Starmer struggles to pin Johnson down on the strikes because we have no idea what Labour would do

22 Jun

Napoleon Bonaparte once advised aspiring commanders to never interrupt their enemies when making a mistaken. So one can understand why Sir Keir Starmer’s instinct might be to hunker down and leave the Government to its foot-shooting spree.

But the current rail strike has exposed the shortcomings of this approach. Even as the country braces for a ‘summer of discontent’, the Leader of the Opposition is struggling to capitalise.

On a tactical level, it shows that he is still struggling to impose discipline on his party.

Whilst it might have been expected that a hard core of very left-wing MPs would defy orders to join the picket lines – and it might have even provided a flattering contrast with Starmer – it is harder to explain at least four members of the shadow front bench doing so.

But the bigger problem, as on other occasions, is that it isn’t exactly obvious what Labour’s alternative is.

At Prime Minister’s Questions today, Starmer pressed Boris Johnson on whether he or Grant Shapps had yet made time to meet with the unions (they had not). So far, so good: Labour would meet them and take a more conciliatory approach.

But what would be the outcome of the meetings? The most obvious way to end the strikes would be to capitulate to the RMT’s pay demands. But as Karl Williams explained on this site this morning, that risks setting in train a whole slew of concessions, with potentially very serious consequences for the public finances.

Yet if Labour’s plan isn’t to fold… what is it? And what is their broader strategy for combating inflation? One can pick plenty of holes with the Government’s theory that it is best staunched by holding down wage, but at least it has a theory.

Until Starmer has an actual, pro-active vision of what a Labour government would mean for the country – not least for the benefit of his own MPs – he is going to be continually on the back foot and at the mercy of events.

Another apocryphal Bonapartism is that he’d rather have lucky generals than skilled ones. In his opponents, at least, the Prime Minister seems to remain a lucky general.

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David Willetts: We aren’t getting an explanation from the Government of its pay policy that is honest about the coming pain

21 Jun

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

Paul Goodman’s excellent piec on this site yesterday admitted that he was so old that as a student he remembered the Battle of Orgreave. I’m even older. I was working for Margaret Thatcher at the time, and remember meetings punctuated with messengers straight from one of Shakespeare’s history plays: “Nottingham is with us.” or “Kent is hostile”.

We wrestled with inflation and pay demands then. There are some lessons which are still relevant today.

First, there is still some truth in the economic proposition that pay increases on their own do not cause sustained inflation which can be brought down by a tight financial policy. Monetarism is often seen as some esoteric economic doctrine, but it was actually a political strategy as well.

If you believe pay demands cause inflation, then the Government has to tackle inflation by doing deals with workers on their pay. Back then, Labour’s links to the trade unions meant they were better placed to do such deals than Conservatives.

So Tories needed a credible way of controlling inflation that did not depend on their relationship with trade unions. The refusal of ministers to get involved even in public sector pay negotiations today is a version of the lesson that was learnt then.

There was a second Thatcherite insight which is relevant today. Inflation is not just a matter of economic theory. It is also deeply political. It is how a society reconciles inconsistent and over-ambitious claims on resources.

Thatcher saw it as the evidence of a moral failure – a failure to recognise we had to live within our means. If we all promised ourselves more than the economy could afford, then one way to reconcile these conflicting claims was to reduce their value by inflation.

Some people and organisations with incomes set in cash without inflation protection lose out. Responsible Government has to deliver the unpalatable but honest message that we are not as rich as we think we are. That is key to Britain’s problem today. We are poorer than we hoped because of a combination of the costs of Russia’s invasion of Ukraine, the higher cost of energy including the costs of the investment to move to Net Zero and the economic effects of Brexit.

So if you were to add up the incomes we all think we are going to get next year, that figure is ahead of the economic reality, and inflation is the only way to make the figures add up. Thatcher’s stern Methodist explanation of these truths barely appears in modern politics.

Apart from these enduring insights the parallels with the 1970s and 1980s are very different from today. Trade unions have much lower membership now. Indeed compared with the 1970s employers and capital are stronger and workers are weaker. That is one reason a lower proportion of GDP goes on wages. Trade union power is almost entirely in the public sector – there are few private sector strikes.

The public sector is much slower-moving and less responsive to economic shifts than the private sector. So when Covid hit us, public sector employees were more likely to keep their jobs and pay – also, partly, because more of their jobs deliver essential services. Public sector workers have more protection of jobs and pay in a recession.

But when inflation is rising fast then lagging, public sector pay puts them at a disadvantage. Public sector pay loses out when inflation is high. So at the moment total private sector compensation including bonuses is rising by eight per cent. Basic pay in the private sector is rising by five per cent. In the public sector that is closer to three per cent. So the sector of the economy with higher rates of unionisation also has lower increases in pay. Strikes are the result.

