Karl Williams: Ministers must not give in to strikers’ demands over public sector pay

22 Jun

Karl Williams is a Senior Researcher at the Centre for Policy Studies.

Public sector unions are agitating for significant pay increases. This week’s crippling rail strikes are just the start: teachers, nurses and civil servants all look likely to follow suit.

With inflation running at nine per cent and projected to reach 11 per cent, It’s easy to understand why public sector workers are unhappy. But those very inflationary pressures are why the Government needs to hold firm.

Given the hardships facing private sector taxpayers and the ruinous state of the public finances post-Covid, significant public sector pay growth is neither fair nor affordable.

As things stand, public sector pay increases are supposed to be capped at 2-3 per cent. That is going to mean a significant real-terms decline in earnings for many public sector employees.

Understandably this is causing a lot of anxiety, and the unions are pitching their demands accordingly.

The more absurd pay demands – inflation plus five per cent, for example – are easy enough to dismiss as negotiating ploys. Demands for pay simply to track inflation are superficially more persuasive.

Large pay rises for public sector workers are needed, so the argument goes, to preserve living standards against erosion by global economic forces unleashed by Covid and Putin.

Yet there is a fundamental principle of fairness at work here.

Private sector workers – the people ultimately footing the public sector wage bill and paying for those nice pensions with their taxes – are suffering too. According to the latest data from the ONS, average weekly earnings in the private sector are also lagging well behind inflation.

Ah yes, say the strikers, but private sector pay was up by 5.5 per cent year on year in April. Average public sector pay was up by 1.7 per cent, so state employees are facing a bigger squeeze right now.

Moreover, the last Budget promulgated the principle that public sector pay growth should ‘retain broad parity with the private sector’. Union bosses have not been slow to invoke this principle: sans inflation-busting increases, parity at least should be maintained.

But digging further into the data, this argument does not stand up to scrutiny.

Breaking pay down by industry sector and indexing it to March 2019 (for a pre-Covid baseline) shows that most of the pay growth of recent months is actually just bringing chunks of the private sector back up into line with the public sector, along the pre-Covid trend. (See the graph at the top of this post.)

The major exception distorting the headline numbers is financial services. Earnings growth there has been robust since early 2021 (when global M&A activity began overheating).

So pay growth inequality is not so much between private and public sector workers as between a small minority of bankers and everyone else. Plus ça change.

The convergence of most of the private sector back towards the level of the public sector is even more apparent when bonuses are stripped out, as in the graph below. Although interestingly, it’s not just financial services where bonuses have been a major factor in pay growth in recent months, but also manufacturing, construction and retail/hospitality.

Presumably, this reflects a tight labour market and record vacancies, with employers using bonuses to attract and retain workers.

Of course, public sector workers do not receive such performance-related pay awards. But what they have instead is the public sector pay premium, estimated at seven per cent by the ONS (controlling for job characteristics and taking into account bonuses and pension contributions).

In addition, public sector workers benefit from much greater job security. This became starkly apparent during the pandemic: while private sector jobs, hours and wages were being cut, public sector earnings more than held up.

Yet having weathered the pandemic relatively well, strikers are now demanding that factory workers and restaurant staff underwrite pay increases for rail workers with salaries well above median earnings, not to mention all those civil servants working from home in defiance of Jacob Rees-Mogg.

Given that private sector earnings are still not yet fully back on track – at parity, one might say – with the public sector trend, this is manifestly unfair.

Demands for greater pay growth might be more persuasive if there was any evidence of durable improvements in public sector productivity. But the opposite is true. Going by ONS measures, productivity cratered during the pandemic and at the end of 2021, was still 5% below 2019 levels.

Remote working might be part of the story here – the goings-on at the FCDO during the fall of Kabul are certainly suggestive. In any case, public sector efficiency drives announced by Rees-Mogg and Sajid Javid are clearly badly needed.

Strikes, in contrast, will undermine public services still further, adding to the colossal backlogs in the NHS, courts, and government in-trays.

It will be tempting for the Government to back down in some instances, to lessen the political headaches. But if ministers give in to one group, they will surely fold to the rest. This would have far-reaching fiscal implications.

The UK’s public sector workforce consists of 5.7 million people – a third in healthcare, a quarter in education and a fifth in public administration, with the rest in the police, the military and so on.

The total public sector wage bill (including employer pension contributions) accounts for 22 per cent of day-to-day government expenditure, coming in at roughly £200 billion. Every one per cent increase in public sector pay will ratchet up state spending by £2 billion.

Under the existing cap, the wage bill is rising by around £4bn. If instead public sector workers were to get a 5.5 er cent pay increase (parity with the private sector, under the misleading statistics cited above), the wage bill would rise by £11 billion, leaving a £7 billion black hole.

And if they were to receive an 11 per cent pay settlement (tracking inflation), the wage bill would rise by £22 billion, with the Government having to conjure up an extra £18 billion.

That £18 billion could instead fund a 3p cut in income tax, say. That would ease cost of living pressures by letting everyone – not just public sector workers – keep more of their earnings.

In the real world though, there isn’t £18 billion to spare. The Chancellor is struggling to maintain the fiscal wiggle room to cut just 1p from income tax before the next election.

In fact, with the tax burden at a 70-year high and monthly borrowing still twice what it was pre-pandemic, a chunky increase in public sector pay would, realistically, have to be financed by spending cuts and long-term savings – through driverless trains, for example.

But we all know the unions will oppose attempts to trim back Britain’s bloated trillion-pound state.

