‘The Prime Minister’s tax rise’

25 Jan

Last autumn, before the Government’s foot-shooting spree began in earnest, it pushed ahead with the controversial decision to increase taxes on working-age people in order to protect the asset wealth of older people.

By pushing up National Insurance, the ‘Social Care Levy’ is supposed to avoid the need for elderly citizens to sell their homes in order to pay for end-of-life care.

At the time, there felt as if precious few Conservatives were speaking out against the policy. Just as with abandoning planning reform, it looked like another area in which the party was set to strangle its future coalition in order to pander to powerful vested interests amongst its current one.

Yet just a few months on, the NI hike is now under sustained internal attack. High-profile MPs such as David Davis and Robert Jenrick have warned that Tory support will ‘evaporate’ unless the move is abandoned. And more tellingly still, Rishi Sunak has started calling it “the Prime Minister’s tax”.

Is the appellation fair? A tax rise wasn’t the only way to fund social care, after all: the Chancellor enjoyed a £30bn/pa windfall at the most recent budget, which would more than cover the money raised by increasing NI. He chose to spend it elsewhere.

Sunak would probably counter that this is what being a proper fiscal conservative looks like. I summed up the ambition set out in his Budget speech thus: “the Government must only be borrowing to actually invest, with everyday spending covered by taxation”. If the Prime Minister and the Health Secretary want more spending, then his duty as Chancellor is to find a politically-saleable way of raising the money.

And what’s the alternative? Our own Gerry Lyons suggests the Government should be more relaxed about borrowing against growth; asking older voters to actually pay in is likely politically impossible; so too is the sort of wholesale overhaul of the healthcare system which Ministers apparently concede, in private, is increasingly necessary. If Sunak would rather meet the challenge without this tax, he’ll need to explain how he would pay for it – and MPs may not like his answer any more than Johnson’s.

Regardless, it is a testament to the unravelling of Boris Johnson’s authority that the consensus behind his grand bargain on social care is coming apart so quickly, and Sunak’s positioning suggests that it may not survive a leadership contest.

Whether or not any of the candidates can come up with a better and more sustainable alternative than just borrowing the cash and hoping for the best, on the other hand, remains to be seen.

Gerard Lyons: How to tackle the cost of living crisis

11 Jan

Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.

Crisis? What crisis? The good news is that the economic rebound continues, and the jobs market has returned to broad health. We may also be over the worst of the pandemic, although possible new variants mean that learning to live with Covid and avoiding further restrictions may be a key priority this year.

Yet it is not this recovery but two other economic matters that look set to dominate policy this year: the immediate cost of living crisis and, less talked about, where growth will settle post-pandemic. Views on the latter may influence how policy responds to the former.

While the consensus expects growth around 4.5 per cent this year, after seven per cent last, there is still much pessimism about the future trend rate of growth.

It decelerated following the 2008 global financial crisis. If future growth is low, more of the budget deficit is structural, not cyclical, and needs to be addressed through fiscal restraint – a squeeze on spending or higher taxes. That thinking, which seems to dominate at the Treasury, will be resistant to reversing planned tax hikes for this spring.

Moreover, the economic consensus is that Brexit will exacerbate this challenge. However, despite this common refrain, tax rises are not inevitable. It is not leaving the EU but what you choose to do after you have left that helps determine future growth. In this respect, the Government still needs to articulate a market-friendly pro-growth economic strategy.

It also has bearings for now. There is no easy way to stop a cost-of-living crisis, but the first thing you should do is not implement policies that will make it worse.

The present crisis has multiple components. Inflation that is set to peak at over seven per cent in the spring. Higher energy prices though global in origin, are exacerbated here by decades of poor energy policies, including price caps that are now being lifted.

Furthermore, there have been two separate decisions taken to raise taxes this spring: higher national insurance, and a stealth tax in the form of a freeze on income tax allowances. And then there is a postponement of the triple lock on pensions, which means that they will rise by less than the increase in inflation this year.

Often at times of economic shocks, the search is for a timely, targeted and temporary response – that is, one that addresses the immediate problem but does not change longer-term policy.

Currently, policy is looking at how to support those most in need, which raises questions of how it can be funded.

Temporary financial help as offered during the pandemic would be one approach. It could be paid for by a windfall tax on energy firms. Such a measure would not be ideal, but it has been tried before, for example on North Sea oil producers and banks.

The argument against a windfall tax is the message that it sends. Firms across all sectors may need to factor in that high future profits could be seen as a cash cow by future governments, and this might deter planned investment in the UK by attaching a risk premium to it. Corporate tax rates have already risen, adding to the anti-business perception.

Another option is to cut the five per cent VAT on fuel. The saving, while small, will help those on low incomes. That measure alone, however, would not be enough in itself. And the Prime Minister seems to have ruled the move out as a blunt measure that disproportionately benefits higher earners.

It also appears that the planned tax increases will not be reversed – particularly as the hike in national insurance was effectively presented as a hypothecated tax for health and social care. Reversing this would reopen questions about how to fund the latter.

However, reversing the tax increases makes more economic sense. Not just because it would alleviate the cost-of-living challenge, but because the fiscal numbers, while poor, are improving and mean that such tightening is a choice, not a necessity.

These decisions are not easy. There is no right or wrong answer.  They are about judgement calls – to address the immediate challenge as well as to position for the future.

A current economic debate is about how much fiscal space governments have, despite public debt levels being at an all-time high globally. The debate is less concerned with providing a case for rampant state spending, and more with avoiding being pushed into tightening fiscal policy unnecessarily.

