July 2015 Budget: Osborne announces a 1 million increase in unemployment.

Well, he did not put it quite like that of course. What he did say was that the Office for Budget Responsibility (OBR) has forecast the creation of 1 million new jobs over the next five years. What neither he nor the OBR added however is that, on the basis of current trends, we will by then have 2 million more new immigrants. Simply deducting one figure from the other shows how net unemployment will increase. And it won’t be the immigrants who are unemployed, though many will be working for scant wages as part of some board and lodging scam, thereby adding to wage compression for the rest of us. The young, the old and the disabled are all set to find jobs more difficult to find.

He also tells us that unemployment is down to 5.5%, but omits to include the thousands of people now classified as self-employed but who are not earning a penny, the thousands more sanctioned off benefits, and the many thousands in part time jobs who want full-time employment. It’s pure window-dressing. The real danger is that he believes his own propaganda, which in turn will lead to further mismanagement of the economy.

Because the other big mistake he makes is to treat welfare expenditure as fixed. It’s not. It’s cyclical. It goes up and down with unemployment. He tells us that “Britain is home to 1% of the world’s population; generates 4% of the world’s income; and yet pays out 7% of the world’s welfare spending”. Frankly that is precisely what I would expect in the middle of a recession.

In fact these figures simply don’t add up. If unemployment is really down to 5.5% then that is more than half-way through the cycle. Unemployment peaked at around 9%, and the lowest it has been historically was 3%, so that sets the middle at 6%; the point at which the cyclical deficit/surplus is nil and any remaining deficit is purely structural.

Historically the factor linking cyclical deficit to unemployment is around £25bn per percent of unemployment. I suspect this is now lower due to changes in the structure of income tax and benefits, so let’s take the factor as £20bn. 5.5% unemployment therefore means we now have a cyclical surplus of £10bn and a structural deficit of £85bn. That means £85bn of more austerity, yet he has announced only £37bn over the next five years and still predicts a balanced budget at the end of it. As I say, these figures simply don’t add up. What about the remaining £38bn?

Of course my strong suspicion as noted above is that the unemployment figures are wrong. Let’s work it out the other way round. The £38bn must be cyclical deficit, which means unemployment must be just short of 8%. That sounds much more likely in the light of high levels of under-employment, both of employed and self-employed people, and of immigration. But of course it also means that unemployment has only fallen by one percent over the past five years, which is a terrible performance. No wonder he wants to cook the books!

And then there is the news that average weekly earnings are rising by 3.3% per annum. What we are not told is how the rich are once again surging ahead at the expense of the poor.

I shall write separately on welfare reform shortly, and in particular on the problems of breeding for benefits and in making work pay, but addressing the former is undoubtedly the main thing he has got right. With Tax Credits now costing some £30bn a year, and families on benefits breeding at roughly double the rate of families not on benefits, it was a matter of urgency to remove this perverse incentive. The benefits cap was a crude first attempt at it, but reducing entitlement to child benefits for new claimants is a more structural and focused approach. I still have problems both with the caps (which in my opinion should not impinge on market social rents or housing benefit) and in their impact on larger families who expanded before they started claiming, but the top priority here was to remove the perverse incentive to breed for benefits. Refinements can come later.

So in summary let’s make some lists:

1) What he got right:-

a) Cutting tax credits, but only for new-born children.

b) Reducing the benefits cap; but see reservations above and below,

c) Introducing the Apprenticeship Levy,

d) Stabilising business first-year capital allowances,

e) Phasing out the bank levy: bashing the banks in the middle of a recession has only made it worse!

f) Earn or learn,

g) Transferring university maintenance grants to the loans system,

h) Increasing the Minimum Wage – but he has not left business with enough to pay for it,

i) Increase in Employers’ NI allowance – will go some way towards it, but not enough,

j) Reductions in Inheritance Tax,

k) Scrapping permanent non-dom status,

l) Various measures against tax evasion

m) Aligning the ESA WRAG allowance with JSA

n) Committing to spending 2% of GDP on defence,

o) Funding for the Defence Medical Welfare Service and the Royal Commonwealth Ex-Services League.