Ultimately, there is nothing the Government can do which will not be greeted with howls of outrage from the unions. That being the case, their threats and demands should be rejected.

These times are deeply painful for many of us. But ministers are right to hold the line against the strikers.

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James Frayne: Strikes and Ministers. Have they taken back control only to lose all control – and be cast out by voters?

21 Jun

The polls are deceptively clear on the strikes. The massive differences between Conservative and Labour voters suggest both parties should take a tough line on either side of the debate.

However, the backdrop of a deteriorating economy makes the reality more complex. At a time when everyone is struggling, apparently “rich politicians” have to tread very carefully in turning down pay rises and in condemning strike action.

So while there’s a way for the Conservatives to maintain public support on this, it’s not as easy as it looks.

Let’s start by looking at where the polls are – and, specifically, at the major differences between different parties’ voters.

In early June, YouGov asked whether people supported or opposed rail unions striking over pay and conditions. Conservative voters opposed the strikes by 74 per cent to 14 per cent, while Labour voters supported the strikes by 59 per cent to 27 per cent.

I doubt this has changed much in the last couple of weeks; certainly, it’s hard to imagine Conservative voters becoming more sympathetic to strikers’ demands.

Looking at the polls on strikes more generally, it seems public opinion is set hard by political fundamentals. Conservative and Labour voters disagree wildly on attitudes to strikes.

Asked whether rail unions should ever be allowed to strike, YouGov’s June tracker showed Labour voters supported the right to strike by 74 per cent to 17 per cent, but Conservative voters opposed the same right by 53 per cent to 37 per cent.

And, even more broadly, asked whether it’s too easy for unions to be able to strike, 44 per cdent of Conservatives said it’s too easy, with 31 per cent saying the balance is about right; and 37 per cent of Labour voters said it was too hard to strike, with 33 per cent saying the balance was about right.

The same political gaps emerge on other questions regarding strikes. Conservative and Labour voters disagree about whether teachers should be allowed to strike, as well as about whether firefightersdoctorscivil servantsnursesair traffic controllers, and police officers should be able to strike.

So it would be easy to think that the Conservatives should stay implacably hostile to strikes and strikers and use the strikes as a dividing line with Labour. Certainly, that’s a possibility if the RMT and other unions continue to take a belligerent approach.

But there are undoubtedly risks for the Conservatives in all this.  Two stand out above all. 

First, and most importantly, the deteriorating economy means people everywhere are getting poorer. In the past, it was relatively easy to dismiss some workers’ claims for higher wages; now, with food and fuel prices rising and energy bills set to soar again, the reality is life is genuinely becoming harder.

This is obvious at one level, but it can get lost in the aggressive rhetoric of some union leaders. This time, strikers have a point: the Conservatives need to keep this reality in mind.

To be clear, this doesn’t mean that the wider public will support strikers’ demands; they will recognise the dangers of an inflationary spiral; they will also dismiss the idea that public sector workers are owed special treatment post-Covid. However, they won’t condemn people at least for asking, and will tolerate some industrial action (although there are, of course, limits).

Second, if more strikes break out, it’s possible the political chaos that appears to have gripped this Government will makes it look as though they’ve lost control of the country. It seems likely that this is what some union leaders are planning on.

It is a high-risk game for all; the public will react very badly if it looks like strikes are essentially political, but the Conservatives won’t want to appear unable to govern.

What does all this mean for the them? Above all, they need to make it clear they understand everyone is suffering financially and that times are tough – but that economic policy will be applied universally, consistently and fairly. They should certainly argue that strikes are wrong, but, unless and until many more strikes break out, their tone should be reasonable and non-condemnatory.

The chances are that some union leaders will over-reach, and stray from a reasonable financial case to a broader political case. It’s almost certain that some striking activists will take such an approach

At that point, the Conservatives would be justified in taking a more hostile tone, but they absolutely will not get to it soon. The public is almost always entirely reasonable: most will oppose the strikes but sympathise with the strikers; they will be angry if it looks like the strikes are essentially about getting Boris Johnson out (even if that sympathise with that outcome too).

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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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John Macdonald: It’s unsustaintable for the Tories to offer so little to younger voters

10 May

John Macdonald is the Head of Government Affairs at the Adam Smith Institute.

It’s not just the cities, or the young and aspirational that the Conservatives are losing. Their very political engine is starting to break down, and to make it worse, they appear to be burying their heads in the sand – whilst simultaneously arguing that Labour’s success in London bodes poorly for the next general election.

Losing both Margaret Thatcher’s favoured Wandsworth Council and Westminster too suggests that the Tories are quite content with sacrificing aspirant prosperity for declinist welfarism.

Perhaps this is because voters have traditionally drifted towards the Conservatives as they got older. But rather than being an iron law, this is more simply a product of circumstance. The boomer generation was buoyed on a current of unprecedented economic growth, rising wages and the prospect of home ownership. Without any of these three factors in place, there is little reason for this phenomenon to be reproduced. In reality, there is no evidence to suggest people under 40 are moving right at all.

This was all well and good in the context of the 2019 election. By promising an end to 2017’s ‘Zombie Parliament’, end the Brexit headache and take the country Corbyn-neutral, the Conservatives could assemble a well distributed coalition of disenfranchised Labour-leavers in the North and Midlands, without worrying about losing their southern, prosperous (but often remain leaning) heartlands – on the basis that a vote for anyone other than the Conservatives would bring Jeremy Corbyn one step closer to occupying Downing Street.

