Spending Review 2010 - Treasury Contents

5 Distributional analysis

Distributional analysis

75.  The Budget contained, for the first time, a section giving a distributional analysis of the measures it contained. In our report on the June 2010 Budget we recommended that this work be taken further in the Spending Review:

It is likely that the Comprehensive Spending Review will also have different effects on different income groups. We recommend that the Treasury builds on the approach taken in the Budget to give information about the impact of CSR changes on different households. We would like the analysis for both the CSR and future Budgets to take two forms: a narrowly drawn set of figures based on those measures most easily modelled and a wider analysis, using more assumptions, which would allow a fuller set of measures to be included. [129]

76.  We are pleased that Treasury has responded to our recommendation and included an Annex within the Spending Review which models some of the distributional impacts of future changes to tax, welfare and public spending information on different households. Carl Emmerson, Acting Director, IFS, agreed that the analysis was a "welcome development".[130]The Chancellor revealed to us that this type of analysis had previously been done by the Treasury but that it had never previously been published.[131]

77.  The distributional analysis produced by the Treasury included changes already announced and modelled at the time of the Budget combined with some of the further changes announced in the Spending Review. Mike Brewer, Programme Director, IFS, had no criticism of the accuracy of the modelling done at the Budget. He considered that the analysis done could have been more extensive if more of the welfare reforms had been included and that the results had been presented over a longer time period. [132]

78.  The IFS produced their own distributional analysis of the Spending Review. This included more of the changes to welfare spending than the Treasury had done and looked further ahead into the future. However, unlike the Treasury analysis, it did not include any of the impact of cuts in departmental spending. As Mr Emmerson explained:

One question that we think we are answering very well is, "To what extent are tax changes and benefit changes affecting individuals' incomes, and how does that vary by family type and across the income distribution?" Another question that is also extremely interesting and important is, "What about the whole fiscal consolidation package once you include all the public service cuts?" We have not included any of that. The Treasury has made a stab at it. Doing it is very, very difficult, and it is important to bear in mind that even on its own figures it is including 55%—I make it—of the consolidation package of the tax rises, the benefit cuts and the public service cuts. So no one can claim that they have looked at the whole fiscal consolidation package.[133]

79.  While the Treasury had modelled some of the departmental cuts which the IFS had omitted, the IFS had produced a more comprehensive model of welfare changes than the Treasury. Mr Brewer said:

The analysis produced by the Treasury covered about 40% of the welfare cuts in 2012, and the cuts in 2012 are about 40% or 50% of the cuts in 2014. Overall, the analysis printed by the Treasury covers about 20% of the cuts due in 2014; we got to about 90% of the cuts in 2014. So, no, we did not cover every single welfare change—you have mentioned the very small increase in discretionary housing payments—but our coverage is a lot greater than that of the Treasury.

80.  The IFS also raised questions about the inconsistencies between some of the charts in the Spending Review document. In written evidence they pointed out that Chart B.6 (which considers the impact in 2014-15) includes additional changes to ESA (Employment and Support Allowance) and DLA (Disability Living Allowance) yet omits the changes to LHA (Local Housing Allowance). They also drew attention to the differences between Charts B.4 and B.5, that show changes as a percentage of net income, and Chart B.6 that shows the impact of changes as a percentage of net income plus benefits in kind. The IFS told us that "we are also unclear why HMT did not additionally publish the distributional impact of the tax and benefit changes due by 2014-15 in the same form as the analysis in Charts B.4 and B.5".[134]

81.  The Chief Secretary robustly defended the distributional analysis included with the Spending Review document. He explained that a "number of tax and benefit changes are difficult or impossible to include, because of data limitations"[135] and that:

The distribution analysis that we have done, which is shown at the end of the document in chart B6, includes for the year 2014-15 departmental expenditure, welfare changes and tax changes. It takes them all together and offers the fullest possible analysis that we could develop, in the context of the spending review, of the distributional effect of the decisions that we have made.[136]

82.  The Chancellor agreed that the analysis had been done in the best way possible and he welcomed input from the Committee on the methodology:

