EMBARGOED until 00.01 am 14 March

1. The fairness test EMBARGOED until 00.01 am 14 March

2. Background Reform – independent, charitable, non-party Our mission is to set out a better way to deliver public services and economic prosperity We are cross party Our funding does not influence the content of our research. We do not take funding for research reports

3. Reform’s work on fairness Long running concern in Reform’s work Universal credit and the money-go-round Every teacher matters Broad based and low rate taxation Paying for long term care and population ageing The IPOD generation Required stand-alone research as Concern over current debate on fairness Concern fairness being used as cover for narrow self interest (vested interests lobbying for concessions) and postponing difficult decisions Fairness essential for sustainable fiscal consolidation

4. What people are saying about fairness Key debates Spending review – ‘new vision for fairer Britain’ Ed Miliband – ‘squeezed middle’ and plans for fiscal consolidation fail the ‘fairness test’ Questions on whether measures are ‘progressive’ (measured as higher income families facing greater burdens than lower income families) Questions on effect of inequality on social outcomes (debate over The Spirit Level)

5. What people are saying about fairness New thinking is needed Living standards were artificially inflated A focus on what is important (combating disadvantage) has been lost. Should no longer use a concern with disadvantage to justify poor spending in other areas

6. Thinking about fairness No single accepted view of fairness. Value judgements are inherent Fairness often cited without clear rationale. E.g., on income inequality No simple, universal relationship between inequality and health outcomes Economic growth matters as the population is ageing Reducing inequality likely to mean fewer resources for redistribution Identifying a problem not the same as identifying a solution (some claims that addressing inequality requires certain policies are unfounded)

7. The fairness agenda Debt and intergenerational fairness Fairness to future generations – poor public finances fuel rising taxes, lower economic growth and more severe restrictions in the future Even if government accounts were not in such poor condition, demographic changes (e.g., population ageing) mean reform would still be required Fairness to the current cohort of elderly people – elderly have been identified for special treatment in the spending review, increasing costs in this area will swamp savings in others, taxes and national insurance contributions have largely been spent on a pay as you go basis

8. The fairness agenda High (productive) pay Does fairness require a narrowing of income inequality? As well as Gini, consider tax base and tax revenue (e.g., see thought experiment below). Also, complexities in conceptual case for income equality Source: Reform

9. The fairness agenda High (productive) pay Higher earners pay a large share of current taxes Source: HMRC (2010), Table 2.4: Shares of total income (before and after tax) and income tax for percentile groups

10. The fairness agenda Personal tax allowances and tax free thresholds The actual effects of an increase in personal allowances likely to differ from those commonly assumed. An increase would encourage tax avoidance, damage incentives to work and mostly benefit people above the allowance Source: Reform

11. The fairness agenda The tax gap Reducing the tax gap (difference between tax collected and theoretical liability) is often seen as painless, the reality is quite different Source: HMRC (2010), Measuring tax gaps 2010, Official Statistics Release, HMRC

12. The fairness agenda Education and poverty traps Low levels of social mobility are of more concern than high levels of income inequality. Coalition has increased funding and choice in schools, but should go further on choice Working aged benefits are undergoing reform. While reform is necessary there are significant risks around the Universal Credit Middle class welfare needs reform (it undermines integrity). Support for families must be judged against its outcomes Source: Reform estimates based on British Social Attitudes Survey

13. Getting real on fairness The dangers of fairness Risk of debate being increasingly precise but missing the point. E.g., static estimates of poverty Risk of debate on fairness and fiscal consolidation descending into vested interests lobbying for concessions. Fairness does not mean ‘only other people should pay’ or that difficult decisions should be postponed Fairness as combating disadvantage While there is no single agreed definition of fairness, relatively broad agreement that extent to which actions combat disadvantage should be central Implies a focus on education and welfare reform. Middle class welfare and increased tax allowances are not justified

14. Getting real on fairness Need to end the ‘borrow now, pay later’ culture Implies some families’ living standards should fall Living standards inflated through unsustainable debt fuelled consumption (meaning the economy was relatively exposed to the global financial crisis) Living standards inflated through poorly targeted spending ‘Borrow now, pay later’ increasingly unaffordable with an ageing population