John Redwood's comments are being taken totally out of context

Tory MP John Redwood wrote a blogpost earlier this week where he drew a parallel between how a middle class family who finds their income cut by 10% can make adjustments and used the analogy to describe how the UK state could also make adjustments.

Here is main part of what he wrote:

Tomorrow’s budget will probably be proposing cuts of less than 10% over the lifetime of this Parliament. Sensibly managed, this need not entail cutting anything that really matters.

The UK state has been living a middle class lifestyle. If you are living on a low income then of course cutting spending is difficult or impossible. If you are living a middle class lifestyle and your income goes down by 10% you have plenty of options. You can holiday nearer at home and cut out the foreign trip. You can eat in more than in the local restaurants. You can trade down for a cheaper car. You can draw some money out of the savings account to tide you over until your income goes up again. You can buy more of the value items at the supermarket, and put more vegetarian dishes into the home menus. You can discover home entertainment to keep the leisure bills down. You can turn down the thermostat a little and put on a jumper.

The UK state finds itself in that position today. It has plenty of assets. Some can be sold to help out. It has been dining out on consultants and temporary labour. It needs to do more in house. It has been appointing all too many to exotic job titles which we could manage without, and sending many of them on expensive overseas fact finding trips and seminars. It has indulged in a mind blowing array of politically correct regulations which often fail to tackle the underlying problem they wanted to address. It has been a master at buying the “nice to have” or the “why do we need this?” instead of concentrating on doing the basics well.

Seems like a reasonable post to me. Perhaps I might quibble with making a direct comparison between the UK state level and a household level as it is a bit simplistic but it allows him to make his broader point in an accessible way which I am sure was his aim.

However the Daily Mail has picked up on this and in a story entitled: "Cold and hungry? Wear a jumper and eat vegetables: Tory MP sparks outrage with advice on how to survive 'Bloodbath Budget'" it proceeds to take Redwood's comment totally out of context and treat them as if he is giving direct advice to people as to how they should handle the budget cuts which he is not.

Sunny Hundal on Liberal Conspiracy has taken only the section highlighted above in red and hence shorn it of all its context and then posted this entitled: "Redwood asks poor to ‘put on a jumper!’" even though Redwood explicitly states that if you are on a low income then cutting is "difficult or impossible". And just to repeat it is an analogy, not direct advice.

I tire of saying this but no wonder politicians are terrified of saying or doing anything outside of bland pre-prepared and vetted statements. All Redwood is trying to do here is point out a way that the public spending cuts could be viewed.

The reaction from The Mail, Lib Con and doubtless others is just deliberately taking his comments and twisting them in order to make it look like he is saying something that he is not.

UPDATE: The Mail article I linked to has now changed so that the Redwood stuff is not in the main article but instead in a side box where they show that Redwood denies what they originally claimed and they give him the right of reply.

James Forsyth's contorted logic

There's some rather specious reasoning going on over on the Spectator blog today. Fraser Nelson has posted a piece where he refers to an article by James Forsyth in the paper version of the magazine entitled "The true meaning of Osborne's budget".

Some of the points from James that Fraser highlights are quite incisive but this one is not:

"During the election campaign, nearly every Tory candidate despaired at how so many families on £50,000 a year were voting Labour to protect their £545 child tax credit — despite the overall cost of a Labour government to them being far higher than that. Osborne’s Budget dealt with this directly. Within two years, no family earning £30,000 a year or more and with one child will receive tax credits. That class of wavering Labour voters, so irritatingly prevalent in marginal seats, will be no more."

According to James this is part of the process of reversing dependency on the state and trying to ensure that the Tories win outright next time. But just look at what he is saying. Some families in marginal constituencies who were on around £50K per year were worried that if the Tories got into power then they would lose their child tax credit. That is exactly what has now happened so by those terms they were right to be worried and if enough of them had voted Labour then they would perhaps not have lost it (although of course we cannot be sure Labour would not also have made this move).

Don't get me wrong, I absolutely think that in the current economic circumstances this adjustment was the right thing to do. But to then make the leap to suggest that because the benefit is not there any more then the Tories will benefit electorally from exactly those people is contorted logic to say the least. Unless everyone just forgets that they used to get those tax credits. If anything it's likely to be the other way round, after all Labour will surely bang on about this at every opportunity they get.