2) What he got wrong:-

a) Balance: the overall impact will be a reduction in consumer demand just when we need to keep unemployment falling. He cannot continue to rely solely on monetary policy to stimulate the economy (the Bank of England is already warning of the consequent financial instability) or house prices will distort still further and be subject to a major downwards correction when eventually we do build sufficient new houses and limit immigration. His cuts to tax credits should have been matched by tax cuts elsewhere (see note on regional policy below) which, because they would reduce unemployment still further, would be self-financing and thus still enable him to meet his deficit targets.

b) Reducing the benefit clawback earnings disregards: this makes it even less likely that work will pay

c) Reducing social rents and limiting housing benefit and LHA in various ways: this will undermine the supply of social housing just when we need much more, and squeeze lower paid workers out of more prosperous areas where their work is most needed. The idea he expressed that higher rents are fuelled by housing benefit is just plain false; the market rent is determined ultimately by supply and demand. Housing benefit is certainly a component of that demand, but unless you are just going to make people homeless it is an unavoidable one. I must say I was distinctly reminded of Ed Miliband and energy prices when I heard this! All tenants should pay rents at the market rate (the Rent Officer used to set the HB limits at around one third of the way up the rental range in each area – I don’t know if that is still the case but it makes sense to me) and the clawback tapers then ensure richer tenants pay what they can afford to pay. No need for complications such as his ‘pay to stay’ idea.

d) Dividends: there was no need to muck about and make the taxation of these even more complicated. Dividends should simply be taxed at the shareholder’s marginal rate with no extra personal allowance, and a withholding tax credit of 25%. With corporation tax now below 20% the double taxation argument has less force. In any case it should be addressed by reducing business taxation, not shareholder taxation, since businesses themselves do not have votes. Business taxation is taxation without representation and undermines incentives to invest and improve productivity.

e) Limiting public sector pay to 1%: pay should be determined by local staff turnover rates otherwise we could end up with severe staff shortages. Likewise there will be some areas where even 1% isn’t justified as staff turnover continues to be low.

f) Building more roads to improve (allegedly) productivity. This will damage the environment and increase taxes. The correct answer is to reduce demand by limiting immigration.

g) Introducing Help-to-Buy ISAs and removing higher rate interest allowability for Buy-to-Let landlords. These will only push up house prices still further. He should give the Bank of England the power to restrict mortgage availability on a local basis to keep house price inflation under control, to assuage the Bank’s fears for financial stability, and as an additional dimension to regional policy.

h) Withdrawal of tax relief on pension contributions and the additional cost of government contributions into pension ISAs. He’s got it the wrong way round. Your pension is taxed when you receive it, so if you have to pay into it out of taxed income that amounts to double taxation. It also reduces the base level of investment upon which the fund can grow. I look forward to contributing to his Green Paper on this, and also as the Coalition made a right pig’s ear of reforming public sector pensions as well (see future post).

i) Abolition of entitlement to housing benefit for 18 to 21 year olds. Many youngsters are desperate to escape dysfunctional or violent family homes before they can concentrate sensibly on their futures.

3) What he should have done but didn’t:-

a) Start to hedge the National Debt (see my Election Address (para 5) and post on Pensions).

b) Introduce post-code regional policy and reform of the Barnett Formula (ditto). This is by far the most efficient way of reducing unemployment, and with it the deficit, as it concentrates stimulation where unemployment is highest and therefore most responsive. It will also I believe prove far more effective in regionally balancing the economy than any of the supply-side measures he did announce. I have elsewhere proposed a supplementary personal allowance of £500 per 1% of local unemployment above a threshold of say 5%, though of course both factors can be adjusted to taste as you go along. The policy presupposes availability of some honest un- and under- employment figures, though estimates would be better than nothing.

c) Cut business rates – see comments above about business taxes and funding the minimum wage, as well as funding the higher levels of training and supervision required by many youngsters entering work. Otherwise employers will simply go on recruiting immigrants instead (in fact they will anyway until immigration is restricted).

d) Introduce the National Credit Card for private sector public services (post 25th February 2015),

e) Relate the Universal Credit single adult living allowance, earnings disregards and clawback rates to the tax personal allowance in terms of fixed percentages, so as to produce a smooth transition from benefits to tax, at least for single adults, and to keep the living allowance at realistic levels, funded by a complete phasing out of the tax credits system. I also cannot see any reason why we have different clawback taper rates for different benefits. Make them all 50%.

f) Fund the building of social housing required through 30-year borrowing. The mortgage repayments will fund the bond redemptions and interest payments, so it won’t add to the unfunded national debt. It’s what I call ‘clean debt’, ie debt which ‘washes its own face’; though there may be some upwards impact on housing benefit until house prices and unemployment fall.

g) Introduce in law, both for the public sector and for publicly quoted companies, the Cheapest Competent Candidate procedure for executive recruitment and promotions (see future post shortly). This will create a much more open competitive market for executive talent, and probably much lower remuneration, thereby reducing the income range as well as costs.

h) Build more medical schools and nursing colleges to eliminate the NHS’s dependence on immigrants.


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