A high level of debt adds to problems, but if the rate of interest is less than the rate of economic growth it creates fiscal space, and improves the chances of debt sustainability. Debt to GDP can be reduced steadily, provided growth is solid and inflation does not let rip. The latter forces rates and yields up, hampering growth.

However, the Bank of England has been asleep at the wheel over the last year. The risk is that the inflation genie is already out of the bottle, as inflation expectations rise and firms increase prices.

In all likelihood, inflation will peak in the second quarter – since some of the initial supply shocks are now over and imported inflation may have peaked already – and, after staying elevated for a short while, will decelerate.

But chances cannot be taken and inflationary risks will force the Bank to raise policy rates this year, and reverse its printing of money by implementing Quantitative Tightening (QT).

We witnessed a short-lived cost-of-living crisis in the wake of 2008, when a weaker pound triggered a temporary rise in inflation. But the last such major crisis was in the mid-1970s.

There is a need not to be taken in too much with current comparisons being made with that decade, since the economy and environment are so different.

While there are not many economic lessons to heed from that period, one springs to mind. In a battle against a rising cost of living, it is vital to have the public on side. Not only so that they can understand the tough policy context, but also in the case of inflation to avoid what are called second-round effects – or put more bluntly, a wage-price spiral.

In June 1975, the annual rate of inflation hit 26 per cent. The then Prime Minister, Harold Wilson, decided that every household needed to receive by post a pamphlet about his policy to fight inflation. I still have a copy.

Entitled Attack on inflation: A Policy for Survival – a Guide to the Government’s programme, its 16 pages made clear why inflation needed to be brought under control. One telling message, in bold capitals was: “the battle (against inflation) cannot be won in one year…but the battle could be lost in one year.”

In the event, the Labour Government lost the battle. Policy focused on a wages and income policy, culminating in the “winter of discontent” in 1978-79. The annual rate of inflation did not fall back into single digits until 1982, after Mrs Thatcher was in power, and also following a deep recession.

I am not advocating such a booklet now, but rather stressing the importance of ensuring that people understand the context of what is happening, especially when here is so much uncertainty and the pain may be severe but short-lived.

The best that can be done is to control the controllables. Provide assistance, ease the pain, reverse the tax hikes, explain why – and focus on a pro-growth strategy.

Robert Halfon: Dealing with child hunger isn’t a left-wing issue. The Government must, and can, do more.

15 Dec

Robert Halfon is MP for Harlow, a former Conservative Party Deputy Chairman, Chair of the Education Select Committee and President of Conservative Workers and Trade Unionists.

Today I hope to be speaking in a Westminster Hall Debate on the National Food Strategy organised by my friend and colleague, Jo Gideon MP.

Yet as the country once again grapples with a Covid-Christmas dilemma, many families and schools face a starker challenge of food hunger.

Lockdowns and school closures following the outbreak of the pandemic have had a devastating impact on children’s learning, especially for those from disadvantaged backgrounds. Ofsted’s latest annual report shows that pupils lost 33 million days of learning. Indeed, at a recent hearing of the Education Select Committee, which I chair, the Education Policy Institute confirmed that for the most disadvantaged secondary school-aged pupils, they had gone from being 1.9 months behind in their reading to 2.4 months over the course of the year.

The Government is rightly boosting support for schools with nearly £5 billion of education catch-up funding targeted towards recovery through the National Tutoring Programme. But all the extra tuition in the world won’t work if children arrive at school without having eaten a nutritious breakfast.

There will be some out there who argue this should be the responsibility of parents and carers. In an ideal world, it should be, but sadly, in too many cases, this is not happening.

Can readers really stand in front of the single mother of three I spoke to, and tell her she should be denied temporary help and her children left to go hungry, because she had been made redundant due to the pandemic and can no longer afford to put food on the table?

The statistics are clear. We know that children who regularly eat breakfast achieve, on average, two higher GCSE grades than children who don’t. The Institute for Fiscal Studies has shown that children in schools with breakfast clubs make two months additional academic progress. According to Kellogg’s (an organisation not usually associated with the left), hunger could cost the English economy at least £5.2 million a year through lost teaching time spent on dealing with the needs of hungry pupils.

So how, ask those rightly concerned about public finances, are we supposed to pay for this? I was not a great fan of the so-called ‘Coca-Cola tax’, the Soft Drinks Industry Levy (SDIL) introduced in 2018 on sugary drinks. It disproportionately affects those on lower incomes who might simply want to purchase the occasional treat for their kids. But it also generates a revenue of £340 million each year.

Given that the money was originally intended to fund healthy living initiatives, why not use it to fund hunger reduction programmes? That way no-one needs to ask the taxpayer for more money.

According to a new poll conducted by Opinium Research, two thirds of UK adults (66 per cent) would be likely to support the Government increasing spending on school breakfast provision for disadvantaged children through using unspent funds from the Coca-Cola tax.

Magic Breakfast have calculated that for £75 million more per year, funded by the sugar tax, the Government could ensure that 7,300 of the most disadvantaged primary and SEN schools could provide a free, nutritious breakfast to every pupil that needs it.

This would reach an estimated 900,000 pupils throughout the year, targeted to the most disadvantaged schools. This could complement other initiatives such as the deeper strategy to support Family Hubs championed by my colleague Fiona Bruce MP and given the additional £500 million provided in this year’s Autumn Budget.

Currently, the Department for Education’s new breakfast provision service reaches just 30 per cent of schools in high levels of disadvantage and invests just £12 million a year. By comparison last year taxpayers spent £380 million on Free School Meals vouchers.

