Who loses most from public
service cuts?
Cormac O’Dea
© Institute for Fiscal Studies
0%
-2%
-4%
-6%
-8%
Income quintile group
Change in modelled expenditure on public services
© Institute for Fiscal Studies
All
Richest
4
3
2
-10%
Poorest
Proportion of 2010-11 net income and
income and benefits in kind
HM Treasury analysis of impact of cuts in
spending on public services, by 2014-15
Source:
Spending Review Fig. B6
HM Treasury analysis of impact of changes in
spending on public services, benefits, tax by 2014-15
Proportion of 2010-11 net income and
benefits in kind
0%
-2%
-4%
-6%
-8%
Income quintile group
Change in tax
Change in tax credits and benefits
Change in modelled expenditure on public services
© Institute for Fiscal Studies
All
Richest
4
3
2
Poorest
-10%
Source:
Spending Review Fig. B6
What’s included and what’s excluded?
• Included expenditure accounts for half of Departmental Expenditure
Limits (excluding devolved administrations)
– Accounts for approximately one-third of the change in DEL
• Of that which is included:
– Health (51%), Local Government (10%), Education (27%), BIS - higher
education (5%), Other (8%)
– Over 80% is accounted for by current expenditure on health and education
• Excluded is:
– All capital expenditure
– Pure public goods (Defence, Environment, FCO etc.)
– Central government administration costs
• The modelled elements – include some clearly progressive elements
• The unmodelled cuts – not so clear
© Institute for Fiscal Studies
Adding in unmodelled expenditure
Proportion of 2010-11 net income and
benefits in kind
0%
-2%
-4%
-6%
-8%
Income quintile group
Change in unmodelled expenditure on public services
Change in tax
Change in tax credits and benefits
Change in modelled expenditure on public services
© Institute for Fiscal Studies
All
Richest
4
3
2
Poorest
-10%
Proportion of 2010-11 net income and
benefits in kind, arbitrary assumption 1
Allocating unmodelled cuts:
Equal in cash terms – one arbitrary assumption
0%
-2%
-4%
-6%
-8%
Income quintile group
Change in unmodelled expenditure on public services
Change in tax
Change in tax credits and benefits
Change in modelled expenditure on public services
© Institute for Fiscal Studies
All
Richest
4
3
2
Poorest
-10%
Proportion of 2010-11 net income and
benefits in kind, arbitrary assumption 2
Allocating unmodelled cuts:
Proportional to income – another arbitrary assumption
0%
-2%
-4%
-6%
-8%
Income quintile group
Change in unmodelled expenditure on public services
Change in tax
Change in tax credits and benefits
Change in modelled expenditure on public services
© Institute for Fiscal Studies
All
Richest
4
3
2
Poorest
-10%
Public Services – How to value?
• Value of service is not equal to cost
– Almost all studies that assess distributional impact of public spending
assume that value is equal to cost
– Questionable, but probably the only feasible starting point
– Treasury acknowledges this clearly
• Issue does not arise with cash benefits (£1 = £1)
• Sensible measure of value is “willingness to pay”:
– How much would different households be willing to pay to avoid a cut?
• Best approach is perhaps to assess distributional impact under a
variety of (equally sensible) assumptions on value to see assess
robustness
© Institute for Fiscal Studies
Conclusions
• HMT analysis says yesterday’s announcements on both welfare and
public services regressive
– Overall package hits richest hardest because of Labour’s tax rises
• Valuing public spending is hard to do precisely
• Valuing the change in public spending is even harder
• Good that Treasury have not shied away from the issue
• The modelled elements include some clearly progressive elements
• Nonetheless HM Treasury analysis implies modellable cuts to public
services are regressive
• Method of estimating usage is unclear at this stage (“black box”)
• Analysis is (necessarily?) incomplete so precludes conclusive
statement on precise level of progressivity of entire fiscal consolidation
© Institute for Fiscal Studies
Who loses more from public service cuts?
Cormac O’Dea
© Institute for Fiscal Studies