But since Brexit is now more about results than bluster, blunder, and blue skies, and the Government is seen to be doing too little to alleviate the cost of living crisis, there is now space for voters to coalesce around anti-Tory sentiment.

It is looking increasingly uncertain whether the Conservatives will be able to hold on to their old, prosperous heartlands in the south while protecting their 2019 marginal seats in the North and Midlands. If voters become more at ease with a Lib/Lab coalition, the Tories’ thumping majority could end up being very short-lived.

In pursuing a political narrative of redistribution, from young to old, from prosperous south to left behind north, the Conservatives have fundamentally misunderstood the underlying challenges facing the country. Productivity and real wages haven’t recovered since 2008. The average house price is 65 times higher than in 1970. But average wages are only 36 times higher. The Government has announced tax rises worth two per cent of GDP over the last two years, the same that the last Labour Government did in ten.

This might not be so bad for those in or approaching retirement, who will be spared paying for the pandemic and will benefit from the rapidly rising value of their homes. But the young have lost formative years of education, early career opportunities and freedoms to a pandemic that they are paying through the nose for.

As it currently stands, the Government is creating a bloc of young voters that attempt to move from their place of their birth to seek prosperity, only to find themselves in cities being paid low wages, taxed at a high marginal rate of 42.2 per cent (if they’re a graduate) and scant chance of getting anywhere near the housing ladder. Quite often, these graduates then return home to non-graduate jobs, embittered by the stark reality that the economy is more oriented towards extracting revenue from them, rather than giving them the opportunity to live, work and start a family where they so choose.

What can be done? The Government could seriously consider treating Covid debt as war debt, hiving it off to be paid back at a much slower rate, and freeing the Treasury from its current, revenue first, growth second tax mentality, a policy being privately pushed by Liz Truss. Rather than exempting young people from income tax entirely, thresholds could be unfrozen, giving them a significant tax cut in real terms.

Adjusting student loan interest via CPI, the Government’s own standard measure of inflation rather than the higher RPI would also ease the pain on graduates reaching the soon to be lowered repayment threshold. Providing maintenance loans on the same terms to apprentices as students could also extend opportunities to those who don’t go to university.

To suggest that the Conservatives face a long-term existential crisis could be hyperbolic. They have succeeded at re-engineering the party time and time again, and the cohort they are targeting with welfare and subsidy is only just reaching its peak electoral salience.

But the Tories’ electoral strategy is jettisoning the fuel behind the prosperity of older generations, allowing them to coast without firing up the engines of growth. But unless the Party reorients itself around value creation, building houses and in offering young people a genuine shot at prosperity, it risks sliding into decline.

David Willetts: The case for Sunak to announce a windfall tax on energy companies next week

15 Mar

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

The Treasury is supposed to work on a stable and predictable annual calendar of economic events. Other departments, like the Foreign Office or Home Office, may just respond to one crisis after another but the Treasury has a regular timetable it can stick to – rather like the annual pattern of rural life in one of those beautiful illustrated medieval cycles of the seasons.

Key anchors for this are the twice yearly updates of the economic forecasts – in the Spring and the Autumn. Autumn makes more sense for public spending decisions, as spending departments need due notice of change in spending plans for the following year.

Tax is rather different and a Spring Budget can help limit forestalling before the new tax year. At the moment, the Treasury is trying to make the Autumn event its main budget announcement, with the Spring forecast much more modest. There has been strong briefing to lower expectations of any big policy announcements next week. But having emerged from one crisis – the pandemic – the Chancellor now finds himself straightaway in a new one driven now by the invasion of Ukraine. He needs to do something.

There is now intense pressure on living standards from the combination of energy prices, food prices and increases in tax. Our forecast at Resolution Foundation is for real household incomes to fall by four per cent this coming financial year – the sharpest squeeze since the 1970s.

We are about to have an unexpected and significant surge in inflation which will hit families hard unless we get help to them promptly. A key mechanism for doing this is through the uprating of benefits, from Universal Credit to the State Pension. The problem is that benefits are uprated every April, based on the previous September’s CPI inflation rate. But last September was a different era – we hadn’t even heard of Omicron back then.

This means that benefits will rise by 3.1 per cent even while inflation is forecast to rise to over 8 per cent. Over the year this amounts to a £10 real-terms cut in support for millions of low-and-middle income families, as well as pensioners.

One solution would be simply to bring forward next year’s likely uprating increase to this year. There would be a period when benefits are higher than they otherwise would be, but the aim would be to do an uprating of less than inflation next year so as to get back on track. The key advantages of bringing forward benefits uprating is that it is targeted and temporary. The same cannot be said for many of the alternatives being proposed.

There is also pressure from Conservative MPs to help families with tax cuts. One candidate is to postpone or abandon the National Insurance increase to fund the NHS and social care. This measure has turned out to be badly timed, but it is still right to recognise that if we are to spend more on health and social care we have to pay for it. If it were delayed it would come in closer to the next election.

Moreover, low-income families hit hardest by high food prices and energy bills would gain the least from cancelling or postponing this tax rise. And it is important that it does not look as if the Chancellor retreats in the face of political and media pressure. He is earning a reputation as a true fiscal Conservative. That reputation helps him maintain the confidence of markets. He should not endanger it by abandoning the national insurance increase.

Another candidate to deliver tax cuts is fuel duty. Robert Halfon is an indefatigable campaigner on this. It is emblematic of white van man. But how much the financial reality lives up to this is not clear – affluent people have bigger cars and drive further. But the Treasury knows that fuel duty is one of their revenue sources now in long term decline as electric vehicles replace the old gas guzzlers, so they may be more willing to give some of it up just to ease the political pressure.