For some, this may be difficult to stomach, but no Conservative opposed the £70 billion furlough scheme which was in essence, a welfare benefit to employers. And no Conservative opposed the £850 million Eat Out to Help Out scheme – again, another form of welfare relief to the hospitality industry.

Pro Bono Economics report the impact of free school breakfasts on Key Stage 1 pupils’ future economic contribution. If every pupil in disadvantaged areas received breakfast provision, this would translate into nearly £3 billion in long-term economic value.

If support can be made available to businesses feeling the brunt of the pandemic, then surely we could provide welfare in the form of breakfast clubs, holiday activities and free school meals to children.

Dealing with child hunger should not be a left-wing issue. Indeed, the Levelling-Up agenda has the potential to heal some significant social injustices in our country and provide every child with a hand-up to climb the ladder of opportunity.

Supporting high-quality education and increasing academic attainment in schools must be crucial to levelling-up but we can’t expect pupils to succeed on an empty stomach.

No-one has to ask the taxpayer for more money to do this – the money is waiting in Treasury coffers to be used. So as we look towards a new year, and a new start, let’s make free school breakfasts a new year’s levelling-up resolution.

Dominic Raab: For too long, victims have been let down by the criminal justice system. Today’s proposals will change that.

9 Dec

Dominic Raab is Deputy Prime Minister and Justice Secretary.

When I first met Emily Hunt, she told me her heart-rending experience of how she had been let down as a victim. In 2015, she reported that she feared that she had been drugged and then raped.

Police officers told her to give up her clothes as evidence, despite having nothing else to wear. She was asked to surrender her mobile phone, without knowing when she would get it back. She was offered scant support, and had no idea of what she could reasonably expect from the different criminal justice agencies.

No victim should be made to feel like that. We appointed Emily as an independent adviser to the Government as a mark of how serious we are about doing better for victims – and I recognise that we have a long way to go.

At present, as many as three in five victims do not even report crimes they suffer, and a third withdraw from a prosecution before justice is done. This is morally wrong. But, when victims drop out of the system, it also has a debilitating effect on our ability to bring criminals to justice. So, today, I am setting out plans for a Victims’ Law – so their voice is heard, and they see justice done. Our aim is to make sure victims feel that their interests are at the heart of the criminal justice system, rather than peripheral to some remote and alienating process.

At the Budget, I agreed with the Chancellor to increase support for victim and witness services from £134.5 million last year to £185 million per year by the end of this Parliament.

Earlier this year, we passed the Domestic Abuse Act to put more protection into law for the two million people who suffer violence and abuse in their homes each year.

And we have rolled out pre-recorded cross-examination and re-examination for vulnerable witnesses – known as Section 28 – to make the experience of giving evidence to the courts less daunting.

Now, we must go further. So, under our plans, we will roll out Section 28 nationwide as soon as possible for the victims of rape and other serious sexual offences, to give more victims the option to testify outside the intimidating glare of the courtroom.

Next, we’re increasing transparency by introducing criminal justice scorecards. The national and adult rape scorecards, which I am publishing today for the first time, give us a more detailed picture of how the different criminal justice agencies are performing. In the New Year, we’ll follow up with local scorecards so you, the public, can see the performance in each area of the country.

Scorecards will shine a light on the things that really matter to victims, like how long it takes for cases to be investigated, charged, and make it to court. It will help identify failings – across the system, and in different areas – that enable us to spread best practice across the country.

Data will help, but ultimately vulnerable victims need to know what support they’ll receive, and how to hold the system to account. So, with that extra transparency the scorecards will bring, we will enshrine in law what victims can expect, and improve accountability – so that when something does go wrong, victims know it will be fixed.

For example, it is reasonable to expect prosecutors to meet directly with victims in serious cases before they decide whether to charge a suspect, and then again before the case goes to trial. I also want to strengthen the role of victims in the Parole Board’s decision-making in relation to their assailant.

Next, we want the collective voice of victims to be heard more consistently through community impact statements. When crimes like anti-social behaviour, which can blight whole neighbourhoods, are considered by a court, the views of the local community should be properly taken into account.

Many victims have said that the Victims’ Code is just not taken seriously by the various criminal justice agencies. So, we will look at how to strengthen redress, including through disciplinary action, complaints procedures and inspection regimes – and reinforce the role of Police and Crime Commissioners, to help tackle problems in their local area.

As well as punishing criminals robustly, I want them to do more to recognise the suffering they inflict on victims. So, we will raise the victim surcharge that offenders pay as part of their sentence. We will invest the proceeds in services that directly support victims – including the independent sexual and domestic violence advisers, who support victims and help them stay engaged in the criminal justice process.

Our proposals will make sure that the voice of victims is heard, they get the support they need, and the criminal justice system takes greater responsibility for instilling in victims the confidence to support the aims we all share in bringing criminals to justice. It will deliver for some of the most vulnerable in our society, as we build back a safer, stronger and fairer country after the pandemic.

Jeremy Hunt: My move today to ensure that we train enough doctors and nurses for the future

23 Nov

Jeremy Hunt was Health Secretary from 2012-2018, and is MP for Surrey South West.

Today, I am hoping to persuade the Government to change the new Health Bill to deal with the workforce crisis in the NHS.

As Health Secretary, I came to realise that extra money for the NHS and care system will never have the intended results unless there are enough trained staff to do the work needed.

Since it takes seven years to train a doctor and three years to train a nurse, this problem cannot be solved overnight: you need long term planning, which is all too often absent from our system.