Ironically, inflation may reduce real pay in the public sector whilst also in the short term boosting public revenues. More people are pulled into higher rates of tax. Public budgets set in cash terms lose some of their value.

Overall, pay is rising less than inflation. This is not some inflationary spiral. It looks as if the adjustment to our being poorer is partly happening through pay rates. The disappointment of expectations which inflation brings is particularly felt amongst workers. They are unhappy, but they are not getting an explanation of what is going on around them which is honest about the economic pain and recognises who is bearing it.

The Government has indeed belatedly tried to protect people, especially those on the lowest incomes from rising energy prices. But it still needs to pull all this together in an account needs to show the scale of the adjustment we are going through and that whilst the sacrifices will be widespread there will also be some protection for the groups worst affected.

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David Gauke: Higher Universal Credit, public sector pay, state pensions – perhaps some tax cuts. What Sunak should do next.

14 Mar

David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the 2019 general election.

In nine days’ time, Rishi Sunak will deliver his Spring Statement. It was clearly his intention that it would be a relatively low-key event. The Office for Budget Responsibility would update its forecasts and perhaps a few reviews would be announced, but there would be little by way of big announcements on tax or spending policy. Spending matters were dealt with last October in the Comprehensive Spending Review, and tax announcements belong in a Budget – with the next one due in the autumn.

The Treasury likes having just one big fiscal event a year. It allows enough time for policies to be properly considered and it reduces the scope for other parts of Government to lobby for voter-friendly policies that cause havoc for the public finances. Sunak, wary of his Downing Street neighbour who is susceptible to such temptations, is likely to take the view that limiting this tiresome process to once a year is highly desirable. For one thing, it extends the period of time before the Prime Minister learns to spot the various Treasury tricks used to frustrate any attempt by outsiders at interfering in Budget matters.

The Chancellor was already under pressure to make the Spring Statement more substantial because of the cost of living squeeze. He pre-empted this with an announcement on a Council Tax rebate and loans on energy costs, and dug in on the forthcoming increase in national insurance contributions. We were heading for a tough spring, but it looked as if he could hold the line. And then came Russia’s invasion of Ukraine.

There are certain items of additional immediate expenditure necessary in response to the invasion that should not cause the Treasury too much difficulty. Additional emergency defence expenditure, including arms to Ukraine and NATO allies in the region; humanitarian aid for Ukraine and Ukrainian refugees; targeted interventions to expand domestic energy sources. There is a case (about which I suspect the Treasury is sceptical over the practicalities) for a big push over the next few months in improving home insulation.

It would be understandable if the Treasury’s focus is currently on what we need to do now, and address the more strategic questions later when the position with Ukraine has become clearer. The answer to such questions will almost certainly result in higher defence expenditure in the medium term, which will leave the Treasury with the headache of funding it. Both the long-term spending and the funding can be resolved at a later date.

Where it gets really difficult for the Treasury is the cost of living crisis. Before determining his policy response, the Chancellor will need to determine to what extent the crisis is the consequence of short-term, exceptional factors, such as this war, or whether it reveals that the cost of living is permanently higher than previously thought. If it is largely the former, the case for borrowing to intervene is stronger; if it is principally the latter, the case for taking those higher costs on the chin (preferably whilst protecting the most vulnerable) is increased.

We know that Sunak is a fiscal conservative. He will not consider it morally acceptable to subsidise current living standards at the expense of future generations in normal times. This is an important caveat. After all, Sunak the fiscal conservative is also the Chancellor who broke peacetime borrowing records in his first year in office. Needs must in exceptional circumstances.

There is a respectable argument to say that much of the squeeze in living standards is the consequence of high energy prices that stem from the invasion of Ukraine and our response to it; that this is the cost of economic warfare in a struggle in which we must prevail; and that future generations should not object to paying off debts incurred to combat threats to our way of life. In other words, protecting living standards now is to some extent analogous with creating a war debt.

The analogy only goes so far. We accumulated a lot of debt in two world wars and future generations did not resent it, but we also spent a great deal on defence during the Cold War during a period of time when debt generally fell as a percentage of GDP. Are we in a conflict lasting, at most, a few years or is this the new normal which may last decades? If the former, we can take a hit to our borrowing, if the latter we need to worry more about fiscal sustainability.

The situation is also complicated by the fact that much of the squeeze pre-dates the Ukrainian war. Energy prices were already high; living standards already set to fall. We are poorer than we previously thought, and that is unlikely to be immediately reversed, even if the Putin regime falls tomorrow and the Ukrainian conflict is quickly resolved. This suggests that we cannot avoid at least some hit to living standards,

A reasonable response would be to be willing to borrow to soften – but not eliminate – the squeeze in living standards. Higher increases in Universal Credit, the State pension and public sector pay than previously planned, perhaps some tax cuts (as many Conservative MPs are demanding), maybe an expansion of the council tax rebate scheme. Even taking into account that tax receipts have been higher than the OBR predicted in October, measures which only go half way to avoid falling living standards will see a deterioration of the public finances.

