Cameron says 80% of Tory cuts must be spending. No they don’t


2:43 pm - May 28th 2010

by Sunny Hundal    


      Share on Tumblr

Speaking yesterday on the Today programme about the need to reduce the budget deficit, David Cameron claimed that most of the reduction had to come from spending cuts.

80% in fact, with only 20% of the reduction coming via tax increases.

If you look internationally at when countries have had to deal with horrendous budget deficits, like the one that we were left by Labour, the international evidence shows that the 80-20 split is about the right proportion

That is if you like the gold standard that has been set internationally.

But is that the ‘gold standard’ internationally?

Research by the non-partisan site FullFact.org contradicts this claim:

In the early 1990s Sweden suffered a deep recession and its budget deficit by 1994 stood at over 10 per cent of GDP. Government action meant that within three years the deficit fell to 2 per cent. However, despite determined action to reduce spending it still only accounted for just over half of the savings – 53 per cent, versus 47 per cent achieved through higher taxes.

Canada and Finland During the mid mid-1990s Canada and Finland had a similar pattern of successful fiscal consolidation. In Canada, 60 per cent of savings came through expenditure cuts with 40 per cent tax rises. In Finland the figures were 55 per cent versus 45 per cent respectively.

They point to an analysis by the OECD in 2008 looking at 85 different examples of budget consolidation.

That research showed that in two thirds of cases, revenue increases accounted for a higher portion of deficit reduction than that achieved by spending cuts.

FullFact.org conclude:

However if the Prime Minister’s comments were intended to mean that the 80:20 ration had been a near-universally adopted approach in the past, this is not what has happened, in recent budget deficit events as shown in the examples above.

In other words Cameron is claiming a historical and international precedent for Tory cuts that is simply not there.

    Share on Tumblr   submit to reddit  


About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
· Other posts by


Story Filed Under: Blog ,Conservative Party ,Economy ,Westminster

Sorry, the comment form is closed at this time.


Reader comments


1. Forlornehope

So can we have an honest alternative to LibCon cuts that accepts the need for a higher level of both taxes and government spending? At the beginning of the last century government expenditure was about 15% of GDP. It rose steadily to a peacetime peak of 45% before Thatcher cut it back to around 35%, a figure that would have been regarded as ruinous before WW1.

It is not unreasonable that as the economy grows, it will again, that more money is spent on public services rather than foreign holidays, electronic toys, bigger cars and fashion shopping. That means that we can well afford government to take 55 to 60% of national income. At that level we can have excellent public services run by well paid professionals and levels of benefits that support human dignity. Brown tried to do this by taxing bankers’ bonuses and on borrowed money and this created the mess we are in now.

Labour needs to explain that we all have to pay more tax and take fewer expensive holidays etc. That means 40% basic and 80% higher rates of income tax and probably 25% VAT with lower income groups protected by better benefits. Scandinavian countries work quite well with these levels of government spending so there is no reason that we could not.

To be honest, I’d settle for public anger at the other 80:20 split Cameron had lined up.

That being that the poorest 80% will pay more tax while the richest 20% get away largely scott free again.

Hence those poor hard working companies will not face the “tax on jobs” of higher national insurance contribution – while us lazy fat cat workers will.

Labour can start to make a progressive case once its leadership contest is out of the way – but the candidates so far have stuck to bland nothingness – and the real depth of ideas in the party can only really be found in any meaningful sense at local levels right now.

Watch what happens in Labour councils in London over the next four years. There we might see the emergence of a more active support of working people than anything we’ll get from the well meaning but ultimately risk averse leadership.

At least that’s what I expect.

I am not surprised that Cameron produced a completely made up “fact”, the Conservative manifesto was full of them.

For example, page 26 they show a graph of “productivity” of the private sector verses the public sector from ONS figures. The figures are correct (I have checked them) where they show that over the period 1997-2007 the private sector “productivity” has grown by 20% and public sector has decreased by 3.4%. But the “private sector services” is things like financial services, and the “public services” is education and hospitals, so how can you compare apples with elephants like this?

They are liars, the lot of ‘em.

