynes central tenet also isn’t it? And again I refer you to the ONS report about blaming the banks.”

    NO NO NO. That Keynesian spending depends on setting the correct environment in the first place. Without saving first, you can’t spend later.

    Large scale borrowing and spending, thus creating a cyclical budget deficit depends on having a structural budget surplus in place, going into the recession.

    “Because their bad debts are still held on OUR books”

    No they’re not. I’ve already debunked that.

    Because their bad debts are still held on OUR books

    “”Spain entered the crisis with a budget surplus of 23.4bn Euros”

    Haha! So they did everything the private sector banks and property developers wanted, but as always its the public and their services which have to take the hit.”

    You’ve got that the wrong way round. The banks were doing what the governments wanted. The banks facilitated exponentially increasing debt funded growth over the last decade, which got politicians re-elected. Government wasn’t forced to run up unsustainable deficits and could have responded with higher interset rates to dampen demand, but kept the fires stoked right upto the collapse. If it hadn’t been for EU intervention, I hate to think how big our structural deficit would have been as the credit crunch exploded.
    Now you try and blame the banks for the sins of the Labour government.

    “”I don’t suppose you remember 1967”

    No, but I remember British schools and hospitals in the 80s and 90s when your Tory mates ran them into the ground. They’ll be making good on all Labour’s investments won’t they when they hand them over to Newscorp and Branson.”

    More petty point scoring that does nothing to expand the discussion.

    What happened in the 80’s and 90’s didn’t occur in a vacuum. They were the response to systematic failures to address the structural economic problems that we’ve had since the 60’s.

    our inability to address productivity problems in the 60’s prompted the ill fated devaluation in 1967 (unlike you, I lived through it). It papered over the cracks for a while, but our inherently weak economy stumbled from crisis to crisis. Every quick fix in the book was tried (QE didn’t exist then but I’m sure if it had, they’d have tried it. The 70’s was a lost decade as government was handicapped by union opposition.

    As you don’t remember “the pound in your pocket”, you probably won’t recall “the sick man of Europe” either, but it was real.

    Because of the inaction of the previous decade, by 1979 only drastic action could start to turn things around. Just like now, Labour’s answer is to wait and see, paralysis and prevarication is all the policies they have. History tells us that this approach not only solves nothing, but makes the inevitable reforms, even more painful. You should look at the bigger picture, rather than jumping in at the middle, 1979.

    “Good, I’m glad we can agree on the need for better taxation policy. Why not target the corporations which are sitting on a £700bn cash pile?It is estimated that only 36% of businesses have been paying their taxes – ? – when people are suffering across the nation, when jobs are being lost, libraries and day centres closed and services privatised to the same tax evading companies – I’d say there was a compelling case that corporate taxation should rise and back-dated evaded taxes be collected. Wouldn’t you?”

    No, most of that is hogwash.

    Existing tax policy just won’t cut it, no matter how much you grub around for scapegoats.

    “Why not target the corporations which are sitting on a £700bn cash pile?” Surely the question should be, why target their cashpile (apart from believing in state theft, that is ?

    This short sighted policy would see companies fleeing from the UK market. If you’re happy to see the UK economy decimated by another attempt at a quick fix, be my guest.

    “It is estimated that only 36% of businesses have been paying their taxes –”

    Probably by the same people that are claiming they know how much they should be paying, without even seeing their tax returns. That’s a neat trick. Excuse me if I prefer reliable sources, which claim nothing of the sort.
    HMRC’s report places the main responsibility on SME’s and self employed workers, but they’re ordinary people so can’t be held responsible for anything in your eyes.

    Fantasy fixes aside, comprehensive public services require HIGHER taxes for ordinary people. Live in dreamworld if you must, but don’t try and infect others with your irrationality.

  • drg40

    I’m afraid I don’t feel it is a false leap. I accept that if the Govt prints money to enhance the market in Govt bonds and thereby fund their own activities, the effect does not come through straight away. I understand that possibly the govt thought that buying their own bonds in this way could be a win win – the banks got money and the govt got something to add to taxable income. BUT the banks didn’t lend this QE as was intended, and funding govt income by this method only leads IMV to inflation and delay in facing up to the real problem, the need for growth which which to pay off indebtedness. I could go along to a degree with the notion that growth may not act fast enough to deal with Govt borrowing and a short term fix is needed, but the private borrowing in the UK. which is at horrific levels, is a situation which (again IMV) can only be corrected by growth.

