The Institute for Fiscal Studies’ recent analysis of the budget – purporting to show that it isn’t “progressive” as the financial hit taken by the poorest decile of society is higher in percentage terms (although not in cash terms) than that suffered by the richest – shows how stagnant debate has become about redistribution of wealth and about economic policy more generally. This presents both a challenge and an opportunity for supporters of free markets.
The IFS is a reputable think tank and there’s no reason to doubt the numbers they have produced. But there are good grounds for challenging their relevance. In public relations terms, they may have tripped up the coalition government – and particularly the Liberal Democrat section of it – but in policy terms, there aren’t many lessons to derive from the IFS’s latest release of data.
What’s at issue is the extent to which the government’s tax and benefits policy promotes so-called “fairness” and the extent to which it encourages social mobility. The term fairness has come to mean a policy which, in immediate cash terms, benefits the poorest at the expense of the richest, or – more often – hurts the richest even more than it hurts the poorest.
Interpreting policies in this way is perverse. To give an extreme example, it seems that a budget that increased people’s welfare payments from £8,000 per annum to £10,000 per annum but legally prohibited them from entering the workforce would be deemed “progressive” under the IFS model. On an immediate snapshot of household income, those at the poorer end of society would be better off – but their long term prospects would clearly have been harmed enormously.
What really needs to be measured is not percentage alterations in tax and benefits packages, but the dynamic effects the tax and benefit system have on increasing overall economic growth and assisting and incentivising people in realising their aspirations. This sort of approach doesn’t lend itself as easily to a bar chart that can be printed in a national newspaper, but is surely the more intelligent way to attempt to tackle low economic growth and an increasing bunkerisation of the poorest in a welfare dependency culture.
The traditional terms of “left” and “right” are not helpful dividing lines in this debate. In recent weeks, I’ve been categorised as both a hard right winger and as one of the country’s most influential left wingers. Although this type of political categorisation is commonplace, it is extremely unhelpful.
Left/right terminology has started to mean little more than a reference to the vested interests that an individual or group is believed to lobby for. The IEA – and free marketers more generally – need to continue to show how market-based reforms are not a cynical attempt at stacking the odds in favour of the wealthy but help the poor too. In fact, in very many cases, free market reforms are particularly vital for the poor. Policies that rely entirely on redistribution of wealth may provide the illusion of improving the lot of the poorest in society, but little more. A structure that encourages social mobility is what is needed – ensuring that work and enterprise is rewarded and incentivised. That would be a “progressive” approach, motivated by “fairness” and these are two terms that free market advocates should seek to claim for themselves.