My amendment to the Bill does not require the Government to spend a penny of extra money – but simply to publish regular, independent estimates of the number of doctors and nurse that we should be training in every specialty.

To date, the Government has resisted, on the basis it is ‘not necessary’. The facts tell a different story: the Royal Colleges say that we need 500 more obsetetricians, 1400 more anaesthetists, 1900 more radiologists, 2000 more midwives, 2-2,500 A & E consultants, 2, 500 more GPs and 39,000 nurses – and that we need them right now.

Overall, we have 93,000 vacancies in the NHS. Our brilliant frontline staff are starting to leave their jobs because of what is called ‘burnout’ – and the more that happens, the worse the problem gets for the people left behind. The pressure, particularly in emergency care and general practice, is now unsustainable.

Some will quite reasonably ask whether I could not have done more on the issue when I was Health Secretary. The answer that is I did – setting up five new medical schools and increasing the number of doctors, nurses and midwives we train by 25 per cent, the biggest single uplift ever.

But that decision, announced in 2016, has not yet led to a single additional doctor on the frontline because of the seven year timescale involved. That is why we need a better approach.

Inevitably in spending negotiations between the Health Secretary and the Chancellor, the number of doctors we will have in a decade’s time is less of a priority than immediate challenges such as the pandemic backlog. Exactly that happened this autumn when, even after the Budget, the settlement for Health Education England, which funds training, has not been settled.

So we need a new discipline in the system to make sure that we are always training enough doctors and nurses for the future. In the past, immigration was a ‘get out of jail’ card on this one but no longer: the World Health Organisation says there is a global shortage of two million doctors and 15 million nurses. We are not the only country with a backlog.

Some in Government are worried that it will cost more if the new body recommends a big increase in the number of doctors we train. The truth is the opposite: we spend about the same as France as a proportion of GDP on health as France and Germany, but with many fewer doctors per head – because we pay through the nose for locums. Every extra doctor we train will help bring down our annual £6 billion pound bill for locum and agency staff.

I have pressed the case in Parliament with the Prime Minister on three occasions now, including at last week’s Liaison Committee when he promised to consider it. The change has been recommended by 50 NHS organisations including every Royal College and even the BMA who were not, let’s be honest, my greatest supporters when I was Health Secretary. It has been recommended in countless select committee reports.

I have total confidence that this change will be made because it is the right thing to do, but every month or year we wait is an additional period of despair for NHS staff. We cannot solve the workforce crisis in the NHS overnight – but we can at least give hope that a long term solution is in place. Surely after the two years we have just had, that is the very least we can do.

Lisa Townsend: Balancing the nation’s finances with policing needs is the priority for PCCs like me

16 Nov

Lisa Townsend is the Conservative Police and Crime Commissioner for Surrey.

On Sunday, I laid a wreath in Guildford Cathedral during a service to commemorate those military and civilian servicemen and women who went into war bravely, giving up so much for our country.

While our police officers and front-line staff start each shift not knowing what danger it may bring, we are fortunate that they can reliably predict they will be back at home with their families and loved ones at the end of each long day or night.

In common with our NHS and care staff, the job they do is relatively safe, but we must not forget that they do so in order that we may go about our own lives in the knowledge that when we need them most, they will be there. Two essential services that protect life and liberty, but the way we talk about how we fund them is so different.

Council tax often tops polls as the most unpopular tax in the UK. Some see it as an outdated way of calculating wealth, others see it as hitting the least well-off disproportionately. But something else makes council different from the many other ways governments have of extracting our heard-earned cash, and that’s the annual bill we all receive through the post. You will all be familiar with the breakdown between district or borough or city, adult social care, fire authority and, of course, policing.

The contribution towards policing (the ‘precept’) is usually described on the bill in England and Wales as ‘Police and Crime Commissioner’ and the amount is indeed set by your PCC. However, we do not simply pluck a number from thin air – much discussion, deliberation, consultation and sometimes, agonising, goes into the process.

When I was elected Surrey’s Police and Crime Commissioner six months ago, I was told (along with every new PCC) that I had control of the £261 million budget, to do with as I see fit. The reality, as I am sure ConservativeHome readers will appreciate, is of course very different. In practice, the chief constable is handed 99 per cent of that budget and although ultimately the PCC decides on the level of the precept, it is for the chief constable to make the case for the resources he or she believes they need in order to carry out the functions we all expect from our police service. More on the remaining one per cent another time.

At a time when household incomes and outgoings are looking uncertain as we grapple with rising energy and fuel costs – as well as inflation, the decision on how much more to ask of our residents is genuinely challenging. Chief constables will understandably seek to persuade commissioners to increase by the maximum allowed while we, as elected politicians, close to our electorate, require assurances that every extra taxpayer penny requested is going to be used wisely and on residents’ priorities.

At the most recent Budget, the Government announced a further £5.9 billion for the NHS, on top of the £12 billion a year set out in September. We will pay for this through a rise in National Insurance and although it has not been without debate, that the NHS needs more money seems a largely settled issue. For policing, debates will be had up and down the country with residents, including a mandated consultation, on whether we want to pay more.

It probably won’t surprise you that the single issue which comes up at every meeting I go to is visible policing. Residents and businesses want more of it. So do I. But you may be unaware that 82 per cent of the policing budget goes on officer and staff wages. The Government’s uplift programme has so far delivered 83 new officers for Surrey and through this year’s precept rise, Surrey residents are funding a further 77 additional officers and operational staff. While most of these new officers are going through recruitment and training now, it does mean that our residents will see more officers on their streets in the coming years.