Speaking for the officials in that part of the Treasury, I think they would welcome input on that work. As I say, I think we want to come to an agreed form of methodology, which may be this Committee, or with the help of the Public Accounts Committee as well, that we're going to use for future Budgets under whoever is the Chancellor.[137]

83.  We welcome the Treasury's response to our request greatly to increase its distributional analysis, showing the effect of measures in the Spending Review on different households. We recommend the Treasury continues to extend and improve the analysis it provides and takes account of our recommendations in our report on the June Budget. We recommend that the Treasury examine the IFS's proposal that more of the welfare changes can be modelled and included in its analyses. We also recommend that the Treasury publish not just the sources but additional information on the calculations underpinning their distributional analysis to provide further transparency and encourage debate on how the methodology of such analysis might be improved.

Fairness and progressivity

84.  A great deal of debate around the Spending Review has been over whether the measures were 'progressive' and 'fair'. The two are not synonymous but they have sometimes appeared so. While 'fair' is a word in common use, in this debate 'progressive' has had a specific meaning. The IFS told us:

The definition [of "progressive"] that we're using, in a very technical sense, is "How are the gains or losses from a measure changing as an individual's income rises?" So, as you move up the income distribution, do you see the gains or losses increase or decrease? It is a very technical, narrow definition, and it is our understanding that that was the definition that the Chancellor had in mind when he used the term in his June Budget speech.[138]

85.  The day after the Spending Review was published the IFS gave a briefing in response to it. At the briefing Mr Emmerson stated that:

The Treasury yesterday published an attempt to model the distributional impact of some of the cuts to public services. This is far from straightforward and it is laudable that the Treasury has attempted this exercise [...] the Treasury's analysis shows both the welfare cuts and public service cuts announced yesterday being regressive. But large tax rises for the very rich announced by Labour lead, on the Treasury's estimates, to the overall fiscal consolidation hitting the highest income individuals the most.[139]

86.  We questioned Mr Emmerson about how the fiscal consolidation could have been achieved without being regressive. He explained that given that the "Government and its predecessor has chosen to do more on the spending side and less on the tax side. That clearly makes it harder to do it in a progressive way".[140] He agreed that the Chancellor was "in some ways trying to be as progressive as possible by taking child benefit away from higher rate taxpayers and by cutting the higher education teaching budget very deeply"[141]. Mr Brewer agreed that "given his [the Chancellor's] choices about the split between tax rises and spending cuts, it is hard to imagine how he could have done this without it being regressive".[142]

87.  The Chancellor stated that the Budget was a "progressive Budget."[143] In contrast we noted that he did not refer to the Spending Review as progressive. However the principle of "fairness"[144] was mentioned as one of the guiding principles of the Review. The IFS were clear that they were not making a judgement about the fairness of the Spending Review. Mr Emmerson stated that "fairness and progressivity are not the same thing" and in regard to previous IFS comments he reminded us that they had "tried to be very clear that we were not saying the spending review was fair, or indeed that it was unfair".[145]

88.  We had a discussion with Mr Emmerson and Mr Brewer about 'fairness' and 'progressivity'. Mr Emmerson explained that in some cases fairness and progressivity may not be aligned:

You can take measures that are progressive that may well be seen as unfair. They could redistribute from what you might deem to be the undeserving poor to the deserving people in the middle of the income distribution, in which case you could say that it is fair and right, but it wouldn't be progressive. You could carry out a reform that taxed high-income people to a really high degree and to such an extent that they worked less and the economy was smaller. That would be progressive, but you might not think it was right, because everyone else would have to pay more tax to pay for public services.[146]

89.  The Chief Secretary highlighted the changes to housing benefit as an example of applying the principle of fairness:

There is a need to reform the housing benefit system to ensure that we are not paying, to people who are out of work, housing benefit at a level that ordinary working people in work could not afford. That is a basic principle of fairness, actually.[147]

90.  Given the choices made by the Government to employ more spending cuts than tax rises in the consolidation, the evidence suggests that it would have been very hard for the overall consolidation to have been progressive. Fairness and progressivity are two different concepts. Decisions that are technically regressive are not necessarily unfair. Whether or not the consolidation is fair is, and will remain, the subject of political debate.