The Treasury then has two further complications.

First, inflation. The intention may be just to protect standards of living but borrowing more will constitute a fiscal stimulus at a time inflation is approaching double figures. This could result in the Bank of England increasing interest rates faster than would otherwise have been the case, which will impose further pressures on many mortgage-holders.

Economists differ on how big an inflationary problem we have and how far interest rates will rise (a further increase by the Bank of England is widely expected this week). Clearly, prices are rising quickly but higher commodity prices also take money out of the economy and suppress demand elsewhere. The risk is that we see stagnation – inflation and a stagnating economy as we saw after the oil shock of 1973.

The second problem is that temporary fiscal measures to address temporary cost of living pressures will have to be reversed when circumstances change. The experience of reversing the temporary UC uplift was a politically difficult one and, I suspect, has driven the Treasury to the bespoke council tax rebate scheme, which will be easier to drop in future. This might be good politics, but ends up with more complexity in our tax and benefit system.

All of this makes next week’s Spring Statement much more difficult than previously assumed. The briefing from the Treasury is that it is going to be policy-light, but I am sceptical. Domestic politics for the next few months will likely be dominated by the squeeze on living standards and inaction in the face of this will be unsustainable and politically perilous for the Chancellor.

Finding a response, however, that satisfies the public and Conservative MPs but does not further weaken the long-term outlook for inflation or the public finances may be Rishi Sunak’s greatest test yet. March 23 will be a big political moment after all.

Richard Holden: The Chancellor’s coming Budget should cut high marginal tax rates. More work should mean more reward.

28 Sep

Richard Holden is MP for North West Durham.

Morrisons, Consett, Co. Durham

Work must always pay and the more you work, the more you should be rewarded. That was the message I received from the 400+ constituents who attended my ‘Jobs, Jobs, Jobs’ fair in Consett and the dozens of employers desperately looking to hire staff. As furlough comes to an end and with record vacancies in the economy work is on the agenda, especially with tax in the news.

It’s clear that our tax and benefits system could be doing better not only at encouraging people, but to work more when they’re in it. There are several related issues here: childcare costs is a substantial one, and we’ve got to look at how it can be delivered at lower cost. But the biggest issue that people have started to raise with me is the marginal rate of tax at certain points in the income scale.

While the main rates of income tax have remained unchanged for some time, other changes have crept in. Some have been hugely beneficial in terms of reducing taxation, but also very costly in terms of revenue – such as raising the basic threshold of income tax much more quickly than inflation.

Someone on the minimum wage now pays over £1,200 less tax than they would have done in 2010 and, due to the living wage, earn about £4,000 a year more. Even adjusted for inflation, these figures are over £1,000 and £2,800 respectively.

The big change to Universal Credit from legacy benefits really helped that “cliff edge”, which had meant that many people would not benefit – some would be left with effective marginal rates of over 100 per cent – at all if they worked over 16 hours a week. The new system is far, far better.

But there are some snags in the system that need fixing at different points and hit in odd ways across the income spectrum.  There are real pinch points, and I’ll give three examples of constituents I’ve met over the last eighteen months:

1) The young couple. They’re renting. He’s self-employed earning just over £24,000, she’s working 12 hours a week on the living wage in the evenings when the grandparents look after their two kids. They get Universal Credit of just under £47 a week. The second child has just started school and she’d like to do more hours but the withdrawal rate on Universal Credit is 63 per cent. So for every hour she works at £8.91 an hour she’ll only get an extra £3.29 an hour before other taxes and costs are added on. Doubling her hours would mean getting less that £30 a week extra after tax and costs are added – a marginal combined loss of benefits and tax rate of around 70 per cent. Additionally, because her earnings aren’t high enough she doesn’t qualify for pension auto-enrolment – not great for her long -term prosperity. That should change too.

2.) The couple in their 30s who have just had their first baby. The couple in their 30s who have just had their first baby. She’s a police sergeant earning just over £46,000. He’s taking shared parent leave to look after their second child. They’ve just seen a big income drop as one of them is staying at home, and she’s in line for promotion to Inspector. Because between £50,000 and £60,000 you lose child benefit, her marginal tax rate will end up as 65.5 per cent (rising to 66.7 per cent next year) if she pushes for promotion with the extra responsibility of managing a much larger team. She questions whether the extra stress and responsibility would be worth it for marginal gains.