Richard

I actually blogged about that when they first started taliing about those figures last year. Comparing defence spending to buying trainers is clearly ludicrous for so many practical and statistical reasons that it isn’t worth doing.

But it was also worth noting that Labour was elected on a promise to pay public sector staff more – because we had major nurse and teacher shortages – and the public enthusiastically supported that massive deliberate reduction in productivity.

Sadly – the case for treating people well and providing good services falls apart a bit when the public feel well treated and think services are fine.

So far, proposed net public spending cuts have amounted to less than 1% of total public spending. If you prefer tax hikes to spending cuts, how about hiking VAT from 17.5% to 20%?

The general case about hiking incomes taxes is that after a point, tax revenue may actually fall for any combination of several reasons – increased avoidance, reduced incentives for work and enterprise and because the rich go and live abroad.

Try this on: CGT rise the first big test for Cameron coalition:
http://www.ft.com/cms/s/0/ce95396e-69c2-11df-8432-00144feab49a,dwp_uuid=0ba3f3b0-5db9-11df-b4fc-00144feab49a.html

“Vince Cable, Lib Dem business secretary, said the more equal treatment of capital gains and income were vital: the revenue raised from the increase would fund his cherished plan to raise the income tax threshold to £10,000.” Rejecting Mr Davis’s arguments, he said: “I don’t think there are terribly many people who he describes as working class who get very large capital gains.”

Raising the income tax threshold would improve work incentives at the lower end of the incomes scale and go some way towards mitigating the extraordinarily high implicit tax rates for those making the transition from benefits to work.

The urgency of cutting the government’s fiscal deficit cannot be lightly dismissed as unimportant. Note this in Friday’s news:

“The euro plunged and US stockmarkets dived tonight after Spain was stripped of its top-level credit rating by a leading rating agency over concerns about its economic growth. In the latest blow to the eurozone, which is struggling to cope with the fallout from the Greek fiscal crisis, Fitch Ratings downgraded Spain’s sovereign credit rating — a measure of how easily it can meet the interest payment on its debt — by a notch from the top AAA rating to AA+. Standard & Poor’s, another ratings agency, downgraded Spain’s rating for the second time to AA last month but Moody’s, the other major ratings agency, has maintained the rating at AAA.”
http://business.timesonline.co.uk/tol/business/markets/europe/article7139449.ece

From concerns over the Euro, it has depreciated against the Pound from about 93 pence for a Euro in early March to a cost of about 84 pence for a Euro now:
http://www.x-rates.com/d/GBP/EUR/graph120.html

And we are hoping that improved export sales of goods and services will make up for cuts in public spending and because UK “business investment is 11.0 per cent lower [in 2010Q1] than the same period last year”
http://www.statistics.gov.uk/cci/nugget.asp?id=258

To see how Britain’s budget balance, current-account balance of payments and, importantly, the yield on 10-year government bonds compare with other affluent countries, see this table from The Economist:
http://www.economist.com/markets/indicators/displaystory.cfm?story_id=16220574

The interest yield on British government 10-year bonds is 3.54%, as compared with 2.64% for German government bonds, 7.7% for Greece and 4.2% for Spain. The differences in yields partly or mostly reflect differences in market sentiment about the possibility of default risk in the case of Eurozone government bonds and default and exchange risk in the case of UK government bonds.

Is this ‘higher taxes’ or simly increased revenues? There is a huge difference.

If we just leave tax rates alone, the budget deficit will shrink as economic growth brings additional tax revenues. If we didn’t cut spending at all, then we might say that 100% was through tax rises – except we didn’t raise taxes at all – we left everything the same.

As I’ve understood, the way it’s presented Cameron is saying that 20% of the reduction would come from decisions to actively increase tax revenues. Perhaps I’ve understood it wrong.

So the private sector as a whole should pay for the banking crisis and maintain the current conditions in the public sector?

If there are no cuts (or limited cuts) in the public sector, the private sector will pay throughout. Whether it be taxes for higher earners or further job losses and worsening working conditions at the low paid end of the sector. Surely that is a concern for those with Left wing sensibilities?