  • andyholmes

    QE1 was primarily a win win, in boosting bank liquidity. Whether that QE leaked into the economy would only have been the cherry on the cake. A little leaked out, giving a limited short term boost.
    That gave the Treasury the idea that QE could increasingly be used to get funding into the economy, but there was only a tenuous link and QE2 and 3 failed to serve this supplementary purpose.

    There is no indication of QE producing inflation, despite the rhetoric generated. The imported inflation spike over the last couple of years was due to ZIRP, but erroneously associated with QE, as it coincided with QE1. However there was no effect on Sterling of later QE interventions, in fact over that period, Sterling strengthened.
    Whilst the markets accept the quantities of QE in operation, there will be no associated inflation. Only if the BoE start retiring debt, or monopolising the bond market to the displeasure of other traders, will inflation become a problem.

    You can’t grow your way out of debt, without a fiscal multiplier far larger than we have, or are ever likely to have until a massive structural rebalancing is complete (something I’m not holding my breath for). Growth can’t save us.

    At present, £10bn of additional borrowing will increase GDP by £9-£10bn on average,( maybe £13bn on capital investment, but only £5bn on welfare payments). The government will take about £5bn in tax.

    So debt will rise by 1% ( £1tn+ £10bn), but GDP will only rise by 0.67% (£1.5tn + £10bn). Therefore debt as a proportion of GDP rises.
    The government borrowed £10bn more and only got £5bn back, so the deficit goes up by £5bn.

    To make debt pay, £10bn in debt needs to generate at least £13bn in GDP, and in order to reduce the deficit, and it needs to create over £20bn in GDP, to increase the tax take by at least its own value, to reduce the deficit.

  • drg40

    One point I feel you have glossed over is that the level of private debt was incurred as a direct result (with Govt encouragement) of the presumption that house prices would rise into the far future. Therefore loans were made, assuming a growth in asset value, which far exceeded the borrowers ability to pay on the day the loan was taken out. Most middle to lower priced houses are stagnating in terms of market value ( the price of the houses of the rich leap ever higher, they of course are not effected by reductions in price, or any desire on behalf of the mortgage cos to tighten up on loans), the future is hardly rosy. Since the mortgagee has no tax income to turn to, unlike Govt. he has to rely on growth in income in real terms to make the ends meet. So growth in the economy to deal with private indebtedness is essential. Since Osborne seems to have no plans to deal with this private indebtedness problem, concentrating solely on the problems of his chums, I confidently expect the sky to fall in. Finally, I suggest that growth on a scale which would counter private indebtedness would fix Govt problems in a trice. Unless of course you suggest we return to house price inflation across the board as the only available palliative?

  • andyholmes

    I didn’t gloss over private debt. your original point revolved around government policy and QE. It had nothing to do with private debt, so neither did my reply.

    Your point on private debt though, is very one sided. ZIRP policy is almost exclusively about protecting the very people you claim have been hung out to dry, at the expense of those wealthier people with interest bearing investments.
    It’s also nonsense to blandly claim that the houses of the rich aren’t affected by a reduction in price. The most buoyant hose markets have been seen in the commuter belts, that’s ordinary workers housing.

    With the built in inefficiency in government spending producing growth, just try and quantify the amount of additional government debt required to “counter private indebtedness”. It’s completely unaffordable, which is why growth proponents only ever talk in Keynesian principles, but NEVER attempt to quantify the scale of what would be needed, because they’d be seen for the charlatans that they are.

    One final point. The multiplier figures that I used for the previous example, were adjusted for the special influences of recessionary pressures (which I’m not convinced we’re seeing here, but used anyway). Under conditions of growth, the multiplier drops to around 0.5, making any government “investment”, only 1/2 as efficient as my figures indicated. Basically, as we start to recover, government needs to spend more and more to get the same effect. This was clearly seen in the years 2003 to 2007, and they’d have to continue this until the global economy recovers, whenever that may be. Would you like to place money on whether that happens before we finally financially cripple ourselves permanently, because I wouldn’t.

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