Brown moves the goalposts

Donald Hirsch	Monday 12th March 2001

Both main parties are now promising extra cash for the disadvantaged. For British politics, that represents an astounding change, writes Donald Hirsch

By delivering a remarkably unremarkable pre-election Budget, Gordon Brown showed two things. First, his confidence that his image as a steady hand at the economic tiller would count for more than any short-term electoral bribery. Second, that his brand of quiet redistribution has in four years so transformed the political landscape that measures which would have astounded people yesterday are today taken for granted.

After Brown's first big Budget in 1998, the New Statesman noted that "for the first time that many of us can remember, the Chancellor made a big, explicit give-away to poor families, and made it look respectable". Each of the next three Budgets followed the same course of giving more to the poor, and much less to the better-off. Treasury charts showing how Budget gains have been concentrated on the poorest 20-30 per cent of the population have become so familiar to the pundits that they have forgotten how novel they seemed only three years ago.

The big change over this period has been the extension of such largesse to more groups. The first beneficiaries, poor working families, continue to be the most favoured, but Brown has also been exceptionally generous, by past standards, to non-working families, and now to pensioners and all families with very young children. Indeed, had it not been pre-announced, this Budget's deal for pensioners would have made it considerably more exciting, representing the biggest single income transfer to a large low-income group that seasoned commentators can remember.

Gordon Brown's record needs to be considered in a long-term perspective. In the 1980s and early 1990s the poorest groups did not share in the fruits of economic growth, in large part because chancellors raised benefits only in line with rises in prices, not rises in earnings. The result was that while average earnings rose 20 per cent in real terms, people who depended on benefits, in particular large numbers of pensioners but also many families on the breadline, had little or no real increase.

The more Brown is lobbied for a formal restoration of a link between rises in the basic pension and the growth of earnings, the more he resists it. But look at what has actually happened between 1997 and 2001.

Average earnings are 20 per cent higher in cash terms than when Labour came to power; 10 per cent higher after adjusting for inflation. The poorest pensioners in 1997 had their income topped up, if necessary to a minimum £68.80 a week; by next month they will have reached £92.15. This is a 22 per cent real-terms increase - so members of this group have not only kept up with earnings growth under Labour, but made up about half the ground they lost under the Conservatives. Their incomes had fallen by 20 per cent relative to average earnings; they have regained 12 per cent. For some low-income working families the rise has been even greater.

These kinds of transfer, Brown's largest, are all based on means tests, which can bring serious problems in their wake. Give poor working families big income top-ups and you make it more worthwhile to be in work, but potentially less worthwhile to better yourself in work by lengthening your hours or training for better-paid work. This is because for each extra pound you earn, you lose a hefty chunk of the means-tested top-up. Similarly, too much reliance on means testing for pensioners makes it hard for many of them to improve their net income in retirement by contributing to pension schemes.

Brown is aware of this problem and is starting to take measures to counter it. The pensioner credit allows people to keep 60p of each pound in their own pensions rather than having it "clawed back" by losing part of their means-tested entitlement. The basic state pension itself is being raised faster than earnings, although these rises will not restore its relative value even to 1997 levels. For poorer working families, increasing the minimum wage should help a bit, in terms of their ability to increase income earned in their own right rather than relying on means-tested transfers that disappear as soon as they get a bit better off.

How much has Brown's redistributive habit transformed political thinking more widely? The Conservatives have been highly critical of the extension of means testing, yet talk far more now about helping specific groups in the name of social equity than they have for some decades past. Compare, for example, Michael Portillo's remark before the last election that people had better start making their own pension provision because the state pension's value would soon be "nugatory", to the promise from the present social security spokesman, David Willetts, that the Conservatives will outstrip Labour's present increases.

Yet the benefit of some of the Tories' proposals for poorer groups could be undermined by the Labour means testing that they criticise but would find hard to remove.

Take, for example, their "transferable tax allowances" for married couples with children where there is only one earner (the "traditional family"). The difficulty with increasing that or any other tax allowance is that Brown's means-tested credits for the working poor are assessed on net (post-tax) income. So reducing other tax liabilities would make people look better off and therefore reduce their tax credit entitlement (unless a specific exception was made). In the case of the transferable allowance, this means that to anyone receiving the working families tax credit it would be worth only £450, rather than £1,000 for better-off families. In the case of the Tories' proposed increases in the state pension, they have stated that such clawing back would not take place - showing that they recognise the problem, but adding to the complexity of the system.

Both parties now see political mileage in promising extra cash for disadvantaged groups, a far cry from the Lawson years when the big prize was cuts in the basic rate of income tax. But, as the table underlines, Labour's emphasis is more squarely on people near the bottom, while the Conservatives verge more towards the middle. Yesterday's received political wisdom would not have seen this as a winning electoral formula for Labour.

After the Budget: red and blue water?
Group	Labour emphasis	Conservative emphasis	Spot the difference
Families	Children in any working family with low income Integrated child credit will give the same per child for poor families in and out of work	Married non-working mothers Transferable tax allowance to make their husbands better off	Tory allowance would be worth most for middle earners. Poor families on Labour tax credits (it's those who earn up to about £17,000 a year with two children) could have over half of allowance clawed back.
Pensioners	Guaranteeing minimum income; ad hoc rises in basic pension Means-tested level has risen 22 per cent in real terms since 1997	Taxing pensioners less; ad hoc rises in basic pension Raising pensioners’ tax allowances by £2,000	Both parties trying to ensure that better basic pensioners won't be clawed back through means testing. But Conservative emphasis on reducing tax burden affects only the rich 40 per cent who pay tax
Savers	Encourage people with lower incomes to save ISAs and stakeholder pensions, but possible measures to help poor acquire assets (eg “baby bonds”) not yet implemented	Not taxing savings Nobody except higher rate tax payers would have to pay tax on savings	Both parties have similar aims, but second -term Labour could introduce important new encouragement for poor. Conservative scrapping of tax may mean little for poorer groups, since ISAs already allow up to £7,000 tax-free