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23 August 2010

Why George Osborne’s cuts will widen inequality

The countries with the biggest cuts also suffered the largest increases in inequality.

By George Eaton

Rarely a week goes by without George Osborne proclaiming that the coalition’s cuts are “progressive”, but past experience suggests that they will trigger a huge increase in inequality.

The graphic below, from today’s Financial Times, shows that the countries with the biggest deficit reductions (Canada, Finland, Netherlands, Sweden) also suffered the largest increases in inequality. Nick Clegg may have promised that there will be no return to “sink-or-swim economics“, but since the poor are disproportionately reliant on public services, they will be hit hardest by cuts.

As the second graph shows, while public services represent 62 per cent of disposable income for the poorest fifth, they represent just 8 per cent for the top fifth.

There’s also a sober warning from the OECD’s Herwig Immervoll, author of a study on the subject, that the comparatively small size of the UK’s welfare state means that the rise in inequality is likely to be more severe. “Because there is already less public spending on some areas, there is a risk that it will crumble away more quickly,” he says.

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Olli Kangas, another expert on inequality, pointed out: “Sweden has a fat welfare state, Finland’s is a bit slimmer, and in the UK it is thin.

“If the welfare state is losing weight it will have more impact in the UK than in Sweden and Finland.”

The government’s decision to opt for an unequal ratio of spending cuts to tax rises (Osborne currently envisages a 77:23 split) also means that the economic pain will be focused on the poor.

The coalition now has a choice. It can either abandon the regressive aspects of its deficit reduction programme, or it can, in true Thatcherite style, argue that the need to cut public spending trumps all social concerns. The current approach, of dressing regressive cuts up as “progressive”, is intellectually and morally unsustainable.

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