Monday, 7 January 2013

The End of Relational Policy Making

A great myth has built up regarding what academics call “neo-liberalism”, and what proper people call “the last thirty years”, namely that it has been the era of small government and shrinking the state. Although the government no longer runs businesses or attempts to maintain full employment, throughout this period the state spent more and more of the national income on other activities. Over time this has moulded our perception of what governments should do and how they should do it. In this post I’m going to show you how the financial crash of 2008 changed the game in ways that we have not yet grasped.

First up, some facts. Look at page 3 of this Institute for Fiscal Studies report. That graph at the bottom shows you the dirty secret of Thatcherism. In nine out of the eleven years she was in power she increased public spending faster than the rate of inflation. The state was far bigger when she left office than when she began. John Major increased it by even more, only managing a cut in one of his seven years. And of course, as you would expect, in the Blair years you can see year on year increases that are simply astronomical. I would guess that very few (if any) readers of this blog have a political memory of a time when public spending was consistently falling.

The extra spending has been used on public services, primarily health and education, and on social security, which includes state pensions, income support (tax credits) and benefits. We have become used to discussing policy in these areas in relational terms, by which I mean we think about which groups of people do better than others as a result of a policy change. When policy is made, it is designed to make these relational changes ‘fair’*.

To understand what I mean, consider Gordon Brown’s 10p tax fiasco. The original policy was a cut in the basic rate of income tax from 22% to 20%, which was paid for by abolishing a lower rate of 10% that was charged on the first proportion of a person’s income (follow this link for more details). The effect was a tax rise on those with low incomes and a tax cut on those with average earnings. It caused political uproar, as Gordon Brown’s own party lined up to condemn what they saw as an attack on the poor.

The significance of this example is in the eventual solution. Instead of reversing the policy, a huge amount of extra money was found to compensate those who lost out as a result of it. It is a classic example of how political problems which are the result of seeing policy in relational terms were solved by increasing public spending. The political pressure was to ensure nobody lost out, not to balance the books. I would argue that this is typical of the thinking of the last thirty years, the introduction and abolition of the poll tax being another good example.

The astute amongst you will see the problem. After the 2008 crash there is no money left to continue in this fashion. Policy changes will now create uncompensated losers. The recent removal of child benefit from high earners is a good example. A family with one earner who takes home £60,000 gets nothing, while a family with two earners, each taking home £49,000 get the full benefit, despite having a much higher household income. The single earner families will not have this unfairness made up to them. All things considered that is a pretty minor injustice, as they are the richest in society, and they can cope. As austerity begins to really bite, there will be examples like this which are far more painful. Imagine if the government was faced with a re-run of the poll tax riots, but did not have the money to reverse the policy. The age of relational policy making is over, and I’m not convinced that we the public are ready for this new reality. 

*Update: When George Osborne says "we're all in this together", he is trying to convince you that he is meeting this relational definition of fairness in policy making. I'm arguing that this will prove difficult if not impossible.  

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