In their expansion of the public sector the Labour party created a further disparity, not satisfied with increasing the gap between the rich and the poor, there is a new divide between the low paid private sector and the public sector.

I’ve worked in the public sector and in various areas of the private sector. I currently work in the low paid private sector and work on contracts with local government.

Job losses, pay and recruitment freezes and increased workloads, all characteristics of the last two years.

I know that public sector cuts could actually affect my work, I know for certain I got the shit end of the stick…

10. DisgustedOfTunbridgeWells

Thatcher cut it back to around 35%

Have you a source for that? Is it a Reaganite ‘tax cuts’ “well at one point it was the case so let’s pretend that was the whole story” type thing?

A few months earlier, a lead headline reported “One in three British babies born in poverty,” as “child poverty has increased as much as three-fold since Margaret Thatcher was elected.” “Dickensian diseases return to haunt today’s Britain,” another headline reads, reporting studies concluding that “social conditions in Britain are returning to those of a century ago.” Particularly grim are the effects of cutting off gas, electricity, water, and telephones to “a high number of households” as privatization takes its natural course, with a variety of devices that favor “more affluent customers” and amount to a “surcharge on the poor,” leading to a “growing gulf in energy between rich and poor,” also in water supply and other services. The “savage cuts” in social programs are placing the nation “in the grip of panic about imminent social collapse.” But industry and finance are benefiting very nicely from the same policy choices. To top it all off, public spending after 17 years of Thatcherite gospel was the same 42 1/4 percent of GDP that it was when she took over.

http://www.chomsky.info/articles/199705–.htm

@10: “Have you a source for that?”

For an informed, non-partisan source on the history of UK public spending since fiscal 1948/9, try this by the Institute of Fiscal Studies: A Survey of Public Spending in the UK (September 2009):
http://www.ifs.org.uk/bns/bn43.pdf

Btw Alistair Darling, the previous Chancellor, was quoted in March saying: “we will cut deeper than Margaret Thatcher”
http://www.guardian.co.uk/politics/2010/mar/25/alistair-darling-cut-deeper-margaret-thatcher

I figured this was just some rhetoric to appease the TPA, Wat Tyler, and every other mathematically incompetent anti-tax hillbilly who spent the last ten years whining about the evils of business regulation.

It’s unlikely he can shift much of the deficit just by cutting spending, because there really isn’t much wastage apart from in HR and consultancy.

And who would pay the extra taxes?

The group that earns between 30k – 100k per anum. Those who make 100k per anum – their take home pay per year is a little more than 48k which is 4k. That is not rich and with tax credits (which should go) gone – try supporting a family on that in central/south london.

The problem with our taxation under labour has been that this particular group has been squeezed and more squeezed. this is the group that expects their children to go to university, pay their taxes and work hard and try to live comfortably. And that seems to be a political crime.

While the political parties of all colours (including the lib dems) are concerned about the very poor and the very rich – this group in the middle are being squeezed and squeezed. Is that fair? This group cannot afford and are simply not eligible for the options that are available to the super rich like off shore bank accounts etc.

Why can’t we have a truly progressive tax system? Where we focus on disposable incomes and the cost of living and factor them into taxation policy. By the way, we are already taxed to the hilt. If you are stupid enough to earn between 40 – 100k – your taxation in effect is : 53 – 54% + your employer pays another 12% – ie for every 1 of productive gain the state takes over 66%.

Now, how is that fair and why should the tax burden be increased? On top of that you have the VAT which disproportionately hurts the poor along with the fuel duty.

who benefits from extra taxation? Who should be taxed more? How should that taxation be structured? These are interesting and serious questions. I would like some answers on those.

Further, quangos have cost the country billions and billions of dollars – some of them do some good work and most of them just pass accountability off to unelected groups and have not made much difference to the quality of public services or life of people. Why is spending cuts such a bad option?

The public sector has directly or indirectly been accountable for more than 50% of all jobs created in the last decade and we all know Governments do not create wealth – so the rest of the population is creating the wealth which is going into public sector pensions and public sector jobs are relatively better paid than most private sector jobs. But those who should be paid more such as nurses and teachers are paid very very low salaries compared to idiotic bureaucrats. In some cases, council chief executives make over 300k – how is that useful.

