All in this together?
We are meant to be “all in this together” according to our Chancellor who also tells us that we are living beyond our means. However, what “this” is and how we are “in it together” is open to debate.
- Budget Statement (22 June 2010): “One pound in every four we spend is being borrowed”
- National Audit Office (Consumer Debt Journey 2010)
- 396,000 mortgages that were in arrears of more than 3 months in September 2009
- In the middle of 2009, 98,342 CCCS Debt Management Plans were in operation, covering approximately 10%of problem debtors
- In 2009, written-off debt totalled £6.9bn
- National Audit Office (HC 292: Helping over-indebted consumers 2010)
- UK consumers had some £1,459 billion of outstanding debt as at November 2009,
- Personal borrowing represented 160 per cent of household annual pre-tax income.
- Bank of England research in 2008 found that some 11 per cent of the UK population reported difficulty in keeping up with their bills and credit commitments.
What is unfortunately not immediately clear is what is “spending” and what is “justifiable debt”. These questions can be addressed at many levels – from National to Individual. The question of “justifiable debt” will be addressed in a later post.
If we look at Individual Spending many people are not saving anything, so their spending is arguably equal to their income (or their income plus increase in debt if they are living beyond their means). But we need to look at what we are trying to measure – particularly when we are being asked to “cut back”. What is important is not so much how much flows through our wallets or bank accounts, but how much is spent to buy our standard of living. So we need to take account of spending by others to fund our standard of living. Thus (for someone living right up to or beyond their means) funding will equal:
- Salary (less any tax, national insurance)
- Tax Credits etc.
- Increases in indebtedness
- Value of specific services provided by local authorities (less amount paid in council tax)
- Social Care
- Bin Emptying
- Plus: Public Goods (Police, Fire Service, Libraries, Local Roads, Planning, Environment Protection etc.)
- Value of specific services provided by national government (less amounts paid in national taxes)
- Health Care
- Dental Care (for those eligible)
- Optical Care (for those eligible)
- Plus: Public Goods (Defence, Consular Services, National Road Networks etc., etc.)
The valuing of Public Goods is probably difficult (and for the sake of this analysis might be ignored), but to look at how this funding occurs for different levels of income is probably instructive. If you are a low-income family the proportion of your funding that comes from the above specific services (rather than directly from earnings) is going to be higher than for a rich single person with company provided private health care. This has difficult implications when we consider how “cuts” are to fall.
- If your income is £5,000 per year, but you receive public services (as listed above) worth say another £5,000 per year, your total “living standard” funding is £10,000. A 25% cut in public services will reduce your funding by 25% of £5,000, which is £1,250 or 12½% of your total (low) funding.
- However, if your income is £50,000 per year (and you spend it), and you receive the same public services worth £5,000 per year, your total “living standard” funding is £55,000. A 25% cut in public services will reduce your funding by 25% of £5,000, which is £1,250 or 2.27% of your total (high) funding.
- For a pensioner dependent on health and social care, the situation could be dire. Assuming the pension is not touched: Say your pension is worth £15,000, and you are receiving £30,000 in social and health care, your total “living standard” funding is £45,000. A 25% cut in public services will reduce your funding by 25% of £30,000, which is £7,500 or 16.67% of your total funding. If you need those £7,500 worth of “cut”services, buying them privately will cost considerably more that £7,500. Even if you could buy them for £7,500, that will take half your £15,000 pension.
If we are “all in this together”, there has to be some equity in how the pain of getting out of “this” falls. The economically stronger are like taller people facing an incoming tide; the weaker are like short people. To argue that the tide comes in at the same rate for everyone is not equitable!