Is there something I am not spotting here?

Campaign in majoritarian, govern in coalition

Something keeps happening regarding the political discourse in this country since the election. Both the Conservatives and the Lib Dems keep being accused of having "broken" their pledges.

We saw it again yesterday. The compromises that were reached by both sides regarding the budget in the coalition government are described as "U-turns" or abandonment of pre-election pledges etc.

I saw Bob Russell, the Lib Dem MP being interviewed talking about how he had been elected on a platform that was in some ways quite different from what had been announced yesterday. I also heard a Tory MP on the radio bemoaning the fact that he had campaigned promising not to raise Capital Gains Tax.

The problem is that the way all the parties campaigned before the election was under the assumption that they would have an overall majority after the election. Yes, even the Lib Dems. The political dynamics that have evolved around the First Past the Post system essentially require each party to talk as if they will have all the power. In the last few decades that has actually not been an unreasonable position for either of the two main parties to take. However this year has of course now proved them wrong.

Perhaps we will see a change in the dynamics of the way the next general election campaign is fought. Perhaps the parties will talk more about what they will fight for and their specific priorities on these fronts than talking as if they will be able to decide everything without having to compromise. Then again maybe we won't. Old campaigning will likely die hard.

I have always been in favour of a more proportional system and therefore I actively welcome the sort of politics where compromise needs to be reached on issues as we are seeing now. Yesterday's budget would not have been the same if the Conservatives had had an overall majority. I do not think the income tax starting point would have been raised by anything like £1,000 nor do I think that Capital Gains Tax would have increased to 28% for higher earners. There are other areas too which have a distinctly Lib Dem flavour. However there is no denying that there are things in the budget that we would not have had were there a Lib Dem majority. That is not a "betrayal". It is a simple reflection of the fact that we did not get enough votes/seats to form that majority.

Also, those opposition politicians screaming "betrayal" at the Lib Dems should reflect on how unwilling their leadership was to engage in meaningful coalition talks and also how the electorate had dealt a hand that made such a route fragile at best.

There will have to be more compromise over the coming years. That's how coalition government works. Everyone needs to recognise this new reality.

Budget 2010 - painful but necessary

So we now know following George Osborne's first budget today what measures are going to be taken over the next few years to get the deficit under control.

I have picked out some of the main points along with my thoughts below:

• VAT up to 20%. As I have repeatedly stated on here I would have preferred income tax to go up rather than VAT as at least that is clear and based on ability to pay. VAT is a stealth tax and by some measures is regressive. But governments hate putting up income tax (because the public hates it whatever they might say to pollsters, punishes politicians that do it and we do live in a democracy). The £13 billion it raises is necessary unless the cuts were to go even deeper which would surely have been politically impossible and caused even greater howls from the opposition.
• Income tax allowance threshold to increase by £1,000. I am very much in favour of this and it moves us towards the Lib Dem policy of having everyone who earns under £10,000 taken out of income tax altogether. I have had arguments with numerous left wingers on Twitter about this who keep saying that it does nothing to help the poorest in society. I know. It's not designed to. It's an income tax measure and the poorest in society do not pay income tax. What it does do it allow the lowest earners to keep more of their own money which I see as a very good thing.
• Capital Gains tax threshold up to 28% for higher rate tax payers, kept at 18% for lower rate tax payers. I would have preferred to see this go closer to 40% to completely close the gap with the higher rate of tax but I understand that this is a compromise.
• Corporation tax for large companies to come down from 28% to 24% in 1% decrements over the next 4 years. Corporation tax for small companies to come down from 21% to 20% next year with no further reductions scheduled. First, declaration of interest, I own and run a small business. Whilst I am pleased to see corporation tax coming down (this will encourage growth which will help us get out of the fiscal problems faster) I think the balance should have been reversed with the small companies rate coming down more quickly. This is not from a self-motivated perspective but because small companies are the engine of the economy and the less tax they pay, the more likely they are to grow and ultimately also become the large companies that pay the higher tax ultimately anyway.
• Levy of £2 billion on banks. I would have liked this to be higher.
• Accelerating the change in retirement age to 66. A necessary move. The sooner politicians are honest about this the better. We cannot continue to subsidise retirements of 20 or more years as the norm. Pensions were never intended to do this and the next generation cannot afford to do it.
• Child benefit frozen for 3 years. I would much rather have seen it means tested although some say it would have been expensive to administer this. I am not convinced this would make it unworkable though. I expect Labour to go for the government's throat on this and it is harder to justify than means testing.
• Tax credits reduced for families earning over £40K per year. I have no problem with this. The money needs to come from somewhere and this is one example of where those earning a bit more have to contribute.