Another option would be to cut the rate of VAT on energy. This could be branded as a measure made possible by Brexit as we now have more control over our own VAT rates. And it helps a wider range of people than car drivers with higher mileage. I believe it would be a stronger candidate than either reversing the national insurance increase or cutting fuel duty.

However if the Chancellor is spending money bringing forward next year’s benefits increase and cutting taxes he needs some way to help fund that. And there may be emergency increases in spending on military help for Ukraine and support for its refugees. Of course, in a crisis such as the one created by Russia’s invasion of Ukraine now, he could say that some of the spending is generated by war, and that can be financed by borrowing. We spend the money now to make life safer for future generations who may eventually pay – way out in the future. That was demonstrated in a 1958 TV interview exchange between the young Robin Day and the then Governor of the Bank of England, Lord Cobbold:

Day: Have we paid for World War Two?

Cobbold: No.

Day: Have we paid for World War One?

Cobbold: No.

Day: Have we paid for the battle of Waterloo?

Cobbold: I don’t think you can exactly say that.

But a Conservative Chancellor may wish to show that not all of any increases in spending will be financed by borrowing. Whilst many groups are suffering from high energy prices heavily driven now by the Ukraine crisis there is one group which is clearly benefitting – energy companies.

Their costs of production have not increased significantly but the price of oil and gas has so they are making exceptional profits. There is a case for a windfall tax on them. The political problem is that this is what Labour has proposed, but this policy option should not belong to Labour alone. Conservative Chancellors have levied windfall taxes on banks and on energy companies in the past. And the Chancellor could broaden the base further than Labour. There could be other tax measures too – a tax on the sale of ultra-high-value mansions for example?

So I hope we see help for those under pressure and perhaps other spending as well. And if it costs a lot it should be funded not simply by borrowing but also by a tax on the energy companies who are doing well out of the crisis. But we must promise not to call it a Budget.

John Redwood: My critique of the Chancellor’s Mais Lecture, and what the Government should do next

7 Mar

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

Amidst all the harrowing reports from Ukraine and the deaths and destruction wrought there by Russia, the Chancellor has sought to chart a course for the economy for the next couple of years.

In his Mais lecture he echoed his predecessor, Philip Hammond, in seeking a productivity breakthrough. He also reaffirmed the Maastricht rules approach to economic management, wanting tax rises to get the deficit down first. The Treasury should note that its role model the EU has abandoned these rules for the time being, and is pursuing monetary and fiscal expansion.

The lecture was wrong to deny that lower tax rates can bring in more revenues. The Republic of Ireland has been a shining example of this, boosting its per capita GDP far higher than ours or the lower level of the  EU by attracting huge investments through a 12.5 per cent Corporation Tax rate.

Their business taxes offer a higher percentage of total tax take than our higher rates. The Chancellor ignores the findings of Margaret Thatcher and Nigel Lawson who he praises. They produced a surge in revenues from higher paid people by major cuts in income tax rates.

The Government should take the cost of living crisis more seriously. In accordance with the Mais lecture, it needs to create the conditions for private sector investment in creating more better-paid jobs and in producing more of the goods and services we need at home.

Levelling up needs to be private sector led, and offer people the chance to set up and run their own businesses, be trained for better paid employment, and find ladders of opportunity in the areas attracting the projects and businesses.

The Government should not take the fast growth rate of 2021 for granted. It was a one-off based on removing Covid restrictions and on an unprecedented injection of money by the Treasury and the Bank of England. In the end, they overdid it in scale and duration, triggering a nasty inflation. The new investment has to take place against a less supportive public sector background.

The rise of prices well above wages will cut growth, as people spend more of their money on such basics as food and energy. That will leave them with less to spend on leisure and pleasure – on items that are nice to have. The huge rise in energy bills alongside tax rises including National Insurance will sap spending power further. The economy will slow. The lecture did not tell us how the extra private sector investment will be attracted in these conditions, particularly with the planned rises in Corporation Tax to come.

These troubles will be compounded by the Government’s import promotion policies, which are most pronounced in the Business and Agriculture departments. Business is busy allowing the rundown of big energy using manufacture like steel, ceramics, aluminium, and glass in the name of Net Zero.

The trouble is that we then import the products from abroad, meaning that more C02 is created in their production and transport to us. The Business Department is busy reducing our oil and gas output so that we need to import more energy. Again, this adds to our CO2 production worldwide.The Environment Department is developing big subsidy incentives to remove land from food production and to encourage older farmers to give up. That will make us more dependent on imported food.

So why does the Government not like products made or grown at home? Why doesn’t it want more home output to boost jobs, incomes and lifestyles? Any sensible programme of levelling up should be cutting taxes and making it easier for local businesses and farms to set up and grow.

This year, revenues have come in much higher than the Budget forecast, thanks to higher growth – and way higher than the £12 billion that the Government says it needs for a tax rise. The Treasury did not put up rates of tax, so revenue grew. During the next financial year, higher tax rates and frozen starting levels will hit taxpayers hard. Revenue is likely to underperform as growth stutters.

An energy shortage is a big part of the problem. The government should ease the shortages of gas, oil and electricity. They should invite in the oil and gas producers in the U.K. and help them increase production straight away from current fields. They should offer licences for new production from all those new and extended fields that have already been discovered. That’s more jobs, better paid jobs, and plenty of extra tax revenue. It is also less CO2 generated globally, as our own gas produces under half the CO2 of imported LNG gas. We will have much more productive industry if we have cheap or competitive energy.