3.) The local doctor in her late 40s. The local doctor in her late 40s. She’s decided to do four days a week rather than five because she’s looked at what she would earn for the extra work and it’s not worth the trade-off. Working full-time she’d earn £125,000 a year. But because of the withdrawal of the tax- free allowance between £100,000 and £125,140 a year and the 40 per cent rate plus national insurance, she’d end up paying a marginal rate of 62 per cent. As it is, she ends up earning almost 90 per cent of her full-time salary for working four days out of five. And don’t get me started on her colleague who is in his mid-50s, but would end up with a marginal rate of nearly 100 per cent, due to the pension situation, if he worked more than three days a week at the local GP surgery. With waiting lists rising due to Covid, we’ve got to remember that people respond to incentives in our NHS no less than anywhere else.

These very high marginal rates kick in unevenly across the income tax spectrum and are even more acute when it comes to recent graduates, an issue I have raised before in this column.

The Chancellor has been right to make the difficult long-term decision to right the ship and the public finances post-Covid. But as we recover, we also need to look at how we smooth our tax and benefits system to ensure that work always pays.

Chatting to people out and about in North West Durham, a basic rule of thumb comes to mind and seems universally accepted: you should be able to keep at least half of every extra pound you earn. I think that this is right.

Whether it comes to those just starting out or those doing well in their careers, working more should always pay more. While it obviously cannot happen overnight, a sensible principle to put in place would be that no-one should be losing more than 50 per cent of every extra pound they earn.

This would be a sound principle to establish and work towards over time – especially for those starting out and looking to the future. Whether people are benefiting from Universal Credit or are higher rate taxpayers, it’s important that work pays, providing for your family is encouraged, and the new party of working Britain always rewards those who do the right thing.

John Redwood: Lorries, Brexit – and the truth about how to keep on trucking

30 Aug

Sir John Redwood is MP for Wokingham, and is a former Secretary of State for Wales.

My comments the other day about business needing to pay truck drivers more and improve their conditions of employment have apparently upset some people.

It is a curious but now deep-rooted view of many on the Left that the UK should have remained in a free movement of labour zone with the EU. They favour us attracting skilled people from the lower-paid parts of the European Union to fill our job gaps instead of putting the pay up for UK residents, or training more home talent.

Since the per capita income of the eastern parts of the EU remains at about one third of UK levels, there is still plenty of scope, as they see it, for us to bid people away from these lower pay countries whilst keeping well beneath  our own current pay bounds.

I have some moral as well as economic and political issues with this approach. Should we denude Poland of truck drivers, or train more of our own?  I read industry reports that Poland has an acute truck driver shortage at the moment. Should we plunder the lower income countries of the world for trained nurses, or step up home education to nurture our own?

Importing so-called cheap labour is not  a cheap solution. Whilst it is clearly cheaper for the company recruiting, the new migrant employee may well need and qualify for state financial help with housing costs, a range of free public services and pay top-up in some cases. If we recruit someone who already lives here, we are covering their public sector costs already.  The cheap labour system  sounds like the caricature of capitalism of old. We have figures on the Left encouraging businesses to scour the world to keep wages down.

Some of my critics cannot get over the decision of a majority of the UK voters to leave the EU. They blame Brexit for most things they do not like. The truck driver shortage is no exception.

I find this a difficult argument to believe, as there are similar truck driver shortages in Germany and the USA. Neither of those countries changed its relationship with the EU at the beginning of this year. I also remember articles being written and the industry complaining of the driver shortage before Covid and well before we left the EU. Again, this calls into doubt the anti-Brexit soundbite.

So why are several important economies and countries facing a truck driver shortage at the same time? Why has this problem been building for some years?

It does come down to terms and conditions. Truck driving the larger vehicles over the longer distances has remained an employment dominated by older men. The industry has been failing to attract women and younger men to it in sufficient numbers for a long time.

Gradually the older men reach retirement, and the shortage grows. When you ask people why they do not want to  be truck drivers, they often cite the poor conditions overnight and the low esteem for the profession, as well as the pay and hours. Even in the richer countries of Europe and the UK, there is a shortage of good overnight stopping places where a driver can be safe, find a meal and a shower and get sufficient sleep for the next day.

The economics of long-haul trucking is competitive, but the main costs are not the driver. The capital and maintenance cost of the truck, and the fuel cost of the long journeys both usually exceed the drivers rewards by a substantial margin. The trucking companies could help themselves and their drivers by being willing to enter a compact with drivers over training, conditions, style of driving and reward.

Drivers who are well-trained to drive with fuel economy in mind can save their employers a lot of money. There should be sharing schemes for good fuel economy. Drivers who keep out of accidents and look after the truck help keep insurance, repair and maintenance bills down. Again, this can be shared with the drivers to mutual advantage.

Years ago, I helped Margaret Thatcher to sell National Freight, a nationalised trucking business. It was bought by its employees, who understood  how a change of attitudes could help firm and driver. I remember interviewing one driver and part-owner after the event. He told me that when he drove a nationalised lorry, he was not that attentive to the wellbeing of the vehicle or even concerned if it would work each morning. But once he became a co-owner, he took a great interest in ensuring that it was looked after and would earn its living every day. The truckers of National Freight did well with their business as a result.