91.  In written evidence, the Government told us:

Publishing analyses of tax, tax credit and benefit changes far into the future may not be representative of the impact of Government policy. This is because the Government will take a view on tax and welfare policy based on the emerging fiscal position in future fiscal events.[148]

Debate about the distributional analysis should take into account the extent to which government policy is likely to evolve. The distributional analysis done at the time of the Spending Review is a snap shot. It should not be seen as immovable but as a forecast which should be adapted as more detail on tax and spending is revealed. On 11 November 2010 The Secretary of State for Work and Pensions announced the publication of a White Paper on welfare reform in a statement to the House.[149] The White Paper proposes combining many out-of-work benefits and in-work support payments into a single "Universal Credit". The first individuals will receive it in 2013, and full implementation is expected by October 2017. Such a significant change to the welfare system will inevitably affect the distributional analysis for 2013 onwards. We are confident that the Treasury will update their analysis to take effect of major policy changes. However, given that the Universal Credit is to be introduced gradually, as other major changes may be, care will have to be taken to show both the effect of the long term reforms, and of transitional measures.

Child benefit

92.  We were keen to understand more about the process for deciding and the implications of removing child benefit from higher rate tax payer households. The Chancellor confirmed to us that the decision had not been discussed with the Cabinet prior to its announcement at the Conservative Party conference on 4 October 2010. He explained that this was partly due to the fact that it was technically a tax measure, and therefore did not need to go to Cabinet, and partly because Cabinet discussion in a coalition was impractical during conference season. He did state however that there had been consultation and planning as "the people with the direct responsibility and the Deputy Prime Minister were involved for many weeks beforehand. This was not sprung on them."[150] The Chief Secretary reiterated that there had been discussions and said that officials in HMRC had been consulted a "significant number of weeks"[151] before the child benefit announcement.

93.  We asked Indra Morris, Director, Personal Tax and Welfare Reform, HM Treasury, why the Chancellor had initially announced the changes to child benefit would save £1 billion yet in the Spending Review the saving was in fact £2.5 billion. She explained that

The difference is essentially that, as officials, we were being overly cautious ahead of the OBR certifying the costings and, therefore, that was fed into our advice to the Chancellor. It is very much as simple as that.[152]

Ms Morris explained that she considered the changes chosen were "incredibly simple"[153] in comparison to the other option which had been considered which would have involved complex means testing. She did however concede that one of the reasons that the changes were not being introduced until 2013 was due to the current change programme at HMRC and the work being done on PAYE and tax avoidance.[154]

94.  Treasury officials and Ministers defended their decision to withdraw child benefit by asking higher rate tax payers to confirm whether or not child benefit was claimed in their household, rather than by means testing, on the grounds of administrative simplicity. The Chancellor told us:

What I've sought to do is introduce this in the simplest possible way—to use the existing systems we have. We know who higher rate taxpayers are. The alternative, if one wanted to remove child benefit from higher rate taxpayers or tax it in some way, would have been to create some means-tested system. I just don't think that was sensible because what I've done preserves the way child benefit is claimed by the vast majority of people in this country. [155]

95.  The Chancellor's decision to preserve the way that child benefit is claimed is important because, as the HMRC website points out, Child Benefit not only provides income directly to mothers, but it gives those who stay at home to care for children under 12 access to state pension credits:

If you have a child under 12—and you're either looking after them at home or you work but don't earn enough to pay National Insurance contributions— Child Benefit can help you qualify for 'credits' for being a parent or a carer. These credits count towards your State Pension.[156]

Claiming child benefit builds up entitlement to the state pension for parents of children under 12 who cannot pay National Insurance contributions. When the Government implements its changes to child benefit, clear information will be essential to ensure that parents are aware that if they simply cease to claim Child Benefit it could affect their pension entitlement.