The Government should work with the electricity industry to keep the lights on. We  will need more capacity than is planned to cover the electric revolution. We need more power for when the wind does not blow and the sun does not shine. We should abandon the current policy of putting in more and more interconnectors to allow us to import more from an energy short continent.  They should produce schemes to promote more home-grown food.

Kathleen Henehan: If fewer workers migrate to Britain, our own will need greater mobility

18 Feb

Kathleen Henehan is Senior Research and Policy Analyst at the Resolution Foundation. She is the author of Under New Management: How immigration policy change will, and won’t, affect the UK’s path to becoming a high-wage, high-productivity economy.

One of the main benefits often cited of leaving the European Union was that the UK regained control of its borders, with the Prime Minister arguing that bringing in a more controlled migration regime would be key to enabling the UK to become a high wage economy. Others fear that the shift to a new, more restrictive, migration regime could render the UK economy less innovative and productive in the longer term, alongside damaging the public finances.

Both sides are right to recognise that migration has an important role to play in the economy. Before the pandemic, migrants comprised nearly one-in-five people in the labour force; and they contributed to more than three-quarters of all labour force growth between 1995 and 2019.

And both sides are also right to want a high wage economy. To get there, however, we need an economic strategy: how much will a new migration regime give us that strategy? That depends on how much the new regime affects the number, and type, of migrants coming to the UK.

Most EU citizens wanting to come to the UK for work will now, like their non-EU counterparts, require a skilled worker visa (SWV), limited to mainly mid- and higher-skilled roles, with wage criteria that varies by occupation but at a minimum of £25,600 (unless specific conditions apply). So we’d expect the number of EU citizens moving to the UK to fall.

For non-EU citizens however, the new work visa is more liberal than the last. And with new visa routes, including those for some Hong Kong residents, being introduced, it’s likely their numbers will rise. On balance, we’d expect to see immigration levels be lower, and the educational composition of migrants be higher, than they were before the EU referendum.

And this has acute short-term implications for some firms and sectors, especially those with high staff turnover and reliant on lower-paid EU migrants, such as food manufacturing, driving and hospitality. These pressures are already becoming apparent, with sectors such as food and accommodation (who rely on EU-workers in SWV-ineligible roles for 10 per cent of their workforce) having seen vacancies double as the economy reopened post-pandemic.

Over the longer-term, the impact of migration policy changes on the UK economy is more nuanced, and uncertain. In the past, the UK’s ability to freely hire migrants from the EU has enabled the workforce to respond quickly to meet shifting economic needs. EU migrants are more likely than UK-born workers to move across the country, sectors and occupations, and this is especially true for those working in SWV-ineligible roles. With fewer mobile workers, the economy will be somewhat slower to adjust to change.

Building up the UK’s economic resilience under the new regime – which will be necessary to successfully respond to the wider challenges posed by Brexit, the Covid recovery and the UK’s transition to net zero – will therefore require sustained improvements in UK workers’ job mobility.

And despite claims from both sides of the debate that the new regime will either improve or exacerbate the UK’s lower-wage, low productivity growth challenges, it’s unlikely to have a big impact in either direction.

For example, critics of the new regime suggest that reducing immigration will have a large negative impact for the public finances, as there will be fewer migrants to contribute to the state via taxation. Getting a clear handle on what would happen is difficult, because it depends how policy changes really do affect the number, and composition of migrants moving to the UK.

Evidence from Office for Budget Responsibility found that the new migration regime could result in £2 billion savings to the public finances by 2024-25 – a positive amount, but one that’s small in comparison to big ticket public expenditure. (For example, it’s equivalent to the Government’s planned spend on its Cycling and Walking Strategy.)

And although past evidence has shown that migrant workers can boost individual firms’ productivity, there is no strong evidence across advanced economies that having an increased share of migrants in your workforce leads to overall productivity growth. Furthermore, there is little research to suggest that shifting to a system with lower levels of migration, but more highly qualified migrants, will turn the dial on productivity – either for the better or worse.

It’s also unlikely that the new migration regime will drive up wages in the longer-term. Having more highly-qualified, higher-paid migrant workers in the economy would drive up wages on average – but not necessarily for individuals.

Moreover, the pay rises recently seen off the back of labour shortages in migrant-reliant sectors aren’t certain to last over the longer term. Labour shortages in these sectors will indeed put pressure on firms to increase pay. But the evidence suggests that where firms can replace labour with technology they will do so – pushing up productivity and raising pay for the few remaining workers, but with the number of workers in those sectors falling by design.

And where automation isn’t possible, for example in some agricultural picking, firms can raise wages to attract labour, but ultimately prices will have to rise pushing down the real value of wages for everyone else. In the end, people will buy less of the product on offer – meaning production, and thereby employment will fall.

Stepping back, if policy makers want to to get to a high-wage, high-productivity economy, they will need to take tough decisions on industrial policy, understanding which sectors can drive economic growth and get them to where they want to go. They’ll also need to have a clear trade strategy, knowing which goods are better produced at home and imported from abroad.

And of course, they’ll need to think hard about underpinning domestic policy: how to build the country’s human capital, boost innovation and encourage job mobility.

Migration policy can complement an economic strategy, but it can’t stand in for one.

