In it together?

THE Conservative government was elected last year on a promise to fix Britain’s public finances. In coalition with the Liberal Democrats in 2010-15, the Conservatives had shrunk the budget deficit from 10% of GDP to 5%. Now freed of the need for a coalition partner, they want to eliminate the deficit entirely by 2020. In the quest to balance the books, they maintain that “we are all in this together”, pushing back against the popular perception that the Conservatives are the party of the rich.

Their claim has been undermined by a controversy over disability benefits. To save about £1 billion ($1.4 billion) a year by 2020, in the budget on March 16th the government unveiled plans to cut the personal-independence payment (PIP), which helps disabled people with their higher costs of living. The amount awarded to those who use an “aid or appliance” (such as a magnifying glass or a ceiling hoist) would fall. Though the proposal was subsequently withdrawn, Iain Duncan Smith, the work and pensions secretary, resigned on the grounds that it epitomised the government’s regressive approach to deficit reduction. Mr Duncan Smith’s true motives are less noble (see article). But he points out an uncomfortable truth: since returning to office last year, the government has been increasingly hard on the poor.

Benefit cuts under the coalition government of 2010-15 hit the needy hardest. That is unsurprising: for a working-age household in the bottom income quintile, benefits are worth about 45% of gross income, compared with just 2% for one in the top quintile. And many reforms were reasonable: for instance, the number of claimants of disability living allowance (DLA), which offers cash for disabled folk, tripled in 1992-2010, with a 369% real-terms rise in spending on people claiming for back pain. The government says that 70% of those on DLA were receiving indefinite awards, meaning they continued to receive money even if they got better. The phasing in of the PIP from 2013 toughened eligibility criteria.

What’s more, the labour market came to the rescue of many of those who lost most from tax and benefit changes. By 2015 there were 1m fewer unemployed people than four years before. The employment rate was at the highest level since records began. Increasing work incentives through reform of the welfare state may have been partly responsible. But improving economic conditions, largely beyond the government’s control, undoubtedly helped.

Thanks to the jobs boom, the living standards of the poorest did not fall as much as the tax and benefit changes alone implied. As bankers took smaller bonuses, there were big income falls at the top of the income distribution. The effect was that a household at the tenth percentile of the income distribution (ie, among the poorest) saw its income rise by 8% from 2007-08 to 2015-16, according to the Institute for Fiscal Studies (IFS), a think-tank, compared with a 3% fall for one at the 90th percentile. By the end of the coalition government, incomes were more equal than before the recession. The “we are all in this together” dictum stood up.

Not any more. In its manifesto last year the Conservative Party pledged to take £12 billion out of the working-age welfare bill by 2017-18 (later postponed to 2019-20), which has forced it to make some painful decisions. A four-year freeze on things like tax credits (wage top-ups for the low-paid) and housing benefit will start next month. In-work benefits will get less generous. On March 22nd George Osborne, the embattled chancellor, said there were “no further plans” to cut welfare. Still, spending on working-age benefits will fall three times as fast in this parliament as in the last one.

The poor will be hit harder by these policies than those of the coalition (see chart). Not only are the cuts deeper, but forthcoming changes seem more to do with penny-pinching than real reform. The abolition from next year of some child benefits for the third sprog onwards has little economic rationale. Making unemployment benefit stingier (Reform, a think-tank, reckons it will be worth £550 a year less in 2020 than in 2010) may do more to reduce the living standards of the jobless than make them likelier to find work.

By comparison, the proposed cuts to PIP, now scrapped, were not so dreadful. The number receiving extra money solely as a result of needing aids or appliances has tripled in the past 18 months. Court rulings have broadened the scope of “aids and appliances” to include things like beds and chairs, which are needed by everyone. Even if the reform had gone ahead, spending on disability benefits would barely have changed from its level last year.

Whatever the merits of particular cuts, Mr Duncan Smith is right to complain that targeting them at working folk is unfair when oldies are so coddled. The government has promised to protect state pensions, which will rise yet again this year by 3%. Rich folk, meanwhile, are doing well. In the budget the threshold for the higher rate of income tax was increased from £42,385 to £45,000. The median full-time employee, who earns £28,000 a year, will not benefit. Even the pledge to raise the personal allowance for income tax, from £10,600 to £11,500, is not especially pro-poor because over 40% of adults do not earn enough to pay any income tax.

Conservatives point out that they have trimmed the incomes of the very richest through measures like greater restrictions on tax relief on pension contributions. The plan to raise tax thresholds was spelled out in their manifesto. But a move to cut the rate of capital-gains tax (CGT), which will most benefit the asset-rich, was not. Of the £30 billion of capital gains subject to CGT in 2013-14, half went to 35,000 individuals with incomes of £100,000 a year or more, according to the Resolution Foundation, a think-tank.

The labour market is unlikely to offset the regressive effects of the Conservatives’ latest welfare changes, as it did in 2010-15. Unemployment cannot fall much lower. Wages are looking shaky, with growth-projections recently revised downwards. The government counters that a new “national living wage”, which will rise to 60% of median earnings by 2020, makes up for the welfare cuts. In fact, many of the very poorest are not in work; middle-income households will be the biggest winners, because many of those on the minimum wage are second earners in higher-income families. A household in the seventh decile will benefit three times more from the living wage than one in the bottom.

The government talks a good game on sharing the pain around; during the coalition with the Lib Dems it was broadly true. But under current plans, the slogan is looking increasingly empty.