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Taxes, jobs and trouble

Douglas Fraser | 15:57 UK time, Saturday, 10 April 2010

They either feature more sound, fury and heat than light, or they're dominated by superficial slogans, gaffes and sidetracks into non-issues: Election campaigns are rarely opportunities for serious political debate.

Not this time though.

The debate about taxation and spending, which has dominated the past two weeks, includes some serious, heavyweight stuff.

The key row, so far, involves an increase in only one tax - National Insurance being a rather complex one - and a share of revenue which is dwarfed by the scale of the deficit challenge.

But it raises a much wider range of questions, about how to sort out the public finances; which tax increases and spending cuts would hurt least, and what exactly is an efficiency saving?

The easy bit was establishing that the national insurance rate rise is a disincentive to job creation. Nobody has denied that, including Labour politicians trying to defend the decision.

There's not much evidence of the job impact. And if the Treasury's studied the issue, it's not publishing it.

After 11 years

One study of the impact of a 1p rise in employers' national insurance contributions came from Tory-leaning Policy Exchange think tank.

It implied that the policy would cost 750,000 jobs, but not even the Conservatives seem to be treating that figure as credible.

Instead, they're citing figures from the Centre for Economic and Business Research (CEBR), carried out last year for the Federation of Small Businesses.

Its reckoning: In small and medium-size businesses, employment levels would be 57,000. And extrapolating from that to include larger firms, Tories say it would cost 96,000 private sector jobs.

That's before the impact on the public payroll of NICs increasing for government employees too.

Look at the small print though - that 57,000 figure would be the gap in employment projections with and without the NICs increase, by 2021.

They're not current jobs lost, but jobs that wouldn't exist 11 years from now. And the impact on the compound growth rate? It would be 0.02% lower by 2021.

As the Tory plans are only a partial reversal of the Labour ones, they say they could save 58,000 of that figure.

What they're not highlighting is that their own plans for a National Insurance increase would cost - according to those CEBR figures - around 38,000 jobs across Britain.

Treasury clutches

But that's only one calculation. The NIC rise may not be as big a disincentive as some business-people say.

James Caan, of Dragons' Den fame, for instance, says an extra £15 per month would not affect him in deciding whether to hire a new employee.

The point is made by those who wish to stop next year's rise (or who favour the Conservative option of reversing only part of it) that the same money kept out of Treasury clutches could be better and more efficiently used by private companies.

It could go into profits, investment or higher wages.

The Institute of Fiscal Studies reckons the impact on higher wages, feeding through into income tax, could even pay roughly £2bn in additional revenue for the Treasury, but only over the longer term.

Hard-working families

Politically, Tories have succeeded over the past two weeks in establishing that Labour's plans would cost jobs. But recent days have seen the complexity of this issue teased out.

And the impact of finding 'efficiency savings' to allow an incoming Conservative government to claw back part of the NIC increase is highlighting the impact of less government spending.

The argument from Tories is that £6bn of savings can be found, in much the same way that any household budget can take out one pound in £100.

They assume that's what British households have had to do in recent months, when in fact, low interest rates have increased spending power through the recession, at least for those remaining in jobs.

Without specifics, the Tory efficiency savings include cancellation of IT projects, freezing non-frontline public sector recruitment and better management of government property.

What is becoming clear is that that, too, would cost jobs. Some of them would be in public sector administration - perhaps the easiest hit of an election campaign.

It's worth remembering two things about those faceless people who manage, for instance, hospitals - they are people in "decent, hard-working families" too (well, let's be charitable and assume most of them are).

They pay taxes, and if they become unemployed, they'll add to the government's welfare bill.

How much would they add?

Well, here's one reckoning as a guideline, returning to the CEBR figures suggesting 57,000 private sector jobs not created as a result of the 1p rise in employers' NICs, adds that the welfare costs of that would add £900m to government bills.

Let's also remember that administrators can run things more efficiently than they'd be run if they weren't there.

They may not always be models of efficiency and rational planning. But working, as I did, in the newspaper industry, I know what it's like when management is pared back too much, and I wouldn't recommend it.

The other factor that's becoming more clearly part of this vital debate about the future of public spending: It's not all civil servants.

Government contracts sustain private businesses. Nobody knows how many IT workers would lose out if public sector IT spending is put on ice, but the number would be substantial.

These people also pay their taxes, and would cost more in welfare if they were on Jobseekers' Allowance.

IT fiasco

Then, what about a recruitment freeze?

We've seen them before. What tends to happen is that the people who leave are the most talented ones, with the best prospects of moving to a better job elsewhere, and they were often the ones doing the most important jobs.

The gaps they leave are more than statistics and potential savings.

And a freeze on IT projects, in particular, could deliver short-term savings but stall longer-term efficiency, whatever the history of public sector IT fiasco.

These are not party political points. We now have an admission from the three main UK parties that jobs will be lost in the private and public sectors, whatever happens.

And we're getting closer to an understanding that management of the public finances over the next few years will be anything but simple.


  • Comment number 1.

    So company bosses don't want to pay more tax. What's new. They avoid paying any UK tax at-all from their personal income.
    I live in Bolton, a typical northern town with a low wage economy. The average wage here is about £200 a week. The increased N.I. would be £2 a week. This is being portrayed as hammer blow to future employment much the same as the minimum wage was attacked by pretty much the same people.
    Yesterday I was in Manchester & had a nice 'Pub lunch'. The chalk board wine list had bottles ranging from £60 to £295. (Sam's Chop House). The average bottle of wine holds about 6 glasses. So the middle of the road wine at Sam's works out at about £25 - £30 a glass. If anyone is interested, I had a pint of IPA costing £3.

  • Comment number 2.

    I am amazed that James Caan would say "an extra £15 per month would not affect me in deciding whether to hire a new employee". If NIC changes had raised the cost of employing my existing 100 employees by £1500 per month then it would certainly predudice my decision to employ more people. I don't think James's sentiment will be typical of the reaction of most employers.

  • Comment number 3.

    This IT business is the most galling of the Tories' nakedly populist "cost-saving" measures. The idea that we will fall for this nonsense is ridiculous. Almost any organisation needs IT. My employer wouldn't last more than a couple of years if it froze software development, and we're not a software company.

    Neil, you come across as a total fantasist. The company I work for employs around 100 people, and £1500/month is nothing, a rounding difference on our accounts. If it would really influence your hiring decision, may I suggest that this would not be for entirely rational reasons?

  • Comment number 4.

    The country is virtually broke. We all know this and we all know that to get out of the difficulties there are going to have to be severe cuts and probably tax rises in the not too distant future. Why don't the politicians tell it as it is. We are not stupid, there are bound to be cuts and they won't all be in the private sector where short time working and job losses have been in existence over the last 2 years. A relatively short time ago Sweden was in a similar position, their government started by cutting 10% from the budget of every ministry accross the board, and then identified more severe cuts and where they vcould be achieved and the country's financial situation was virtually resolved within 4 years. Why can't the politicians simply say that the situation is bad and in the short term there will have to be severe cuts in public services, benefits, and funding for new projects. Lets face it, that is what is going to have to start happening on the 7th of May.
    If they don't say it now and they don't gain power in the election, you can guarantee that they will snipe at the party in power when it has to implement cuts that are unavoidable. So they are all treating us like idiots.

  • Comment number 5.

    The labour party has also included a tax break for investment in research and development. Now that would create jobs and put companies in a better position to compete in future therby ensuring their survival. This money would however have to be invested by the companies unlike the removal of the NIC that would just mean more money available for managerial bonuses.

  • Comment number 6.

    This comment was removed because the moderators found it broke the house rules. Explain.


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