The wide-ranging deficit reduction plan announced in the Emergency Budget in June has repeatedly been described by its Coalition authors as “unavoidable”.

 

However this is not a tag that has been accepted by everyone. Thecutswontwork.co.uk is a website that sets out an alternative vision for Britain’s economic future, arguing for smaller cuts made to different public services over a longer timeframe.

 

Full Fact investigated the evidence used to support this thesis.

 

 

A key argument made by the website is that if cuts in public sector spending are carried out too quickly “the economy grinds to a halt.”

 

This, it is claimed, is backed by expert opinion on the matter.

 

The website notes: “Even amongst those that think massive cuts are necessary, the sane ones (like these 60 economists) think we should cut later, when growth is stronger.”

 

So who are these compos mentis academics, and does this portrayal of expert consensus ring true?

 

The 60 economists referenced are the signatories to a letter written by Lord Robert Skidelsky and published in the Financial Times in February this year, which argued against large and swift cuts in public expenditure, noting that “the first priority must be to restore robust economic growth.”

 

Importantly however, the letter was written in response to another correspondence published previously in the Sunday Times and signed by 20 other economists that supported the use of such cuts as part of a deficit reduction programme.

 

As Full Fact noted at the time, it counted amongst its signatories a number of perfectly sane and well-respected academics, including Director of the LSE Sir Howard Davies, former Chief Economist at the Bank of England Sir John Vickers and even Labour peer and LSE Emeritus Professor Baron Desai.

 

So whilst the 60 economists cited by thecutswontwork.co.uk are more numerous and as well respected as their epistolary interlocutors, there does remain a body of academic opinion in favour of cutting that cannot be ignored.

 

It is also worth noting that the Skidelsky letter was published in February. Since then there has been a sovereign debt crisis in Greece leading to a bail-out and retrenchment in the Euro-zone, and the supposed revelation by the Coalition Government that the scale of the UK’s deficit was much larger than originally thought.

 

So do those 60 economists still hold the same opinions that they expressed in the letter in February some five months on?

 

David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee and one of the signatories of the Skidelsky letter told

Full Fact that he felt the points outlined in the letter are as pertinent now as they ever were.

 

He said: “Since we wrote to the Financial Times things have worsened in the global economy. Consumer confidence is plummeting, growth in China and the US is slowing.

 

“The arguments against slashing spending are even more appropriate today than in February, as conditions are even more fragile," he concluded.

 

We also contacted several of his co-signatories, and none have indicated that they think the arguments they made in the Skidelsky letter are any less valid in the present economic climate.

 

Professor Christopher Cramer of the School of African and Oriental Studies, for example, noted that although recent events had forced him to revisit the arguments, the points made in the FT letter still hold water.

 

“My views, basically, remain the same. We should not cut too sharply or excessively. I think the idea that cutting the state will unlock magically the private sector, until now cowed in a cell, is just that: magical thinking,” he said.

 

So whilst it is worth putting the Skidelsky letter in its original context – as a riposte to other, perfectly “sane” economists supporting a wide-ranging deficit reduction programme - it is certainly valid to point to a body of academics of equal if not greater number opposed to sharp cuts in public spending.

 

 

The second point of contention highlighted by thecutswontwork.co.uk is much more controversial. Under the heading “Cut Less”, the website argues that the Government is “talking down” the UK economy, and that the scale of its deficit reduction programme is unnecessary.

 

To illustrate the point, the website rejects the comparison that is often made between the UK and Greek economies, asserting that the nature of UK sovereign debt is markedly different to its Southern European ally.

 

According to the site: “Since most of our debt is owed internally (to British pension companies) we’re not going to end up like Greece with foreign banks determining our future.”

 

So just how important is the location of Government creditors to the UK’s fiscal independence?

 

UK Debt Management Office figures reveal that overseas creditors hold 23.7 per cent (£243.6 billion) of Government gilts, the fixed-rate bonds issued by the Treasury to fund its borrowing.

 

Pension funds and insurance firms based in the UK do indeed hold a greater share of this debt, accounting for 30.4 per cent (£245.7 billion) of all gilts. The Bank of England is also a significant creditor, holding 23.4 per cent (£198.3 billion) of the national debt.