This government has created a fair pay review in the public sector – which is good and if we become a little less tribal and find faults with everything this government it is probably much better for the country. Labour did squander money and the public sector is bloated – and now we want more taxation. Not me.

The academic literature on optimal tax theory can be daunting but try this digest by Gregory Mankiw and others (Harvard): Optimal Taxation in Theory and Practice:
http://www.economics.harvard.edu/faculty/mankiw/files/Optimal%20Taxation%20in%20Theory.pdf

Btw the IFS has just published its review of the tax system chaired by Prof. Mirrlees:

Tax By Design: The Mirrlees Review (OUP 2010)
http://www.amazon.co.uk/Tax-Design-Institute-Fiscal-Studies/dp/0199553742

Dimensions of Tax Design (OUP 2010)
http://www.amazon.co.uk/gp/product/0199553750/ref=pd_lpo_k2_dp_sr_1?pf_rd_p=103612307&pf_rd_s=lpo-top-stripe&pf_rd_t=201&pf_rd_i=0199553742&pf_rd_m=A3P5ROKL5A1OLE&pf_rd_r=1A2HYANG3R0J8CDHEEDD

Bob –

Excellent reading list – I just did the first part of the reading. Insightful.

A more pragmatic example for me was the 1993 Clinton Economic plan which even Republicans now agree helped transform the US economy. And the development of the plan and the ensuing debate was very well chronicled by Bob Woodward in his book ” The Agenda”

First, Clinton Administration focused on cutting the public sector deficit by cutting spending over a 5 year period – which worked because it meant lower interest rates all around and the impact of the bond market was very much felt in that debate. The spending cut was almost equal to about $255 Billion over 5 years and total reduction of deficit by $500 Billion

Second, tax credits were offered to Middle class families – through HOPE TAX Credits And Earned Income Tax Credits. This not only helped middle class and low income families send their kids to college but along with the supported deficit reductions allowed for lower interest rates ie lower mortgage rates which pushed home ownership to a new level along with faster economic growth for businesses

Third, tax was increased for the highest 1.2% tax payers where the nominal income tax rate was increased at the highest level to 36% with a 10% surcharge for the highest earners ie who earned over $ 10 Million a Year to 39.6 – while cutting taxes for most lower income families. Clinton also increased the top rate of corporate tax rate to 35%

And today, all economists and even political opponents of Bill Clinton agree that it was visionary and his successor Obama is trying to follow the same principles under very difficult circumstances – but when Clinton restructured the tax policy of US – it had one of the lowest tax regime in the world now it is nearing the top.

***************************************************

Obviously, our system is a bit different and our structural economy is very different than that of the US – however, similar principles should apply. If the state continues to tax the most productive and hard working middle class it does not help in any way.

Spending cuts are a necessity and anyone scoffing at that is being delusional or does not understand economics at all. At the same time, one must focus on growth and balancing our economy as the Prime Minister made abundantly clear yesterday.

This Government is taking a holistic approach to economy and the public purse which I dare say was not the case when Mr. Brown ran our economy. And I think so far the new coalition Government has done the right thing – so lets get less tribal and think about the country as a whole please.

No one should challenge if this Government puts on a surcharge on the top 1 – 2% of the highest earners who have increased their wealth by 33% in the last year or so – but calling for wider taxation without exploring how best to do it is irresponsible.

***********************************************

Also, Canada is not the best example as they introduced the Federal CGT (our VAT) in the 1990s properly and Paul Martin (the exact Gordon brown replica with this stupid fights with Chretien – like Brown & blair) could take money from the Alberta Oil boom. And no wonder, Paul Martin was rejected by the Canadians and they had a hung parliament with a Tory minority government which has cut taxes for the middle class while increasing a little bit for the richest. Somehow, Clinton’s model has permeated through to almost all OECD countries – look at Rudd’s Australian tax plan in their recent budget.

Shamit,

Thanks for that.