David Gauke: To cut taxes and raise spending would be unsustainable – and so fail to salvage the cost of living

14 Feb

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

Last week, inflation in the US hit 7.5 per cent, the highest for nearly 40 years. In the UK, inflation is expected to hit seven per cent in the spring, the highest level since 1991.

There are clearly some temporary factors in play as the world economy returns to a new normality after two years of a pandemic causing major disruption. The transition will inevitably be bumpy and, the optimists argue, as long as we do not allow ourselves to assume that inflation is here to stay (which could result in a wage price spiral), high inflation should be a relatively short term phenomenon, as the spike in energy costs pass through the system.

The more pessimistic view is that there is a more fundamental over-heating of the economy. We have had years of quantitative easing and low interest rates, unemployment is remarkably low and labour shortages (caused predominantly by older workers retiring earlier) are likely to persist, and energy prices look set to remain high. We cannot assume, say the pessimists, that the current inflation is largely transitory. This latter view is gaining ground, including in the Monetary Policy Committee which has voted for two increases in interest rates in recent weeks, with a minority of members wanting to go further.

Whichever view is correct, inflation and its consequences will be the big domestic issue affecting people’s lives in the next few months. Most obviously, we will see a squeeze in living standards that is going to be very painful for many households.

The Bank of England is forecasting the weakest growth in real post-tax labour incomes in more than 70 years. This will have negative political implications for the Governmen,t with the local elections in May likely to be very difficult for the Conservatives, whoever is their leader at that point.

All of this will increase pressure on the Government to assist households facing higher costs. We have already seen an announcement of a loan scheme for energy costs, but there will be plenty of calls for more action, whether that is dropping or postponing the national insurance increases, cutting VAT on domestic fuel or increasing Universal Credit.

The Treasury will rightly worry about affordability and credibility. On affordability, the public finances are performing better than was predicted by the Office for Budget Responsibility at the time of last year’s October Budget, but the Chancellor will not want to get into the habit of spending all the proceeds of an improved forecast as a matter of course. Scrapping the National Insurance increase would also raise questions of credibility and suggest to the markets that the Government – with an 80 seat majority – is too weak to put up taxes. That is not a good signal to send.

A further problem is that if fiscal policy is being used to soften the consequences of inflation by putting more money into people’s pockets, the Bank of England might be compelled to move further and faster on interest rates. Mortgage holders may find that tax cuts are accompanied by interest rate rises.

The issue of pay rises is already proving to be contentious. The Governor of the Bank of England, Andrew Bailey, attracted criticism for his remarks that workers should not chase pay increases that match inflation.

These words – although well-intentioned – were unfortunate. Putting aside the inevitable criticism that he is in a position than most to afford a pay freeze, it could be interpreted that he was advocating a return to an incomes policy where the man in Whitehall (or, in this case, Threadneedle Street) told everyone else how much they should be paid. Private sector pay should be a matter for the market which can reflect changes in the labour supply and consumer choices.

Bailey was not really advocating a return to incomes policies, even though it sounded a little like that. His point was that large pay rises will make the process of getting inflation under control all the more painful with interest rates potentially having to go higher than would otherwise be the case and workers finding themselves priced out of a job. The higher cost of global commodities is going to have to be absorbed somewhere, and ultimately this will result in a fall in people’s real term income.

Pay rises in the public sector will be a contentious issue. Again, the issue is not really about controlling inflation (at least, only indirectly), but about the public finances. Big increases in public sector pay will place further pressure on spending and, understandably, the Chief Secretary to the Treasury, Simon Clarke, is calling for restraint. Controlling public spending, ensuring that public sector pay is sufficient to recruit, retain and motivate the workforce and avoiding a summer of disputes with the public sector unions will be no easy task.

There are measures that the Government can take to protect people from the squeeze in living standards, but the fundamental problem is that costs are going up faster than we are getting more productive. We can smooth the pain of a short term spike in energy costs – if that is what it is – but in the end these costs will have to be paid by real people, whether taxpayers or consumers.

If this all sounds somewhat fatalistic about the short term, that is true. Ultimately, our standard of living will be affected by factors such as global commodity prices as well as our own productivity. For multiple and complex reasons, many negative factors are coming to a head this spring.

The immediate focus of the debate will be distributional – who we should protect and how we should do it. Such a debate is understandable, and there is a very strong case for protecting the most vulnerable who will struggle to pay their bills.

But if the response to the cost of living pressures is cut taxes or spend more to protect the bulk of the population, we just end up borrowing more and passing on costs to future generations. Such an approach is unsustainable.

The reality is that our national living standards depend upon our success in delivering a highly productive, strong economy. Even in those circumstances, we will always be vulnerable to being buffeted by high commodity prices, but we are more exposed because of a relatively weak currency and low productivity growth.

The predictions made by the Prime Minister as recently as last autumn that we are about to enter a period of high wage growth now ring hollow as, in real terms, wages are falling. There is a risk that both the Government and Opposition focus their energies on short term solutions – often involving borrowing more money – without addressing the fundamentals.

Our living standards reflect the strength of the economy. It has faced a number of difficulties in recent years – some unavoidable, some self-inflicted – and this will have consequences. The challenge for policy-makers, about which we hear too little, is how we deliver that strong economy for the future.

Tony Danker: Now is the moment for the Government to go for growth

3 Feb

Tony Danker is Director-General of the Confederation of British Industry

For business leaders, the past few weeks have felt like peak politics. But this week has marked a shift back to economics. And it is most welcome.

Yesterday saw the publication of the long-awaited Levelling Up White Paper, with its transformational aspirations. Today there are energy price announcements and an interest rate decision. Economics is coming to the fore once more.