There are lots of other measures but I think these are the main ones. Overall it is not a nice budget and there is lots of pain. However I totally agree with Osborne's comments that the government has been forced into this position. I think Harriet Harman actually made a good impassioned contribution from the dispatch box in response in terms of performance but there is no narrative from Labour about what they would have cut differently. They just seem to oppose everything and as a result lack credibility. They should also display more humility about why we are in this situation in the first place.

At the end of his statement, Osborne claimed that the Treasury has analysed the changes and calculated that the poorest are least affected and the richest most affected. I expect to see lots of alternative analysis from left wing blogs in the next few days telling us why they think this is wrong.

I think however that particular argument goes, the pain is necessary to get our finances back on track. Hopefully as the economy grows in the next few years some of the pain can be mitgated.

Why is VAT seen as the natural option?

In George Osborne's first budget next week, most commentators are expecting him to put VAT up to 20% or thereabouts. It will bring in a decent chunk of extra revenue to help deal with the deficit.

Why is it though that VAT is perceived as a natural, easy option for putting up by politicians?

If you measure how VAT affects people by relating it to their income then it is regressive, i.e. it affects the poorer disproportionately. There are some who argue it should be measured by consumption (by which measure it is less regressive) but opinion is at the very least divided on which is the right way to measure it. Items such as some foods, children's clothes and other essentials are exempt from the tax and I would be surprised if Osborne significantly changes this but I still think putting up VAT is quite unfair. There are plenty of things that are not exempt.

One form of tax that is not regressive is income tax because it is based on the ability to pay. So for example if Osborne instead decided to put up income tax by 2% next week, at least then those paying the extra tax would be those earning above the earnings threshold and would only be proportionate to how far up that scale they go.

Of course income tax is the most visible of taxes. A VAT rise may not even be noticed by lots of people because it is many small adjustments to the various things they purchase rather than being able to compare one month's salary slip with another and seeing a very definite and comparatively chunky drop.

But just because something is politically easier should not make it the only game in town. I hope these options are being discussed at a high level and not dismissed out of hand.

The current government is almost certain to be unpopular in a year or two's time due to all the things it is going to have to do that will affect people's services and pockets. Given that, it might as well implement measures that spread the pain more fairly around.

Testing Means Testing

There has been much discussion about various state benefits recently in the context of what could be cut in order to save the government money and the question of means testing has raised its head again.

Every time I hear this subject discussed there is always someone from a body who opposes the idea of means testing whatever specific benefit they are talking about involved. The argument often revolves around for example the fact that if a benefit is universal then take up by those who need it most is higher and also that the admin costs per capita are lower. There are other arguments in favour of universality too such as the one that Frank Field advanced recently for child benefit which is along the lines of it being unfair to take away benefits from higher earners who have "played by the rules".

The problem I have with universality (especially in the current economic context) though is that it is providing benefits to people who do not really need them. Does a multi-millionaire's family really need child benefit? Does a wealthy 60 year old really need free bus travel around the country? Do rich pensioners need the Winter fuel payment? All of these benefits are currently universal.

We are having to look long and hard at cutting spending and increasing taxes. One of the taxes that is likely to go up in the emergency budget the week after next is VAT, perhaps to 20% or even higher. VAT is a regressive and to an extent stealthy tax (as an aside, I would actually prefer income tax to rise if any tax has to go up instead but that aint likely to happen at the moment). Think about what we are saying when we are preserving for example universal benefits for the children of richer families and better off older people. We are effectively asking the poor (who will be disproportionately hit by a VAT rise as a percentage of their income) to subsidise the rich.

Even though changing to means testing would not be enough to completely stop tax rises it would be enough to mitigate them. And at least we would be focusing benefits on those who need them.

Perhaps then the government would have a better claim to be doing things in a way that is consistent with the principle of us all being in this together.