As a PCC I must balance the needs of my local police force with the ability and desire of local residents to pay more and more for the service that protects us all. More police will mean safer streets. It will mean that our children and vulnerable are safer online from those predators who wish to both physically and financially harm them. It will allow more officers to work with domestic abuse victims and the criminally exploited. As a Conservative I want to ensure that every pound that goes into policing makes us safer and that savings are found so that taxpayers can be confident they are getting are getting value for their money, and that includes more officers in our neighbourhoods. But I doubt it will make your council tax bill any more welcome.

Ros Altmann: Ministers must think again about abandoning manifesto commitments to pensioners

11 Nov

Baroness Altmann is a Conservative peer.

The Bill governing next year’s State Pension increases for the country’s twelve million pensioners returns to the Commons for Ping Pong on Monday 15th September.  MPs have a chance to reconsider their decision to take away promised protections for next year, just as household bills for basic essentials such as heating and food are rising sharply.

When voting in September to remove next year’s triple lock earnings uprating from all pensioners, there was very little debate. After careful scrutiny, as is their role, Peers concluded the legislation that would increase State Pensions by only September’s 3.1 per cent CPI, required amendment. It concluded MPs had inadequate or misleading information, so they should be asked to reconsider their original decision.

The triple lock promise to increase pensions at least in line with earnings was part of the 2019 Conservative Manifesto.  This should not be abandoned lightly, especially as the Bill is also removing the long-standing earnings protection for the very poorest pensioners, who rely on means-tested Pension Credit.

Pension Credit has never benefitted from the triple lock, it has been tied just to earnings inflation. However for 2022-23, this would be replaced by September CPI.

Of course, Ministers themselves could recognise the changed circumstances for pensioners and the need to rebuild public trust, by agreeing to the Lords amendments.

These ensure the Government honours its Manifesto pledge, but without increasing State Pensions by the full 8.3 per cent rise in the traditional earnings inflation measure. This year’s ONS Average Weekly Earnings figure for the three months to July was artificially inflated by composition and base effects from last year’s sectoral job losses and furlough scheme, making the year on year comparison for those months exceptionally high.

However, the Lords amendments propose adjusting the data for  pandemic distortions.

This is part of new evidence for MPs to consider. When voting in September, they were led to believe there was no alternative to using the 8.3 per cent earnings increase, costing over £5billion at a time when public finances are under exceptional strain.

However, this is not actually true. The 1992 Social Security Administration Act, which this Bill amends to remove earnings uprating provisions, actually allows wide discretion for the Government to adjust the data as it considers necessary each year. Section 150A subsection (8) says that when reviewing how to uprate the state pension ‘the Secretary of State shall estimate the general level of earnings in such manner as he thinks fit’.  So why did the Government not do that?

Apparently, officials believe they cannot produce a reliable adjusted figure. This does rather strain credulity, given the large numbers of statisticians, mathematicians and actuaries at the Department’s disposal. Nevertheless, since the original debate, the ONS itself has released information to explain methodologies for adjusting the data and Budget 2021 also provided OBR figures for average earnings – all are below 8.3 per cent, but above the September cpi of 3.1 per cent.

Indeed, the September CPI is itself too low, partly due to pandemic effects. For example, last year’s sharp rise in restaurant meal costs as ‘Eat Out to Help Out’ ended, meant a significant year on year fall this September. The Budget figures forecast inflation well above four per cent with OBR warnings of over five per cent and even 7.5 per cent next year, possibly driven by rising energy and food prices.

The Budget also undermined affordability arguments with announcements of huge spending increases and tax cuts, including reducing bank levy tax and alcohol duties. What would it say about our society’s values if Parliament forces pensioners to accept a real income cut during a cost of living crisis, to help pay for lower bank and alcohol taxes?

And doing this in the eye of a cost of living storm, with UK State Pensions being the lowest in the developed world, and pensioner poverty levels that were already rising even before the pandemic.

Pensioners are not all well off. Two millions live in poverty, more than half of single pensioners (mostly women) are in fuel poverty and one in eight in extreme fuel poverty.  Most rely largely or entirely on their State Pensions for retirement income. If they are not protected against rising living costs, they will struggle to pay their bills.

MPs have a chance to think again and so does the Government. They also have a chance to restore some trust and confidence, by demonstrating determination to keep their Manifesto pledges.

Protecting pensioners as promised also upholds the values of our welfare state. It is no surprise that younger generations are paying for unfunded pensioner benefits. That is how our National Insurance system has always worked and, with an aging population, the costs are bound to soar. That cannot justify Chancellors eyeing State Pensions as a valid target to raid when Government wants money for other priorities.

Pensioners will have good reason to feel angry as their bills keep rising.  Even if supposedly just for one year, this clearly inadequate 3.1 per cent rise will not protect pensioners as inflation soars and will cause more hardship and poverty. A decent society does not knowingly abandon its elderly citizens in this cavalier fashion. Pensioners will not readily forgive such betrayal.

James Frayne: The Conservatives’ new working class base would voice little opposition if the party rolled back the state

9 Nov

James Frayne is Director of Public First and author of Meet the People, a guide to moving public opinion.

Does the need to retain provincial working class support mean the Conservatives’ traditional commitment to a small state is over? After all, Rishi Sunak’s Budget – which significantly expanded the size and role of the state – has been blamed on the supposed demands of the Party’s new working class base. 