For me, the biggest takeaway from yesterday’s PMQs is that the debate about long term growth has now reached primetime. Here at the CBI, we’ve been banging this drum for a while now. We partnered with the Campaign for Economic Growth at Conservative Party conference back in the Autumn because we wanted the government to focus more on business investment to drive the economy. And today I was joined by the brilliant Robert Colvile from the Centre for Policy Studies at a joint CBI-CPS event to answer the question: are we actually serious about growth?

The UK currently has the fastest growing economy in the G7, but it doesn’t tell the whole story. V-shaped recoveries around black swan events are no time for credit or blame. The downward nosedive is not an accurate judgement of economic performance; and nor is the climb.

The truth of the matter, as set out in black and white by the OBR, is that we’re looking at post-recovery growth of just 1.3-1.7 per cent. For a country that has demonstrated it can do growth at around 2.5 per cent, this is not ambitious enough.

And let’s be honest, without higher, sustainable growth the ambitious, levelling-up goals set out yesterday, from improvements to public services and much more besides, will be all the harder to achieve unless we can get growth going again.

Let’s look a little closer at the bind we’re in – and importantly – how we can escape being caught in a trap.

Lumping more onto the UK’s tax burden – already at the highest sustained level seen in peacetime – cannot be the answer. The evidence is clear that raising taxes stifles growth, and cutting them drives it.

We’re not talking growth at any cost and by any means. And we’ve not lost sight of the need for fiscal responsibility. We’re talking sustainable, long-term growth stemming from greater investment, innovation and productivity.

Just as companies can’t afford not to invest in growth, nor can countries. It’s not just about money – it’s about ambition and imagination too.

And there’s never been a better time to go for growth, because right now we’re at a unique moment: when once-in-a-lifetime events have coalesced to create a burning platform for change.

One of those is Brexit. I am a big believer in the opportunity of post-Brexit Britain. I think it gives us the platform we need to push the UK’s huge economic potential and the freedom to make big bets. It can awake us from the flatlining productivity that took hold after the financial crisis.

Another is the pandemic, which has driven huge acceleration in tech and digital adoption.

And finally, we have the opportunity that flows from our world-leading position on decarbonisation. There is a wall of investment to fund decarbonisation – backed by firms with over $130 trillion in assets. British businesses are begging Conservative politicians to see the enormous economic prizes available go to those who move fast.

All this means this is our moment.

So how do we seize it? By harnessing the creativity and initiative which birthed the Super Deduction, new skills bootcamps and offshore wind investment – measures which spurned orthodoxy in public policy and showcased the boldness and vision we need.

The first step should be a permanent Investment Deduction, succeeding the Super Deduction and mitigating the looming Corporation Tax rise. It would act as a long-term incentive to invest and grow enterprise, with businesses acting across many fronts in service of the nation.

Achieving the Prime Minister’s vision of the UK as a science superpower requires nurturing a workforce fit for the future. So, how about building on the Apprenticeship Levy with a new Skills Challenge Fund to invest in the high-value skills businesses really need.

We also need to get serious now about generating more of the skills we need at home – so we’re less reliant on immigration. Nadhim Zahawi is onto something with his new Unit for Future Skills, examining where skills gaps exist. Let’s supercharge that and build an independent Council for Future Skills. It could optimise training towards future economic demand and recommend visas to overcome shortages in home-grown talent, setting the Shortage Occupation List.

On energy, ending uncertainty on hydrogen and schemes like carbon capture and storage will enable the UK to lead in global green markets.

Meanwhile, let’s build on Monday’s Benefits of Brexit paper by establishing a new Office for Future Regulation to allow a post-Brexit UK to become the smartest and most future-focused regulator in the world, with a clear remit to target competitiveness, investment and innovation.

The focus of this new body should be the big bets for our economy. Set free to be agile, now we are no longer bound by EU-wide consultation and compromise. Proportionate, so that it strikes a better balance between investment and consumer protection. And more dynamic, allowing regulators to act quickly and decisively, as we saw with the vaccine, when the MHRA saw the UK lead worldwide.

This is not all on Government. Business has a key role, and the CBI will be promoting serious growth to firms across the country. We will ask them to increase business investment. In net zero. In innovation and digital transformation. In exports. In skills. In workforce health and wellbeing. And we will gather them in clusters around the country to deliver levelling up the only way it can be done – by the private sector through better skills, jobs and wages.

Business leaders – of all sizes and sectors – will respond because they are serious about growth.

So let’s get serious, together. Let’s unite, creating sustainable growth – the only real answer to our cost-of-living crisis, rising energy prices and high inflation. Growth that propels the UK beyond recovery to a new era of prosperity.

After a disappointing decade for UK investment and productivity, this is our second chance. Let history show that, this time, we seized the moment.

 

Jonathan Werran: Levelling up. Is Gove poised to mimic his academies programme – and bypass local authorities?

2 Dec

Jonathan Werran is Chief Executive of Localis.

In the well-reviewed recent popular anthropology book The Dawn of Everything, the authors, David Graeber and David Wengrow, posit that the “ultimate question of human history is not our equal access to material resources… but our equal capacity to contribute to decisions about how to live together”.

This, they suggest, implies there should be something meaningful to decide about in the first place.

And so it is with what awaits us in the Levelling Up White Paper. Neil O’Brien has offered a helpful and concise definition of what the agenda means in four easy pieces, to wit:

  • Empowering local leaders & communities;
  • Growing the private sector & boosting living standards, particularly where they’re lower;
  • Spreading opportunity & improving public services, particularly where they’re lacking; restoring local pride.