As someone who believes that free enterprise brings many advantages, I see the driver shortage as an opportunity to put right some of the problems of the industry here in the UK and get more people into better paid and worthwhile jobs. There need to be more training courses, linked to employment packages for those that stay the course and pass the test.

The industry needs to work with government over better facilities for long-distance drivers, and could profitably explore with them how there could be a profit-share for the fruits of good driving. The model of keeping wages down is a bad one. I have always favoured training and productivity-enhancing improvements in jobs so that employees can be better rewarded whilst leaving the company money to invest and to reward the savers who have invested in the improvements.

It is time my critics thought more about the needs and potential skills of people already living in the UK and less time dreaming about bringing in many more people from overseas. Better qualifications can  bring better pay and a richer working experience. It also brings more respect from society. I remain grateful to the truckers who deliver the food to my local supermarkets and the parts to UK factories. We need them and should value them more.

Andrew Griffith: Unpick the triple lock – because it’s unfair for pensioners to gain from the misfortunes of others

24 Aug

The author is MP for Arundel, founder of the Campaign for Economic Growth, and the former Chief Operating Officer of Sky plc.

Would you keep £50 if you found it lying in the street? Most Britons say that they wouldn’t, and quite rightly. As a nation, researchers regularly find us in the very upper echelons of honesty.

No one would wish to profit from the unprecedented Covid pandemic. But that moral scruple is what lies at the heart of the debate about the so called ‘triple lock’ which currently gives recipients of the State Pension the higher of inflation, a guaranteed 2.5 per cent every year or annual growth in wages.

In an unexpected twist of fate, without an amendment to the current rule, today’s pensioners stand to benefit from the misfortunate of others. Not, to be clear, at their own instigation but as the result of the unique volatility in wages which fell sharply last year as millions, predominantly in the private sector, suffered from the shuttering of businesses and collapsing demand in many sectors.

In theory, election manifestos ought to come with an insurance-policy style page of disclaimers: “excludes acts of nuclear, chemical and biological warfare, large scale cyber terrorism or, as in this case, a global disease pandemic without precedent in modern times and which has left no country on the planet unscathed.”

Perhaps in future they will. But it would be sophistry to ignore the difficulties of the last eighteen months, and pretend that an event which saw cross-party support for Parliament invoking emergency powers didn’t happen. I don’t even believe that most pensioners would wish this.

Pensioner poverty for many is real – although, thanks to past increases in both the state pension and the pension credit, there are 200,000 fewer pensioners in poverty today than a decade ago. As a Member of Parliament, I know the burden felt by those on fixed incomes of annual council tax increases above inflation – ironically, often to put another log on the fire of funding someone else’s final-salary local government pension. But we should not conflate this longstanding issue with an indiscriminate, across the board increase on the back of a Covid19-induced distortion.

Unnoticed in the understandable focus on Afghanistan, last week the Office for National Statistics published wage growth for the three months to June of a record 8.8 per cent. Growth in July – the basis of any annual pensions uprating – is expected by some to be even higher. Demand for staff has been squeezed by the recovery for those businesses able to operate whilst the widely admired furlough continues to protect jobs elsewhere.

The result is a labour market that is so tight you can hear the rivets starting to pop. Using this statistical anomaly of a near double-digit rate of wage growth to increase pensions would, I believe, be wrong.

The Government has been bold and decisive in many of its measures during the pandemic, stepping outside the usual parameters. Similar logic and confidence should pertain to the approach to the April 2022 pension uprating. One example: applying the higher of the rate of inflation or 2.5 per cent would deliver a healthy increase of at least five per cent across the two years of the pandemic, protecting pensioners against the rising cost of living whilst shielding those of working age from what would be an unfair additional tax burden.

One of the positive aspects of the crisis was the collaborative way in which Parliament came together for the common good of the nation. In the summer heat of recent weeks, that has dissipated somewhat. As colleagues return to Westminster in the cooler air of the autumn, I hope that we can build consensus on what should not really be a subject of controversy but a sensible and pragmatic response to post pandemic management of the economy.

Ryan Bourne: Calm down, stay cool – and drop this talk of tax rises. It’s too early to know how everything will settle down.

25 Nov

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

I feel as if I am stuck in some mid-2010s time warp. Rishi Sunak will today update us on how much the Government has splurged during this Covid-ridden year and what it intends to spend next year.

But commentators are already pivoting to sizing up what deficit reduction will eventually be needed, and whether tax rises or spending cuts should fill the future fiscal hole. That conversation will be spurred today by the Office for Budget Responsibility updating its guesstimates of how far the pandemic will permanently impair the economy’s potential, and so the “structural deficit” to deal with. Welcome to the Austerity Wars 2.0.