This is wrong: these new working class voters give the Conservatives a real opportunity to roll back the frontiers of the state and significantly reduce the tax burden. This isn’t to say they want the state to play no role in English life – hardly anyone wants real libertarianism – but within the realms of the real world, the Conservatives can make significant gains to reduce the state’s size without working class opposition. 

Here is a brief summary of working class attitudes to the state. 

1. They’re more in favour of lower taxes than professionals. A recent poll for the TPA was unambiguous: working class voters are now the low tax voters, not Southern professionals. This was just the latest example of what is becoming a defining trend within English politics. Why is this? Most obviously, because their limited disposable income has been eaten into by higher taxes and higher prices to a much greater extent than professionals’ income. Tax cuts are frequently written off as a preoccupation of rich businesspeople; this is simply wrong.

2. They believe that much of Government spending is wasted. It’s certainly my experience from focus groups – and also the TPA’s experience during their grassroots campaigns – but our poll for the TPA confirmed it: working class voters are more likely to think the Government wastes money. While professional voters were much more likely than working class voters to say that some money was wasted by Government but not enough to be a problem, working class voters were much more likely than professionals to say that “most of it” was wasted. 

3. They don’t trust politicians. This is crucial to understand and helps bring the first two points together. The anti-politics movement that grew in the 2000s was in part created by a sense Labour had let them down with promises on the economy and society that were not met. Specifically, many working class voters did not believe higher spending on public services – paid for by higher taxes – had sufficiently raised standards. You can trace a shift in working class / lower middle class voting habits from Labour to Conservative in the mid-2000s as this feeling took hold (it’s also linked to low-tax UKIP’s rise). Fundamentally, working class voters are sceptical about politicians’ promises; from this a compelling argument for a small state can be made.

4. They are apolitical. It’s often said left-wing people are more politically interested than conservatives; this is true: there’s an intensity of interest in politics and activism amongst left-wing people that is baffling. This distinction is true by social background too; working class people are almost entirely apolitical. This doesn’t mean they don’t care about things like the quality of public services; rather, that they don’t care about much other than outcomes – ie how services work. Working class voters are therefore highly pragmatic and are open to different ways of doing things; they don’t immediately go mad because they hear, for example, businesses might be involved in something.

5. They are less supportive of new lifestyle taxes. In the summer, after the publication of the National Food Study – which raised the prospect of higher taxes on particular unhealthy products – YouGov research suggested big gaps between professional and non-professional voters on the issue. The poll itself presented an incredibly positive vision of how such taxes might work, yet still failed to secure big working class support. And this takes us back to the points made above: because they’re less affluent, they’re more hostile to lifestyle taxes; and because they’re less political, they’re more sceptical of Government promises. Again, they’re not self-consciously, ideologically libertarian – but their lack of belief in grand political schemes makes them effectively libertarian.

6. They are great beneficiaries of a consumer boom. Because they struggle more with money, working class voters are more reliant on the great benefits capitalism has brought the consumer. They don’t consciously credit capitalism with any of this and it’d be hard to make this point to them. Regardless, it does mean they are hostile towards measures that would make consumer goods more expensive and positive towards policies that promote commerce – particularly local commerce (on the high street). For those pushing a small state agenda, this is obviously extremely useful. Incidentally, in my experience this means they are positive towards cuts in business rates, but also hostile to taxes that would raise the costs of goods online – which they don’t see as a trade off. (Declaration of interest: my agency has worked for many businesses in the retail and tech sectors). 

7. The understand – in very practical ways – the need to support business. For a couple of years after the referendum, there was a marked shift amongst working class voters towards “the interests” of business – including big business (see this poll I did for the TPA a couple of years ago). With all the talk post-Brexit of businesses leaving the UK, working class voters became temperamentally protective of them – swinging behind things like corporation tax cuts. As time has gone on, this support for big businesses has waned and they’re now more open to taxing them to pay for deficit reduction post-Covid and to pay for Net Zero policies. However, the point remains that working class voters can see – and have seen – the need for policies that support business.

I’ve obviously given the positives about a small state here. What about the negatives? There are of course several but two will immediately jump out to anyone that takes an interest in this big question: levelling up and the NHS – arguably the two biggest political themes of this Parliament after Brexit. On levelling up, as I’ve been writing on these pages for many months, it’s true that working class voters want a well-funded public realm – so, properly maintained town centres, parks, squares and war memorials, as well as police and CCTV to maintain order. This focus on civic pride can be done with relatively small amounts of money, but it’s money that must come from the state.

On the NHS, while the Conservatives aren’t talking about seriously reforming it, it’s such an important issue it’s worth raising here. Working class commitment to an NHS free at the point of use is total – and they want it properly, massively funded. However, there’s an interesting caveat: a poll by Reform from 2018 (also confirmed by my groups) showed working class voters agreed by a greater margin than middle class voters that it was essentially irrelevant run actually runs hospitals and surgeries as long as they’re free at the point of use. In other words, they’re theoretically open to NHS reform as long as it appears to work in the same way.

What does this all mean?

If the Conservatives were serious about rolling back the frontiers of the state, working class voters would voice little opposition. But they’d have to speak to working class voters on their own terms. I’ve touched on this before, but it means ditching the positive, optimistic language of the past – all the stuff about opportunity, enterprise and so on, which is lost on them – and instead talking practically about outcomes and about the limits of the genius of politicians and officials. In other words, it would mean admitting that politicians don’t have all the answers and can’t – from a delivery perspective – be trusted with vast sums of taxpayers’ money. Most politicians are uncomfortable with this – even supposedly right-leaning Conservative ones – and it will therefore be difficult to make progress.