96.  We have other concerns about how removing child benefit from higher rate taxpaying household will work in practice. We raised the practicalities of compelling couples to discuss financial arrangements with each other. Ms Morris did not think this would be a problem stating "all we are asking for is a very reasonable conversation between a couple".[157] The Chief Secretary responded to our questions by saying:

There are many things that higher-rate taxpayers are required to declare in the context of filling in their tax return. We will be adding a further item to that list and, in common with other areas of the tax system, there will be penalties for failing to do so.[158]

We [the Treasury] will set this out in legislation. The requirement on the higher-rate taxpayer will be to declare whether child benefit is being received in their household or not.[159]

97.  We consider there are some risks involved in the new system. When we questioned Mr Brewer about the difference between two couples that collectively earn the same amount but only one of which has a higher rate tax payer and will therefore lose their child benefit he agreed that there was an issue of fairness.

We [the IFS] have avoided using the word "fairness" when talking about progressivity, but I am happy to use that word here, when we are talking about two families who are apparently very similar. It seems unfair that those two families should be treated so differently.[160]

He also pointed out another problem regarding incentives.

What also seems economically perverse is that families who are just below the higher rate threshold, who get a pay rise, will find themselves worse off. A £1 increase in one of those families' incomes will lead to a loss of all their child benefit, which could be £1,700. That is economically distorting and perverse. The Treasury published a figure in the Budget that suggested that it expected to lose £270 million a year in tax revenues from people tax planning around this. That sounds like an inefficient way to devise a means test.[161]

98.  The change to Child Benefit is not being made until 2013. Government will want to carefully consider the issues raised with us in evidence: perverse economic incentives; perceived unfairness; and enforceability.


99.  The Spending Review announced reforms to housing benefit and social housing intended to reduce housing benefit costs and increase incentives to build while significantly decreasing public sector capital investment. These changes have been controversial. Indeed, the Work and Pension Committee are undertaking a major inquiry into the housing reforms announced in the June Budget. We do not intend to replicate that inquiry but wished to explore the effect of Spending Review changes on public spending, and on the operation of the housing market.

100.  As one of the Government's aims is to reduce the housing benefit bill we were keen to understand the drivers behind the increases in it in the past. The Chief Secretary considered that one of the reasons that housing benefit had increased in the past decade was that "rents would follow housing benefit which would follow rent, and you would get a sort of ratchet effect".[162] David Orr, Chief Executive, National Housing Federation, agreed that this was an issue but felt that the underlying reason that housing benefit bill was so high is the "desperately overheated housing markets characterised by an absence of supply right across the board".[163] He attributed the increase in the housing benefit bill to a lack of social housing:

Most of the recent increase in housing benefit costs has been due to the number of people who might traditionally have expected to live in social housing at rents of perhaps £80 a week, but who now live in privately rented accommodation at rents of maybe two or three times as much, the cost of which is still covered by housing benefit. Unless we find some way of addressing that core issue, we will not resolve the problem.[164]

David Montague, Chief Executive, L&Q, also felt that increasing supply from "the housing association sector, because we currently charge about 50% of the market rent"[165] would be an important way of reducing the housing benefit bill.

101.  Mr Montague considered that the changes to increase new social housing rents to an intermediate level of 80% of the market rate would help his housing association (which is based in London and the South East) to increase supply. He did not think it would be effective in areas in the north where rents were lower.[166] Mr Orr agreed that these changes would be less effective in other areas of the country, where differentials between the social housing and private sector rental market were lower or non-existent. Indeed he said that in some areas charging 80% of the market rent would require housing associations to reduce their rents.[167] Mr Orr agreed that more houses would be built but was concerned that the provision "will be a net transfer away from social housing to these intermediate [80% of market rent] offers".[168] Mr Orr was frustrated that the decision to cut capital investment by 74% would mean less social rented housing to provide a good offer for the working poor.[169]