As I’ve said before, all this debate is massively premature. Yes, this pandemic has caused masses of government borrowing—producing a deficit of 21 percent of GDP or around £400 billion, according to the Resolution Foundation. But we are (still) in a once-in-a-half-century pandemic where we have knowingly kept shuttered swathes of the economy and paid people to sit at home.

There will obviously be “deficit reduction” next year, in the sense that the vaccines ending the pandemic will bring furlough to a close, make Covid-19 test and tracing redundant, and see the end of the inoculation and PPE scrambles. Like demobilisation at the end of war, so the government will de-Covidise its budget with drastic cuts to virus-related expenditure. Likewise, as things re-open, tax revenues will ascend again. So, the deficit will fall.

But anyone who claims they know what level it will settle at, and so what “needs to be done” to re-achieve pre-Covid borrowing levels, is, quite frankly, talking poppycock – including the Office for Budget Responsibility.

None of us, nor them, really have a clue what the long-term impact of this crisis will be on the economy. Will a whole bunch of industries shrink permanently now that the risk of government shutdown orders in future pandemics is understood? Will people stick with online retail and eat out less than they did? Will professionals work from home more, transforming parts of inner cities? Or is there a pent-up demand for socialising and “the old life on speed,” with a roaring 20s to come, as after the Spanish Flu?

Without knowing all this, nobody can say what demands on public service spending will be or how tax revenues will perform over the next five years. Add in the uncertainty of whether there will be a Brexit deal, and the underlying budget position for Sunak is pretty much unknowable today – the whole reason, remember, that the Chancellor is only delivering a one-year spending review.

To see the scale of uncertainty, note that various independent forecasters have predicted that UK government borrowing in 2021 could be anywhere from £102 billion up to £273 billion. That’s a bigger range than the actual unprecedented borrowing of 2009/10.

So we need to take whatever comes out of the OBR’s economic and fiscal outlook today with gallons of salt. Their forecasts have already proven unduly pessimistic, with borrowing outturns from April through October a massive £76.5 billion lower than they were expecting. Nor, historically, have they had a stellar record in assessing the growth potential of the UK economy exiting a deep crisis.

Back in 2010, remember, the OBR predicted a return to robust productivity growth, meaning George Osborne’s strict spending limits were predicted to eliminate the structural deficit as early as 2015. That didn’t happen, despite spending levels being delivered as planned.

So it’s baffling why think-tanks are taking the OBR assessments today as truth, and outlining “fiscal repair” measures of £40 billion to be delivered from 2023 onwards already. The Resolution Foundation wants significant tax rises on everyone earning over £20,000, for example.

Why not just calm down a bit, and see how things shake out? My central assumption is indeed that there will be a bit of a hit to our growth potential from living through this crisis, pushing the structural deficit up. And, obviously, if the Government keeps NHS spending higher and permanently raises Universal Credit generosity even after the pandemic ends, on top of recent announcements on defence spending and the “green industrial revolution,” then this makes the prospect of future deficit reduction less likely. But it’s the underlying economy that still has the biggest impact on the public finances, and that should be our focus right now.

Indeed, in talking up the need for restraint, the Chancellor, the OBR, and others may be unwittingly damaging our recovery prospects. Tell people big tax hikes are coming, and they begin thinking their permanent incomes will be lower because the economy’s prospects are weaker.

Of course, the Chancellor is trying to balance risks, and make clear to bond markets that the government is aware of the need for fiscal discipline in the longer-term. But what does he think headlines telling people to “prepare for tax pain next year” achieve? As Julian Jessop asked, wisely, on Twitter, what should that preparation look like? “Increase savings? Cut investment? Dump assets? Don’t start that new business?” How is that helpful given where we are?

Rather than lasering in on the deficit as a target, it would be better for now if the debate stayed focused on how to achieve a strong recovery. Whether they help or hinder the economic rebound should be the metric by which we judge almost all new spending and tax choices today, as well as regulatory policy. Anything that we can do to ensure the vaccine roll-out goes as smoothly and quickly as possible, for example, will produce a huge economic stimulus. Bringing forward the end of pandemic restrictions by just one month could generate tens of billions in value.

But even beyond getting that right, we need to stop talking as if spending measures are something wholly independent of our recovery prospects. The whole public sector pay debate, for example, has been tiresome in focusing on whether the Government can afford to raise public sector pay, or whether it is fair too, rather than about how setting pay rates will affect the jobs recovery. A more disaggregated analysis would surely conclude that raising pay in areas of the public realm under severe strain due to Covid is highly desirable to ensure good retention and recruitment, whereas pay restraint is justified in areas where public sector productivity has plunged due to home working.