David Willetts: If we’re to have less migration into Britain – and more productivity – we must move around more within it

5 Nov

Lord Willetts is President of the Resolution Foundation. He is a former Minister for Universities and Science.

Behind last week’s Budget and the Prime Minister’s conference speech there are deep questions about how Britain is going to pay its way – and hence pay ourselves well too.

In the 16 years leading up to 2008, average earnings grew by 36 per cent. In the next 16 years up to the end of the period covered by the Budget, it is forecast they will have risen by just 2.4 per cent. One reason for the anger and frustration in our public discourse is quite simply that we have stopped delivering the great promise of capitalism – of increasing prosperity for us and our children.

The only viable way to get us back on the path to higher living standards is by boosting our productivity. GDP per hour worked is now about a quarter higher in France and Germany than ours. We ought to be able to catch them up: that is the challenge we should set ourselves.

There is a clear agenda for it in the Budget. Invest in human capital at all stages of our lives. Invest in physical capital with public spend on infrastructure at record levels. And invest in science and innovation where increased public spending should crowd in more private spending too. And, crucially, get business investment growing again.

That is an excellent agenda. But it may not on its own get to the deeper reason for the decline in performance of the British economy: we are not dynamic enough.

The rate of economic change has been declining. Our research at Resolution Foundation shows that over the decade before Covid struck, the rate at which labour moved from one broad economic sector to another was at a post-War low. Similarly, the rate of voluntary job moves in 2019 was a third lower than in 2001. Labour mobility, geographical mobility and social mobility are all linked. We are quite simply not moving enough.

We are anyway going to have change forced upon us, thanks to the need to decarbonise and advances in technology. We ought to be able to use these drivers of change to boost our performance rather than trying to hide from it. That is why we at Resolution Foundation have set up an inquiry in partnership with the LSE into the future of Britain’s economic model.

The health advice during Covid – “stay home” – in a way summarises what has been happening to our economy for two decades. It is a striking contrast with the 1980s when Norman Tebbit famously told us to “get on your bike”. We had record rates of creation of new jobs (and the painful loss of old ones) and record shifts between different industrial sectors.

One clear signal about which jobs to move to was larger pay gaps between jobs. Nowadays, the places with higher pay also have higher rents and as fewer people are owner-occupiers this directly reduces their incentive to move. The 1980s did see rising inequality but, at the same time, there were record increases in absolute incomes – including for the less affluent half of the population.

This poses acute dilemmas for any Conservative. We are the party of freedom, mobility, and enterprise. But we are also the party of community, belonging, and tradition. What is it to be – roots or wings? These are tensions we all feel within ourselves. And we may reach different views at different stages of our lives. Young people need their chance to fly the nest but this is getting harder – with the move to independent adulthood slower and harder.

The mood in the Party and perhaps in the country seems to favour the ties of place. If you were still living in the county of your birth you were 10 per cent more likely to vote Brexit. In this sense, rather paradoxically, it is the remainers who were the Brexiteers. The balance is tilting in the endless debate on whether people should move to the jobs or jobs to the people.

This is why universities – a crucial means of detaching us from the family home and giving us the chance to move on and move up – appear to have fallen out of favour. But the higher education route has long been used by the more affluent for whom the residential university served as a natural successor to boarding school. It is still the case that the more affluent a student’s family, the further their university is likely to be from their hometown.

The Conservative Party owes its long political success to its skill in balancing these conflicting instincts – leave or stay – and needs to find a way to do it now. One way of reconciling them over the past 20 years – migration – is now diminishing. If we didn’t want to move but there were new requirements for new jobs, some of them unappealing ones, then the new migrant came in to plug the gap. We brought them in to the places and occupations which were short of people, so we didn’t have to retrain or move around ourselves. Reduced reliance on them means we have to be more flexible and mobile.

There are other smart ways of resolving these conflicts without forcing people to face anything like the disruption of the 1980s. Birmingham and Lyons are cities of roughly similar size. But many more people can get to the centre of Lyons in half an hour because local transport is so much better. It creates a bigger labour market. There are towns stranded on the edge of major cities outside London which would really benefit from such investment. So this sort of transport spend really makes sense and we got some of it in the Budget.

Next, social housing is a real barrier to mobility. I remember from my time as an MP the appalling bureaucratic hassle if you are a tenant of one association and trying to move to another social tenancy in a different area. Easier and standardised rules for easier transfers would make a big difference. Meanwhile, stamp duty acts as a disincentive for home owners to move as well.

Then if we are to boost the prestige and values of vocational qualifications, we could also provide some maintenance loans for residential training courses. The original idea of the apprenticeship was that the apprentice left home to live with his or her new master. Conscription and apprenticeships have both declined as ways of semi-supervised living away from home. Instead, the university has become the dominant model. Rather than trying to suppress demand for university places we should try to enable other forms of vocational training to offer that residential experience as well.

The 2020s can a decade of renewed dynamism and mobility. Our Economic Inquiry is already identifying some reasons for optimism too. In the week of COP26, the happy accident that our renewable energy in wind and tide are distributed across the country will attract economic growth to those areas. Carbon capture and storage means ingenious repurposing of ageing industrial plant.

There is also a surge of young people into the labour market – the baby boom of the first decade of the new millennium will drive economic change just as Thatcherism rode an earlier tide of incoming young people born in the 1960s. Lots of new workers is a fantastic opportunity to move into new jobs in new sectors with higher productivity and higher earnings. The Conservative Party needs an agenda for dynamism and change. It is what the economy needs too.