Sadly, much or most of the improvements in the US fiscal position in the Clinton administration were recklessly thrown away by the Bush administration:
http://www.usgovernmentspending.com/federal_deficit_chart.html

By 2007, Warren Buffett was quoted saying:

“Warren Buffett, the third-richest man in the world, has criticised the US tax system for allowing him to pay a lower rate than his secretary and his cleaner.”
http://www.timesonline.co.uk/tol/money/tax/article1996735.ece

Try this alarming recent report in the Telegraph of the deterioration in the US fiscal position:

“US faces one of biggest budget crunches in world – IMF”
http://blogs.telegraph.co.uk/finance/edmundconway/100005702/us-faces-one-of-biggest-budget-crunches-in-western-world-imf/

That news report has a useful download link for the IMF Fiscal Monitor published on 14 May 2010.

By comparison with the US, the projected fiscal position of the UK looks relatively benign.

Useful OECD chart here showing how heavily the UK was taxed compared with other OECD countries in 2007, prior to the international financial crisis:
http://www.oecd.org/document/4/0,3343,en_2649_34533_41407428_1_1_1_1,00.html

This is the link to the IMF Fiscal Monitor published on 14 May:
http://www.imf.org/external/pubs/ft/fm/2010/fm1001.pdf

18. DisgustedOfTunbridgeWells

@11

For an informed, non-partisan source on the history of UK public spending since fiscal 1948/9, try this by the Institute of Fiscal Studies: A Survey of Public Spending in the UK (September 2009):
http://www.ifs.org.uk/bns/bn43.pdf

Cheers, good read.

“The average real rate of increase during the Conservative years of 1979 to 1997 was 1.5 per cent.”

The IFS counter-part on taxation is: A Survey of the UK Tax System (April 2009)
http://www.ifs.org.uk/bns/bn09.pdf

The important benefit of these independent IFS surveys is that they restrict the capacity of partisan political spin to rewrite history and mislead the course of public debate.

20. Richard W

19. Bob B

‘ The important benefit of these independent IFS surveys is that they restrict the capacity of partisan political spin to rewrite history and mislead the course of public debate. ‘

Eh no they don’t Bob. The politicians still use nominal, real terms, ratios and cash terms in an interchangeable manner with the sole purpose of confusing the public. The IFS might know they are bullshitting but invariably the TV interviewer does not have a clue.

Thanks for helping out, outstanding info.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Cameron's claim on 80:20 Tory cuts doesn't stack up http://bit.ly/aBda5n

  2. Liberal Conspiracy

    Cameron's claim on 80:20 Tory cuts doesn't stack up http://bit.ly/aBda5n

  3. johnhalton

    Cam says international standard for deficit reduction is 80% cuts, 20% tax rises. He's lying: http://bit.ly/bVywHM /by @libcon

  4. sunny hundal

    RT @libcon: Cameron's claim on 80:20 Tory cuts doesn't stack up http://bit.ly/aBda5n

  5. James Graham

    RT @sunny_hundal: RT @libcon: Cameron's claim on 80:20 Tory cuts doesn't stack up http://bit.ly/aBda5n

  6. Sheryl Odlum

    RT @libcon: Cameron's claim on 80:20 Tory cuts doesn't stack up http://bit.ly/aBda5n

  7. Sheryl Odlum

    Cameron seems to be using the deficit purely as an excuse for cuts. libcon http://bit.ly/aBda5n #noshock

  8. Tribune

    Liberal Conspiracy on the nonsense of Cameron's cuts rationale http://tinyurl.com/2uxwlt6

  9. Artisan Cupcake Co.

    RT @libcon: Cameron's claim on 80:20 Tory cuts doesn't stack up http://bit.ly/aBda5n

  10. Don Paskini

    RT @sunny_hundal: RT @libcon: Cameron's claim on 80:20 Tory cuts doesn't stack up http://bit.ly/aBda5n

  11. Rosanna

    RT @libcon Cameron’s claim on 80:20 Tory cuts doesn’t stack up http://bit.ly/9h8Bp0





Sorry, the comment form is closed at this time.