Yet, sadly, thinking through how spending or tax policy affects our growth potential is not where public discourse is. Instead, people are already fighting the last war, battling over shaping the narrative on whether another round of spending cuts are desirable, or else buttering us up for yet higher taxes despite the historically high burden even before Covid-19 hit. The biggest 2010s economic policy mistake was not austerity, but that the focus on it led us to being fatalistic about growth. Let’s not do the time warp again.

James Heywood: The case for public sector pay restraint is founded on fairness

21 Nov

James Heywood is a Senior Researcher at the Centre for Policy Studies.

We may be eight months into this pandemic, but we have barely begun to see its full impact on the labour market. The unemployment rate, which has already risen from 3.9 to 4.8 per cent compared to a year ago, is expected by the Bank of England to rise as high as 7.5 per cent, and other forecasts put it much higher still. Wages fell over the summer and wage growth is expected to remain subdued for some time.

The figures from the Office for National Statistics (ONS) show the worst month for wages was June, with a decline across the economy as a whole of 1.6 per cent compared to 12 months before. Within those June figures, however, there is a huge disparity between the public and private sectors; earnings in the private sector were down nearly 3 per cent, while the public sector actually saw growth of 4.5 per cent.

In fact, pay growth in the public sector is now higher than it has been for over a decade. Private sector wages have improved a little since June, but even that bounce back in the late summer as restrictions were lifted was far outpaced by earnings growth in the public sector. A recent survey of employers found that more than half of private sector employers expect to freeze pay over the next 12 months, compared to average expected rises in basic pay of two per cent by public sector employers.

The setting of public sector wage rates has to take into account what is going on in the rest of the labour market. With the labour market tightening in recent years and wages picking up, the Government has found it necessary to ease up on public pay policy to keep pace with the private sector and prevent problems with recruitment and retention. It is right that pay policy should reflect what is happening elsewhere in the labour market. Now that the private sector is suffering a sudden shock, it is reasonable, fair and prudent to adjust pay policy in the public sector.

Public sector workers, on average, receive a pay premium compared to their private sector counterparts, even once factors such as types of role and levels of qualification have been accounted for. This gap is wider still once the generosity of pension provision in the public sector is factored in. In the public sector 86 per cent of workers receive implicit employer pension contributions worth 10 per cent of earnings or more, compared to just 10 per cent of private sector workers. Employees in many areas of the public sector also benefit from incremental pay rises in addition to the uprating of basic pay levels, meaning their pay increases automatically unless they are already at the top of their pay band.

The ONS have modelled the differential in earnings taking all these factors into account, including pensions. While public sector pay restraint after 2010 has narrowed the gap somewhat, the ONS estimate that the public sector earnings premium in 2019 was still seven per cent. This gap has only narrowed by three percentage points since 2011, and has been rising since 2017. Now that private sector earnings are stagnating, it may quickly widen again significantly unless the Government alters pay policy.

The Centre for Policy Studies published a paper yesterday which looks at comparisons of pay in the public and private sectors and explores the Chancellor’s options for pay restraint. Limiting average pay uprating to one per cent each year for the next three years could deliver a reduction in annual expenditure of nearly £6 billion and ensure private sector workers are not being left behind unfairly. Not only is it unfair on workers facing pay cuts and the threat of redundancy to continue widening the gap between public and private sector remuneration, it also distorts the labour market.

We should be clear: this is not a simple argument about public sector ‘fat cats’ or top civil servants with gold-plated pensions, and we should not pretend otherwise. Most of the public sector workers we are talking about, including no doubt some of the people reading this, do not earn huge salaries, and some work in high pressure or dangerous jobs.

The Government will need to think carefully about how any change to pay policy is presented, and the approach should be nuanced and flexible. Pay restraint is not about a political assault on the public sector – not only would that be unfair, especially after the year our NHS has experienced, it would also be terrible politics. It is simply about making a reasoned case that pay policy should reflect developments in the wider labour market and should be fair to all workers and all taxpayers across the UK.

Ryan Bourne: A message for Johnson and Sunak on tax rises. Not now. And not these.

2 Sep

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

How’s this for a false dichotomy? Last Saturday, Prospect asked: “Post-Covid, are taxes hikes essential to fund the future? Or should we abandon “deficit fetishism” and spend our way to prosperity?” [i.e. through borrowing]. I shouldn’t need to tell ConservativeHome readers that “spend to grow” and “spend to grow”—the only difference being how to finance it—are not an exhaustive set of fiscal policy options post-pandemic.

But that tweet, sadly, reflects conventional wisdom. You should take the pre-Budget briefing in the Sunday papers about Treasury desires for £20-30 billion in tax hikes through capital gains tax, corporation tax, fuel duty, an online sales tax and restrictions on pensions tax relief with a pinch of salt. Before every recent budget such stories have emerged, perhaps due to kite-flying or overexcited journalistic coverage of illustrative exercises in how one could raise revenues. One suspects the briefings may even be a political ploy—raising fears in the Tory base before Number Ten saves the day.