 

Greece, by comparison, does owe a much larger share of its debt to overseas investors. Research conducted by the IMF and Barclays Capital indicates that foreign entities accounted for 74 per cent of the Greek Government Bonds (GGB) market at the time of the debt crisis in May, with Greeks holding just 26 per cent.

 

But just how relevant is this information when reviewing fiscal policy in the two countries? Richard Wellings, Deputy Editorial Director at the Institute of Economic Affairs, sounded a note of caution to Full Fact.

 

He argued: “The identity and location of creditors is only really relevant if the Government defaults on its debt, and if that happens then its economic policy will have already failed. The external versus internal debate sounds convincing, but it is nonsense”

 

“If the Government wants to maintain anything like its current levels of expenditure, it needs to borrow money, and lenders of any nationality are only going to make that money available if they believe that it will be paid back.

 

“The UK Government could exercise some leverage over pension funds, but the result is unlikely to be any better. Pension funds are sponsored by companies, who would have to pick up this loss, with the knock-on effect on jobs and the wider economy,” he added.

 

However Mr Wellings did concede that the terms of Greece’s debt did mean that the comparison with the UK was unhelpful. As he pointed out, whilst Greece held most of its debt on short term bonds, the UK had much longer to meet its repayment obligations, meaning that it can refinance in more favourable economic conditions if growth continues.

 

So whilst thecutswontwork.co.uk is correct to identify that the UK and Greece have very different creditors for their sovereign debts, this information is perhaps less important than the issue of the time that each country has to honour its bonds.

 

Here, the UK has a definite advantage over its Hellenic counterpart, with longer average terms until maturity meaning that the UK can afford more room to manoeuvre when structuring its deficit reduction plan.

 

 

The third objection to the cuts proffered by the website is centred on the type of Government spending that has been targeted for cuts by the Coalition.

 

In particular, Britain’s arms industry is highlighted as an area in which the Government can find some savings, given, we are told, that it spends some £888 million a year subsidising it.

 

Whilst the figure has a pleasing symmetry, doubts have been raised about its relevance today.

The source for the statistic is the Campaign Against the Arms Trade (CAAT), long-time opponents of Government subsidies for the munitions industry.

 

To their credit, CAAT source their information as much as possible from the public institutions involved, however the scarcity and age of the data used gives some cause for concern.

 

The calculations themselves were made in 2004, since when there have been a number of changes affecting the figures.

 

For example, CAAT attribute £16 million of Government subsidies to The Defence Export Services Organisation (DESO), a public body that no longer exists, having been subsumed into UK Trade and Investment in April 2008.

 

Equally, CAAT themselves acknowledge that large changes have been made to the Exports Credit Guarantee Department, which accounts for £180 million of the original £888 million estimate.

 

As a spokesperson told us, this has changed significantly since 2004. “Traditionally, the bulk of the ECGD budget has been taken up by a handful of large arms projects. However last year, BAE pulled out of the ECGD over its al-Salam deal with Saudi Arabia,” she said.

 

“This has meant that the proportion of the ECGD subsidies going to the arms trade has fallen from 57 per cent in 2004 to around one or two per cent now, although it could go up at any point,” she added.

 

The manner in which arms subsidies are calculated has itself has been the source of some disagreement.

 

A British American Security Information Council (BASIC) memorandum submitted to the Trade and Industry Select Committee in 2004 placed the value of the ECGD subsidy at £150 million, £30 million less than CAAT’s calculation.

 

Similarly, the Oxford Research Group (ORG) conducted its own inquiry into arms trade subsidies, also in 2004, and found that the bill footed by the Government was between £450 million and £930 million per year. CAAT’s estimate would therefore fall within this range, albeit at the upper end of the scale.

 

However all the estimates produced suffer from the same problems associated with the CAAT research, in that much of the source data is either out-of-date or shrouded in secrecy, and any calculations rely on a good deal of guess work.