102.  While increasing the income from housing would help increase the housing supply, Mr Montague also said that certainty over housing benefit was necessary to ensure there would be investment in new housing. He explained that investor "confidence sits on the security of our income stream, and that security sits on housing benefit, so we really do need certainty about the future of housing benefit".[170] David Orr said that "If we get nothing else in the next year, a real commitment to flexibility would make a huge difference."[171] He claimed such flexibility would increase the effectiveness of the sector. As an example, he said that was important to use the existing stock as effectively as possible but that it would be very hard to encourage current social housing tenants to move to smaller more suitable properties if this meant that their rent would increase significantly to the new 80% level.[172]

103.  Gillian Guy, Chief Executive, Citizens Advice, considered that the higher rents that will be charged in future mean "there is lower work incentive coming through this package" as people would become more reliant on housing benefit to pay their rent.[173] She was also concerned about the 10% cut in housing benefit for people on Job Seekers Allowance for over a year.[174]

104.  We were interested in better understanding the numbers of people affected by the proposed changes to housing benefit. Lizzie Iron, Head of Welfare Policy, Citizens Advice, considered that over 21,000 households (17,000 of which are in London) would be affected by the cap in housing benefit and therefore could potentially have to move.[175] Mr Orr said that as many as 1.3 million people could be affected by all of the different housing benefit cuts announced and "as many as 80,000 households could be displaced in London"[176]. In a debate in Whitehall on 4 November 2010 the Parliamentary Under-Secretary of State for Work and Pensions said:

What is important is that the Government have an important role in the private rental sector. Some 40% of people in that sector are in receipt of housing benefits, so we are part of the market-making, and we must recognise that. We cannot stand back and let the market control the sector, as the Opposition did when they were in government. We must take action and, at the same time, protect the sort of people in the constituency of my hon. Friend the Member for Nuneaton (Mr Jones) who he mentioned. That is why we have put in place £140 million transitional relief to ensure that the support is there if it is needed. That problem was anticipated by the previous Government and it was in Labour's manifesto.[177]

There was concern from some representatives of the housing sectors that the reforms may adversely affect new and existing tenants.

105.  The Government's housing benefit reforms attempt to reshape the housing market. We shall monitor their effectiveness both in terms of their effect on public expenditure, and on the regional and national housing market, and on the London market.

Regional policy

106.  As a committee we wanted to understand more about the regional impact of the Spending Review. The Joseph Rowntree Foundation told us:

JRF is concerned about the geographical and regional impact of the spending review. The Joseph Rowntree Foundation and the Joseph Rowntree Housing Trust (a provider of housing and care services) are both based in York and we have a ten year commitment to working in partnership with the district and people of Bradford. The JRHT runs operations in Hartlepool, Scarborough and Leeds as well as York and its surrounding area. From this base, as well as from our research evidence, we are very aware that the spending review will have markedly different impacts on different towns, cities and regions across the UK—and may be particularly damaging for Northern towns and cities, where the public sector is a major employer as well as a major source of private sector, voluntary sector and social enterprise contracts, and grant funding for community and voluntary sector organisations. [178]

107.  Given the variations in the extent to which different regions relied on public sector employment, the regional effects of headcount reductions caused particular concern. Mr McCafferty said that there was a "worry that [...] the regional match, in terms of where the jobs will disappear and where the new jobs will be created, will be absolutely as one would hope".[179] This concern was also echoed by Mr Patel who spoke about a "regional mismatch".[180] Dr Philpott said that he would recommend "more regionally targeted support for small businesses [...] getting more credit and help to them".[181]

108.  Mr McCafferty expressed some concerns over the new Local Enterprise Partnerships (LEPs), which have replaced Regional Development Agencies (RDAs):

The worry that we have had, and that John Cridland [Deputy Director-General, CBI] has expressed, is whether these new forms of regional economic management have sufficient scale to be effective; whether they are sufficiently focused to allow the business view to be heard and acted upon; and whether they have sufficient resources to carry out their job.[182]

Mr Patel also had some concerns "On the equity side, we think that there is probably a lot more that the Government can do [...] one thing that the RDAs did well was promote a lot of these regional equity schemes".[183]

109.  We raised our concerns with the Chief Secretary about the significant cut in funding that the LEPs will receive in comparison to the RDAs. He agreed that "across the board of Government spending, we are having to make spending reductions, and regional spending cannot be immune from that".[184] However the Chief Secretary considered that the new LEPs would help in "empowering businesses and local authorities to work together at a local level"[185] and disagreed that requiring LEPs to bid to a centrally managed fund would be a problem.[186] The Chancellor also considered that the RDAs were "not an effective tool of policy" as "at the end of more than a decade, the gap between the regions was growing".[187] We note the Business, Innovation and Skills Committee is conducting an inquiry into LEPs.

