A title given to this piece tongue in cheek but only slightly. The greatest surprise of our most recent budget (a budget which managed the signal attainment of making an already byzantine tax system even more complex) was the announcement of the Conservative party’s conversion to the Living Wage and ambition that in five short years not £6.50 but £9.00 would be the legal basis for earnings in the UK (outside London). The chatterati were delighted (money of course being a ‘free’ commodity), the business community muted – presumably too stunned to comment.
Not one newspaper or commentator seems to have set out to look at or discuss the implications of this extraordinary announcement. Paul Johnson of the IFS has pertinently savaged the nature of the UK budgetary process which leaps from one series of ill considered changes to another, lays out no direction of travel, layers complexity upon complexity for cheap political effect and seems to have not the slightest regard for the coherence or economic effects of the manifold loopholes it creates. A fine previous example of utter stupidity is Entrepreneurs Relief (I speak as an entrepreneur who has benefited from it!). By reducing the Capital Gains on disposal of a small business to 10% this was meant to encourage entrepreneurship. The only tiny flaw in the argument was that one benefits not on setting up the business but on disposal. It is thus not simply a completely unnecessary but very welcome tax windfall to those who would be selling their business anyway but also a huge incentive to set up complicated ownership structures to exploit the loophole. Unsurprisingly an estimated cost of £800 million to the Exchequer is now £2 billion and rising rapidly. In the best traditions our Chancellor did not abolish the relief but merely hedged it round with another set of regulatory hedges.
Yet here we have an announcement of massive consequences for competitiveness and employment in British business dropped in for effect at the end of a budget. And the astonishing site of the Tory benches rising to cheer it to the echo!
So let us consider what this announcement might mean.
I will of course enter an honest disclaimer. I have as a businessman not the slightest problem and indeed think it is utterly desirable that the poorest in our society should earn more. I regard the wealth garnered at the very top end of our country as utterly obscene. I am entirely with those who think that quite a number of those who systemically defrauded our financial systems (with the government turning a blind eye) should be doing serious time. There is ample evidence of the beneficial effects of raising the incomes of those at the bottom of the rung. But while the principle may be sound the method of arriving at it is economically illiterate and hugely damaging.
My figures come from extrapolations from an Institute of Fiscal Studies short paper on the effect of the Living Wage. I apologise in advance that the income figures in the paper are from 2007/8. Since when of course there has been a considerable rise in the income tax threshold (but equally a rise in salaries – unadjusted for inflation). Clearly any new analysis needs new figures for salaries, size of labour force etc so the figures that damn Comrade Osborne come with considerable caveats and must be considered as illustrative.
Firstly let us look at an unconsidered consequence of moving everyone (as the Living Wage requires) onto 60% of median earnings. This is of course that median earnings itself rises, introducing a further infkationary turn into the system. Total estimates of those affected range from some 6 million to 7.3 million ie between 20% and 25% of the UK Labour force will now be on a government imposed wage rate. But that is just the start of it. Not a single institute appears to consider the effect of maintaining differentials in this new salary structure. After all if those at the bottom are having their salary increased by 40% in 5 years then all those above them will need to have compensating awards to maintain a hierarchy in a company. Every one of these awards and changes feeds back of course into an ever rising median earnings figure necessitating an ever increasing merry go round of compensatory rises to strive towards it. We are into the era of the good Socialist who thought everyone should be paid above average. Except this is a Conservative Chancellor. So now this good Conservative has managed to set pay rates either directly or indirectly for probably at least some 50% – 60% of the UK labour force by legislative diktat and not market forces let us consider the cash implications of his announcement.
Based on the IFS statistics the extra labour costs the private sector will have to meet will be of the order of some £25 billion by 2020. That of course is only the base costs and does not include the further massive on costs of holding salary differentials. On top of that there will be some extra £3 billion of Employers National Insurance. The salary push in the public sector will add some £6.5 billion – £7 billion to public expenditure. It doesn’t however stop there. Large sections of state function have been sub contracted. The care industry is one notable example. These are highly labour intensive and relatively low wage areas of work. The consequence therefore of the policy will be a very substantial price inflation to the state sector for subcontracted core provision. All of this poured into an economy already criticised for poor competitiveness and low productivity. It is of course true too that low wage work tends to be concentrated in particular sectors – retail and distributive being obvious ones. Since there is little scope in already hollowed out supply chains for further efficiencies the consequence has to be the possibility of intense price inflation in precisely the sectors of the economy on which we all depend to survive and in which the very poorest whom this policy is designed to benefit spend most of their income. For a devastated retail sector struggling to address online competition and business rates still maintained at the giddy levels of 2008 the consequences can but be brutal.