 

Whilst CAAT hasn’t seen anything from the Coalition to suggest an ideological commitment to cutting defence subsidies, it is clear that circumstances have nonetheless meant that its 2004 £888 million per year valuation of Government arms subsidies is now likely to be much lower.

 

So whereas it is absolutely legitimate for thecutswontwork.co.uk to highlight arms subsidies as an area of public spending that has apparently been neglected by the Coalition’s cutting programme, it is important to bear in mind the difficulties involved in placing a figure on the potential savings to the taxpayer.

 

 

With Britain’s high-earning bankers under intense scrutiny at the moment for their role in the financial crisis, thecutsdontwork.co.uk feels that the time is right to ask them to contribute more towards reducing the country’s deficit.

 

It claims that “raising the top band of income tax from 40 per cent to 60 per cent (the level it was under Thatcher) would raise £19 billion a year, while a one-off levy on the £77 billion in profits that the richest 1,000 Brits made last year would raise £7.7 billion.”

 

But can the rich cough up the sums that the website claims?

 

An increase in the top rate of income tax is commonly cited as a way of increasing Government revenue. Indeed it is worth noting that the high tax band in Britain is currently 50 per cent, not the 40 per cent claimed, after a rise for those earning £150,000 or more, announced in the 2009 Budget, came into effect in April.

 

A 40 per cent tax band does indeed exist for those on incomes of between £37,400 and £150,000.

 

Furthermore, whilst the some readers might be surprised to learn that the top tax band was higher under Thatcher than at present – and indeed the figure was 60 per cent between 1979 and 1988 – the Thatcher governments were actually responsible for lowering the highest rate of income tax.

 

In 1979, the first Thatcher administration was quick to lower the top tax bracket from 83 per cent to 60 per cent in the post-election Budget of that year. It was subsequently lowered it again to 40 per cent in 1988, where it remained until this year.

 

But would a reversal of this trend produce the £19 billion a year claimed?

 

According to HM Revenue and Customs data, 274,000 people currently pay an average of £151,000 each as part of the 50p tax band, generating £41.4 billion for the Treasury. Assuming that the number of people paying the highest rate stayed the same, a rise to 60 per cent would only generate an extra £8.25 billion.

 

If, in addition, the 40p tax rate was hiked to 60p, the Treasury would find itself banking significantly more than £19 billion. Approximately three million people currently contribute tax through this band, sending £49.2 billion to the Government coffers. A rise to 60 per cent would increase this by £24.6 billion to £73.8 billion, which when added to the extra income generated from the abolition of the present 50p rate would see the

Government purse swell by some £32.9 billion.

 

In reality however, tax matters are rarely so simple. Institute for Fiscal Studies (IFS) research has demonstrated that historically, as the tax burden on the rich is raised, so too are the numbers prepared to move their funds outside UK tax jurisdiction.

 

According to the IFS’s Mirrlees Review, “there does not seem to be a powerful case for increasing the income tax rate on the very highest earners, even on redistributive grounds—it would not generate much, if any, extra revenue to transfer to the less well off.”

 

This is because, the review finds, the amount reported as taxable income amongst high earners reduces as the tax rate is raised.

 

Looking specifically at the years in which the top rate of tax was reduced by Thatcher’s governments, this notion would seem to be substantiated. According to historic information published in the Budget, Government receipts as a proportion of GDP actually rose after the top rate of tax was cut in 1979, from 33.5 per cent to 35.5 per cent. Similarly, there was very little change to public income from taxation after the 60p rate was cut to 40p in 1988, with receipts moving from 36.8 per cent of GDP to 36.1 per cent.

 

Similar complexities can be found in relation to the second tenet of claim: that a ‘one-off’ 10 per cent tax on the richest 1,000 could raise £7.7 billion for the Treasury.

 

As with the former claim, it makes use of a Socialist Worker report into alternative deficit reduction strategies. This in turn uses the Sunday Times’ most recent Rich List to reveal that the richest 1,000 collectively increased their overall wealth by £77 billion last year.

 

Assuming that no action was taken by the richest 1,000 to avoid such a tax, a 10 per cent levy of this sort could in theory raise £7.7 billion. However, the idea that those hit “won’t even notice the difference” is harder to justify.