Yet there’s undoubtedly an unnerving regularity to them. Alongside a steady drumbeat from “One Nation” Tories and such organisations as the Resolution Foundation, the idea that large tax hikes will be desirable and necessary is taking hold, with Covid-19 apparently making this agenda more urgent.

We are told, as the kitchen sink of argumentation is thrown, that the pandemic itself proves the false economy of a “hollowed out” state after a decade of austerity. Or that the “levelling up” and the “inevitable” higher spending we will now want on health, welfare benefits, and higher public sector pay means tax hikes are needed. Or that the crisis necessitates urgent repair to the public finances, and that there’s simply nowhere left to cut spending.

None of these arguments, however, stand the test of reason. Countries that have dealt with the Coronavirus better include those (South Korea, Taiwan, Australia) with much lower tax-to-GDP ratios than the UK and much lower health spending too. Many with higher tax-to-GDP ratios (France, Belgium, Italy) have seen similarly shocking death tolls to us.

At best, any failure to deliver resources where needed reflects bad state priorities, not an impoverished public realm. Indeed, the story of a hollowed-out state at a time of the highest tax burden since the early 1980s, coupled with this international evidence, suggests ascribing blame to austerity for poor performance is both ahistorical and parochial.

The wisdom or otherwise of  the “levelling up” agenda, and how best to pay for it, is largely unrelated to the pandemic too. Actually, to the extent that Covid-19 affects the desirability of infrastructure and public service spending in the regions, it throws substantial doubt on the benefits of projects such as HS2 and other city and town revival plans.

Who knows what lasting impact the crisis will have on remote working, the location of activity, and favoured transport modes? One Nationers arguing that the virus proves the need to level up would have us believe that the pandemic’s effects are significant enough for a tax revolution, but insignificant enough to alter the desirability of any of their proposed spending. One might almost suggest motivated reasoning here.

In macroeconomic terms, the case for significant tax rises now is weaker still. The point of bridging support through furlough was to shelter businesses and workers from this unexpected shock. To pass the bill to the private sector now as it struggles back to life would strangle the recovery. And for what? Borrowing costs are low, and we have no idea yet whether and how much this crisis will leave a permanent budget hole once emergency spending stops and private sector activity revives. In fact, even borrowing to date has not been as high as initially feared.

Of course, the extra debt to deal with the crisis has to be paid somehow, eventually. But, as I argued here before, unusual shocks such as pandemics and wars primarily result in step-level debt-to-GDP increases rather than ongoing budget holes, because you stop spending on the immediate threat afterwards.

The implication is that modest consolidation over decades is optimal to account for the extra incurred debt, rather than adopting large tax increases to compensate over a Parliament. Economists call it “tax smoothing”—debt provides a safety valve to allow us to only modestly change spending or taxation over long periods to maintain incentives. Of course, if the Government thinks that, for political reasons, it must expand welfare benefits or health spending permanently, this would be a normative choice: there is nothing inevitable about sharp tax hikes.

Even if you think permanent scarring will occur, those taxes suggested to raise revenue seem bizarre choices today. The Government presumably wants us to be Covid-cautious still. Two ways of reducing risks would be to drive more rather than use public transport and to shop more online.

Aside from all the other downsides of raising fuel duty and introducing an online sales tax, to use the tax system to incentivise worsening virus transmission right now by making driving and online shopping more expensive seems bizarre.

Raising top capital gains tax rates to 40 or 45 per cent would simply be self-defeating from a revenue-raising perspective. Capital Gains Tax on many investments represents a double tax. The justification for having it at all is to deter people hiding income as capital gains.

But there’s a revenue-maximizing balance between this effect and deterring people from selling assets. The Coalition government introduced a top 28 per cent CGT rate precisely because HMRC research suggested this raised most revenue. Though it was then lowered to 20 per cent under George Osborne, raising it to 40 per cent plus would reduce revenue relative to a lower rate. We’d get less investment and entrepreneurship when we need it most too.

And then there’s the mooted corporation tax rise from 19 back to 24 per cent. Taxes on mobile capital will deter foreign investment just as Brexit is set to happen, as well as reducing the after-tax return on new domestic projects. Who will bear the costs? Not just “the wealthy,” as commonly asserted, but workers too: evidence suggests that they bear between 30 and 70 percent of the burden of taxes on corporations.

Not only is the tax rise call premature then, but the specific proposals don’t conform to the pandemic’s needs or Boris’s Johnson’s ambitions to create a high-wage economy. Covid-19 may permanently scar the public finances, sure. But as yet its full effects are unknown and there’s little cost to pausing to see. Anything else at this stage is using the crisis as a pretext for raising funds for hobby horses.

If the Prime Minister truly objects to this rationale as reported and understands the threat to the nascent recovery of sharp tax rises today, he should take this message to his Chancellor: on tax rises, not now and not these.