In looking at these, and the follow-on consequences of how the White Paper might treat them, we will consider the Department for Levelling Up, Housing and Communities (DHLUC) to be more on the Hobbesian ‘nasty, solitary, brutish and short’ side of the debate of social origins than Rousseauan champions of the uncorrupted noble savage.

When it comes to the empowerment of our local leaders and communities, the reset of relations between central and local for more constructive ends would be as necessary as desirable.

Localis called for it in our report Hitting Rest – a case for local leadership and, in his final days as Communities Secretary, the late James Brokenshire put out a call for a Green Paper on the subject.

As to the actual transfer of powers and responsibilities and the deal-making process with Whitehall, the eyes of many ConservativeHome readers will be what this means for non-metropolitan England – and where the meat is in the county deals.

There’s incredible relish for this from among our friends in the counties. There is more obvious concern from the districts as to what role, if any, they would enjoy – even in areas with strong records of joint-working.

And this is before anyone reaches for the pearl-handed revolver to bang on about local government reorganisation. We will leave the party to consider what this might mean for political calculus and campaigning foot soldiers.

To our mind, the efficacy of driving recovery through changes of machinery to the local state remains unproven. In any case, national recovery that is sustainable and more evenly shared will only succeed through a grounded approach focused on place – melding the horizontal elements of place with the sector based vertical deals from the ancien regime’s industrial strategy.

Talking of which, the role of Local Enterprise Partnerships, the Coalition offspring of those unlikely parents Vince Cable and Eric Pickles, is also under threat from the move to a stated wish for closer democratic accountability in growth. On the White Paper wish list is the hope for clarification, if not codification, of the role of local authorities in driving growth, and something that marks out a clear role for the local state in driving towards the skills for Net Zero.

From the macro to the micro – and perhaps more comfortable territory of communities as Burkean ‘little platoons’. What will the White Paper have to offer in terms of pushing out the social infrastructure that needs to be laid in parallel tracks alongside the billion-pound big ticket infrastructure items?

Communities need both powers and resources to step up with a stand-alone spirit if they are to create public value. We need to allow communities to self-organise, take back control locally of assets, and deliver unique local services where they have desire and capability.

And will this be in a way that principal councils are able to facilitate and support? Or, like Gove’s academisation programme, is this a way for the centre to bypass local government as a mediator? And would this lead to the setting up of more social and children’s care trusts, in addition to the nice fun things such as community pubs, green spaces and the like?

Growing the private sector and boosting wages, skills and living standards will contain, we hope, the best fruits of the concerted thinking that has gone into the White Paper. Devolution and growth must be seen as so intrinsically linked as for one to be as impossible to conceive of as existing without the presence of the other – like ‘mom and apple pie’ or ‘bread and butter’.

As noted earlier in the reference to LEPs, the constant dodgy supermarket trolley swerving of the last decade’s national economic policy alone has made consistent long-term planning problematic.

Finding levelling up levers to encourage an area’s major local employers – local economic anchors – to invest and serve in the communities they are based in as a virtuous cycle of prosperous communities and productive places would be most beneficial.

Beyond business investment, there are of course the various ‘tournament financing’ routes where councils bid to receive – the Levelling Up Fund, Towns Fund, and the UK Shared Prosperity Fund. This may be of benefit to the more superficial but sensitive quality of life and hyperlocal public realm issues, such as town centre renewal, that more readily shape public perceptions in the run up to the next general election.

For the bigger and longer-term view, it would be good if the Levelling Up agenda has any answer to the need to get heavy sums of capital money for subregional infrastructure projects shovelled more quickly to where they can create the most impact more quickly.

In his interview on this site earlier this week, George Osborne called for a doubling of local taxation. This is in stark contrast to Lord Hague’s declaration, when a devolution trouble-shooter in 2015, that from a Conservative viewpoint “localism is not a new way of imposing new taxes”.

The recent Spending Review did not inspire much in way of hope for the fiscal devolution that would inspire and support self-sufficient, locally-led economic renewal. The constrictions on council tax are set and business rates remain a disastrous and anachronistic revenue raiser.

It doesn’t have to be this way, as Localis unearthed for the Local Government Association in our analysis of growth-driven fiscal devolution in Germany, the Netherlands and Switzerland and as previously argued here.

But with this financial background, in which our councils are resigned to deliver less for more, the headroom for innovative local public service delivery seems limited to the hyperlocal community sector. And this is without knowing whether the White Paper will come with any dedicated funds, or whether the October public finance settlement has covered it.

Many Conservative MPs, ‘Red Wall’ and beyond, will become if they are not already are acutely alert to the fact that they risk paying the political price for an unreformed, silo-fixated Whitehall’s disjointed and agonisingly slow local delivery at local level.

The test for Levelling Up White Paper will be its ability to work through connective administrative tissue of the “people’s priorities” – clean growth, whatever new badge is thrown over industrial strategy, as well as local skills training. If it achieves what it sets out to do, a joined-up and fleshed-out levelling up could achieve a virtuous circle of devolution, leading to growth and recovery that inspires further trust and pride in place and place leadership. Better answers to the question about how we as a nation contribute to the decisions on how we live together.

Otherwise, as a certain former Number 10 Policy Director ranted on SubStack, Levelling Up risks a fate as “a vapid SW1 slogan like ‘Global Britain’, that objectively does not work & shows the opposite of ‘strategy’”.