 

The problem is that the £77 billion figure includes all changes to an individual’s wealth, including rises in the valuation of assets that haven’t necessarily realised, such as businesses and property.

 

It obviously becomes much harder for a Government to enforce a 10 per cent levy on a house than it is on cash, and it is worth noting that the UK already has the means to tax transactions involving such assets through Capital Gains Tax.

 

 

The idea that a reform to the justice system could save the taxpayer money is currently very topical. Justice Secretary Ken Clarke recently proposed increasing the number of community sentences given out in order to reduce the required capacity of Britain’s jails.

 

In part therefore, thecutswontwork.co.uk’s assertion that “it’s way more expensive to put kids and drug addicts in jail than it is to run youth centres and treatment programmes” is already being acted upon.

 

Indeed Full Fact has already looked at the evidence for a link between prison populations and crime rates in the wake of Mr Clarke’s controversial announcement. However could a reduction in the number of Britain’s inmates also save the country money?

 

There are certainly some who think so. The National Association of Probation Officers (NAPO) has argued that locking up offenders on short sentences costs the Ministry of Justice £350 million each year.

 

NAPO research found that “if the majority of these individuals were supervised in the community on programmes it would cost between £50 million and £60 million [per year].” This would therefore represent a saving of up to £300 million annually for the Treasury.

 

Campaign group Make Justice Work has also estimated that across the lifetime of a drug offender, the use of community rehabilitation instead of custodial sentences would save the taxpayer £60,000.

 

This, however, relies on the assumption there would be a fall in reoffending rates if such a move was made.

 

As Full Fact has shown, this is a highly contentious area. Whilst Shadow Home Secretary Alan Johnson argued last month that criminal rehabilitation programmes had been central to the fall in reoffending rates over the course of the last Government, Ministry of Justice figures also show that prison populations have been rising over the same period. This makes the cause of this fall in reoffending hard to pinpoint.

 

Both advocates and opponents of community sentences have also pointed out that significant investment would be needed in such schemes if they are to take over from the short-term custodial sentences currently handed out.

 

Shadow Prisons Minister David Hanson has argued that it “would take significant resources” to set-up and enforce community schemes, which cannot be squared with the Government’s stated desire to cut the £4bn prisons and probation budget.

 

So whilst there is a strong argument to be made for the increased use of community sentences, it is less clear whether or not the Coalition – who have already announced their intention to legislate in this direction – are able to squeeze any more savings for the taxpayer out of the current reforms.

 

 

Thecutswontwork.co.uk presents a broad polemic against the Coalition Government, and uses an impressive amount of examples to support its position. Whilst Full Fact feels that it is crucial to put some of these claims in some wider context, we also accept that there is plenty of evidence to justify their use on the site.

 

When citing academic opinion, it is hard to ignore that whilst there are a number of well-respected economists prepared to support the site’s arguments for later cuts, a number of others have argued to the contrary. Nevertheless, Full Fact did discover that many of the economists that signed the Skidelsky letter had actually hardened their stance in relation to the timing of deficit reduction since February, strengthening the point raised by the site.

 

Likewise, whilst there is plenty of evidence to support the use of community sentences as a means to improve efficiency in the justice system, it is important to recognise that there is a debate to be had in this area, particularly on the controversial issue of reoffending rates.

 

Whilst it is certainly true that a greater proportion of Britain’s debt is held by organisations based in the country than is the case in Greece, the amount this liberates our economic policy is contentious. What is undeniable however is that the UK has longer to repay its loans than Greece, which does afford it greater flexibility in planning its deficit reduction.

 

Concerns about the age of the estimates used to calculate Government subsidies to the arms industry do persist however, and it is likely that the £888m figure cited has fallen since 2004.

Equally, the complexities of estimating the impact of changes to the tax system on potential Government receipts are perhaps not accounted for in the website’s calculation of the money that could be raised from lifting the top tax band. Given the dearth of tangible evidence, it is to be welcomed that the site’s reasoning is transparent, but the conclusions drawn should be placed alongside other, sometimes contradictory, findings.