110.  The Chancellor said that "producing a new model of growth that is not so dependent on debt, or so concentrated in one part of the country, is a major challenge". He pointed out "that for every 10 private sector jobs created in the south-east of England over the last decade, only one was created in the north". The Chancellor told us that:

I don't accept that any particular regions should do worse out of the Government's economic policy. Our intention is that all regions do well and, indeed, we have a bit more of a rebalancing of this economy geographically in the way that I was just describing." He noted that " there are some very specific regional tools that we are using through, for example, the distribution of the capital projects, where they are located, and partly through, as I say, the Regional Growth Fund, the regionally based tax reduction, which is, again, not something that has been tried before. So there are a number of tools which also, I think, help.[188]

111.  In written evidence after the hearings, the Treasury drew attention to these policies to support local growth, citing the Regional Growth Fund, the NICs holiday and infrastructure programmes. In addition, we were told the Local Growth White Paper

  • Sets out a new approach to supporting growth in all places, including
  • a framework of powerful incentives to ensure that local authorities who deliver sustainable economic development benefit from that growth, including considering options to enable councils to retain locally-raised business rates
  • launching the first round of bids to the £1.4bn Regional Growth Fund
  • reform of the planning system so that it promotes rather than hinders growth, including a national presumption in favour of sustainable development establishing 24 Local Enterprise Partnerships (LEPS).

112.  While the economy grew in the last decade, some regions benefited more than others. We agree with the Chancellor that it will be a "major challenge" to ensure that all parts of the United Kingdom benefit from future growth. The Government has announced some policies designed to help achieve this. We will monitor their progress.

129   Treasury Committee, First Report of Session 2010-11, June 2010 Budget, HC 350, para 82 Back

130   Q 105 Back

131   Q 757 Back

132   Q 111 Back

133   Q 115 Back

134   Ev 145 Back

135   Q 700 Back

136   Q 705 Back

137   Q 755 Back

138   Q 112 Back

139   Opening remarks by Carl Emmerson at IFS briefing on the October 2010 Spending Review, 21 October 2010 Back

140   Q 120 Back

141   Q 121 Back

142   Q 123 Back

143   HC Deb, 22 June 2010, col 180 Back

144   HC Deb, 20 October 2010, col 951 Back

145   Q 134 Back

146   Q 134 Back

147   Q 657 Back

148   Ev 150 Back

149   HC Deb, 11 November 2010, cols 438-440 Back

150   Q 765 Back

151   Q 689 Back

152   Q 565 Back

153   Q 566 Back

154   Q 568 Back

155   Q 767 Back

156   http://www.hmrc.gov.uk/childbenefit/start/claiming/protect-pension.htm Back

157   Q 567 Back

158   Q 677 Back

159   Q 678 Back

160   Q 144 Back

161   Q 144 Back

162   Q 629 Back

163   Q 433 Back

164   Q 435 Back

165   Q 435 Back

166   Q 456 Back

167   Q 442 Back

168   Q 455 Back

169   Q 438 Back

170   Q 440 Back

171   Q 456 Back

172   Q 444 Back

173   Q 446 Back

174   Q 421 Back

175   Qq 425-427 Back

176   Q 428 Back

177   HC Deb, 4 November 2010, Cols 378WH-379WH Back

178   Ev 38 Back

179   Q 354 Back

180   Q 357 Back

181   Q 286 Back

182   Q 298 Back

183   Q 302 Back

184   Q 614 Back

185   Q 615 Back

186   Q 618 Back

187   Q 808 Back

188   Q799 Back

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