Let us return to my opening figure – a direct cost to business of £28 billion plus a further huge and unquantifiable sum on top to hold differentials. This represents I think the biggest single new impost ever levied in the UK since the war as a result of one announcement. It is an impost directly levied on the wealth creating sector of the economy. Changes in corporaton tax, tinkering with NI allowances are as nothing compared to the sheer and devastating scale of what is proposed. The collateral damage is currently set at some 60000 jobs (and how little comment is made about this jobs toll as a result of this change).
It is to me utterly dishonest to pretend that this policy is about helping the poorest in society when the effect of National Insurance is to impose on employee and employer a marginal tax rate of 25% or so below the income tax threshold and 45% above it. In other words the greatest beneficiary of this scheme iappears to be George Osborne and the UK Treasury! This is fiscal larceny at which even Henry V11 with Morton’s Fork would balk.
George and I share a great deal in common. Anglicanism, a Demyship to Magdalen College Oxford and a 2.1 in Modern History. But there to my relief the comparison ends. He moved into the Conservative research department and a career entirely spent in politics and the distribution of pork. I moved into the world of publishing and the considerably more useful task of the breeding of the pigs whose pork he so gleefully distributes. While my own understanding of economics and the world of business have benefited very considerably from over twenty years in it, it is questionable whether a similar length of time in the Conservative party has done the same for George.
But George has achieved something quite unique. By attempting to force the private sector to pay for the social benefits the state through its slashing of the tax credit system will not he has managed to privatise socialism. He is attempting to force onto the private sector the responsibility he has abnegated himself. We have a Chancellor who sets by administrative fiat the wage rates of much of the workforce. We have a Chancellor legislating the free market into a mockery and outbidding Ed Balls! And he calls himself a Tory? And we have a yet further absurdity. We will have marginal businesses where people want to work and are prepared to work for less being actively closed down by a Conservative government, of people who had jobs and wanted to work being forced on the dole! Already in my business legislation has made it almost impossible for me to take on interns despite the fact the free training we provided them gave an 100% job take up when the left us. Such is the lunacy of the world we live in.
And if my Tory friends do not feel sufficiently uncomfortable already is it not fair to suggest that there is little point in stealing your opponents clothes when all you have left is an endless arid tactical positioning with no sense of principle or what it actually seeks to achieve? If Conservatism really means so little why not go the whole hog and introduce Clause 4 to the Tory party. That would really fox the left!
I do not wish to end this article on a negative or carping note. There was of course a remarkably simple and non disruptive way in which George could truly have raised the wages of the poorest in our society without hammering the private sector that pays the taxes he needs, a way in which all the undoubted benefits to society which reduced income differentials and a higher income for the poor would mean, a way which would simplify the tax system and eliminate the shock waves of his most recent pronouncement. And that is to remove National Insurance, both Employers and Employees on the lowest paid until you reach the purchasing power of the Living Wage. Please note those marginal tax rates of 25% and 45% that NI – now an income tax in all but name – imposes. If the state simply stopped taking those taxes to a set level then it achieves precisely the same effect as imposing a £2 cost on every employer to achieve just over £1 in the employees pocket. And how would this be paid for? By cutting and slashing the vast range of tax loopholes and exemptions which festoon our tax system at the top and through which the richest in our society so effortlessly jump. George doesn’t need to contact me. The IFS or Sir John Mirrlees or the Taxpayers Alliance I am sure can give him a little list. Is there not a certain irony in myself as a Liberal putting a pro business, tax cutting, tax simplifying case against an over taxing, over legislating Chancellor who calls himself a Conservative?
I end with a little thought. The coalition ended a mere two months ago and the first piece of new unrestrained lunacy for some five years has been introduced into the UK budget system (not I hasten to add for the increments it seeks to achieve but for the methods by which it does it and the lack of any consultation process by which it was introduced). Don’t you just wish that dose of common sense that the Liberals added was still at the heart of British government.