Ryan Bourne: Don’t write off the Budget. It showed that the Treasury is taking incentives and tax coherence seriously again

3 Nov

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

Before George Osborne’s 2013 Budget, his biographer, Janan Ganesh, wrote a revealing column for The Financial Times. “The Treasury regards Labour’s call for a fiscal loosening as dangerously wrong but at least coherent,” Ganesh explained. “It is some of the Tory right’s proposals for growth – such as tax cuts financed by deeper spending cuts, so that there is no actual overall stimulus – that really mystify.”

That raised alarm bells among those of us who think lower tax rates enhance a country’s growth potential. Osborne’s Treasury saw tax cuts as mere “demand stimulus,” on par with additional borrowing for government spending. It apparently did not think or did not understand that tax rates had important incentive effects for the economy’s supply-side: that people’s marginal rates (the proportion of additional income given up in higher taxes or lost benefits) influences their willingness to work, earn more, or invest in human capital, all affecting potential GDP.

That shone through into policy too. Osborne worried little about 1.5 million more people getting dragged into the higher income tax bands, or about the incentive effects of his new child benefit withdrawal reform, or about extremely high effective marginal rates within the novel Universal Credit system. The combined tax and benefit code got shot to bits with perverse incentives right across the income spectrum.

Rishi Sunak’s Budget last week is no classical liberal document. In tone and substance, it really could have been delivered by Gordon Brown. And yet, there were signs his Treasury is taking incentives and tax coherence seriously again. Though the overall tax burden is projected to rise to its highest level since 1949, Sunak extolled principles that point to the possibility of meaningful pro-growth reform of how revenues are raised.

The first indicator was the decision to lower the Universal Credit (UC) taper rate from 63p per £ to 55p. Sunak sold it, rightly, as an effective marginal tax rate (MTR) cut for those on low incomes, improving their incentive to work or earn more.

When you add in income tax and the new higher employees’ NICs rate, the effective MTR faced by UC recipients earning above £12,750 will fall from just over 75 per cent to 70 per cent in 2022. The MTR cuts the policy delivers for people moving into work or on lower income levels will be higher still.

For families with two children and no rental costs, in fact, marginal rates will fall for all earning around £6,000 per year to just over £30,000 per year (although the lower taper naturally raises the numbers of people on UC’s higher MTRs further up the income scale).

As the Office for Budget Responsibility concluded, these changes “can be expected to increase the labour supply of those affected – with evidence suggesting the most significant effects are likely to be in bringing non-working mothers into the labour market.” And if Sunak is convinced of the distortionary impacts of high marginal rates, there is plenty of low hanging fruit to attack in future Budgets.

There’s Osborne’s “high income child benefit tax charge” that, due to child benefit’s withdrawal, will raise effective MTRs for individuals earning between £50,000 and £60,000 with three children to as high as 68.25 per cent in 2022.

There’s the tapering of the income tax personal allowance, which will create an effective 63.25 percent marginal tax rate for those earning between £100,000 and £125,140.  There’s the marriage allowance penalty for those moving into the higher income tax bracket, which can result in a cliff-edge marginal rate of over 2,800 percent.

And, of course, there’s more people being dragged into higher income tax bands. The number of higher rate and additional rate taxpayers has increased by around 1.2 million since 2010. From 2022, the base combined MTR (income tax plus employees’ NICs) will be 43.25 percent and 48.25 percent for 40p and 45p income tax ratepayers.

Smoothing all these high rates out would have less support than the UC changes, as they are “non-progressive” reforms. But Sunak’s argument makes the intellectual case for action. What’s more, his Budget reform of rationalising alcohol duties, a domain usually of interest to just a few tax experts and academics, shows he is not afraid to improve the code in politically non-salient areas.

The old alcohol tax system was a complete mess, with the tax rate per unit of alcohol completely unmoored from “pricing in” the worst social costs of drinking. Under Sunak’s reforms, the number of duty rates is reduced from 15 to 6, with rates progressively increasing in steps with alcohol content. Yes, there are anomalies: cider is more lightly taxed than wine, spirits, or beer. But overall the system is more coherent, with less distortions, and the highest tax charges well-targeted at genuine high-strength “problem” drinks.

It’s the rationale behind prioritising this which is perhaps most intriguing. Nobody was spoiling for alcohol taxation reform as a Budget demand. I doubt it’ll affect how many people vote in the next election. This was good, old-fashioned policy change – making economic improvements to the world without any large direct political rewards. And if Sunak is willing to reform a whole area of taxation in this Budget, might it signify his intention to live up to the portrait he has of Nigel Lawson by reforming another at each future Budget?

Some free-market friends will regard this as a glass half-full take. Though Sunak talked about how he aims to deliver actual tax cuts in future, for now that is rhetoric against the reality of a historically high tax burden and the ever-growing demands of an aging population.

The interesting thing about both the Universal Credit and alcohol changes though are that they actually added to the deficit – the former eventually costing £3 billion per year and the latter being greased with a one year freeze in alcohol duties.  As with the sensible reform of business rates to more frequent revaluations, this highlights a truth I’ve outlined here before: any tax reform worth doing usually requires at least a temporary tax cut to ensure there aren’t too many losers who kick up a stink.

Given the Chancellor is hemmed in by spending demands and needs a more efficient economy to ease the pressure, pro-growth tax reforms that broaden bases and reduce marginal rates become even more important. If Sunak really does intend to ease the tax burden in the coming years, I’d say this Budget suggested that he will prioritise targeted cuts towards greasing the wheels for meaningful, lasting reforms. That would be a welcome change given the legacy of recent Chancellors.