Unfunded pension liabilites are £1.7 trillion. It’s time the Government admitted it
Mar 2014 26

Teachers are on strike today. One of the reasons is their anger over pension entitlements becoming less generous after reforms become effective in April 2015. These reforms don’t much affect the rights to pensions they’ve built up already. The changes are primarily about what additional pension rights they’ll be entitled to thereafter.

But there’s a huge problem with the cost of these pensions. As the unions fight for more generous terms and the Government decides how much of the next generation’s money it is prepared to promise them, they aren’t recognising the true scale of how much those promises will cost.

The Government has not put a single penny aside to pay for them and it’s also in denial about just how big those commitments are. Across the public sector, it says that unfunded pension schemes have liabilities worth £1.1 trillion. The problem is that this number is calculated using an artificial measure of the how to value what payments in the future are worth in today’s money.

Instead of using market ‘discount rates’ to account for how money set aside to pay for future commitments should grow, the Government invents its own number and this number makes the size of the liabilities seem a lot smaller than they really are. The TaxPayers’ Alliance asked finance and pensions expert Neil Record to estimate the difference between the real and official size. He found that the Government is downplaying the value of its promises by a colossal £610 billion.

Difference between offical and TPA pensions estimates

The real value of these commitments is not the £1.1 trillion the Government claims. It’s £1.7 trillion, a figure which has swelled by £1 trillion since 2003-04. In other words, it’s been getting bigger by £100 billion every year, on average. And that’s on top of the £1.2 trillion in the official National Debt.

Pensions liabilities and official net debt

Private sector pension schemes aren’t allowed to invent their own discount rates to make their liabilities seem rosier. The Government shouldn’t be allowed to, either. It’s time they were a little more honest about how much public sector pension promises will cost taxpayers.

New £20bn OBR black hole means Chancellor Osborne must declare War on Waste
Mar 2014 07

Office for Budget Responsibility economic models replicated by the Financial Times have revealed a new £20 billion black hole in the public finances. The news comes on top of the repeated deterioration in deficit forecasts since 2010 and means that the public sector would potentially continue living beyond its means until 2020.

Page 15

Our War on Waste spending factbook highlighted the deterioration of deficit forecasts for 2014-15 in the graph shown above (click here to share it on Facebook, and here for Twitter). It’s clear that while the economy seems to be recovering, particularly with respect to private sector employment figures, the public finances are still a mess and tough decisions have to be made on spending.

This isn’t necessary only to close our still huge deficit but also to allow room for the tax cuts the country needs to sharpen economic incentives, boost growth and ease the financial burden on taxpayers. Mr Osborne should look again at spending when he delivers his budget in two weeks. It’s time he declared a War on Waste.

Stamp Duty, unemployment and a glimmer of hope for the Autumn Statement
Oct 2013 25

Could Stamp Duty be contributing to unemployment rates? That was the question posed by the Head of Residential Research, Adam Challis, of property group Jones Lang LaSalle in response to a presentation at Chatham House by Professor Andrew Oswald of Warwick University about the correlation he found between levels of owner-occupancy and unemployment.

These are substantial sums of money… Stamp Duty must add substantial levels of immobility and immobility is associated with higher levels of unemployment. Nobody has looked at the effects of that on unemployment.

Oswald’s contention is that owner-occupancy causes higher levels of unemployment in the general population. While he does not claim there is proof that higher levels of unemployment are caused by owner-occupancy levels, he does provide evidence that they are correlated and he suggests three reasons which might explain why more owner-occupancy does cause higher unemployment.

First, owner-occupiers are less likely to move when they get a new job and this results in more commuting which in turn leads to higher commuting costs and congestion for others. This, he says, might deter some people from taking a job and so add to the unemployment rate. Secondly, owner-occupancy leads to reduced mobility which in turn means less knowledge flow through interaction. This, he says, might reduce everyone’s productivity and therefore could increase unemployment. Finally, owner-occupiers are more likely to object to new businesses opening near them and other planning matters. So higher levels of owner-occupancy lead to greater levels of resistance in the planning system which, they say, could be reducing the speed at which businesses are created and expanded, leading to higher levels of unemployment.

It’s an interesting theory. And if it’s true, and if labour immobility is the cause of higher unemployment, then there’s a good case to say that as well as all the problems it causes in the housing market, Stamp Duty might also be causing higher unemployment, too. Which is why it is interesting that Exchequer Secretary to the Treasury David Gauke told a Conservative party conference fringe meeting held by the Institute of Fiscal Studies and the Chartered Institute of Taxation that the problems caused by the ‘slab’ rate structure of the charge are ones that the Government “should seek to address“.

Does that mean we might hear some good news in the Autumn Statement in less than six weeks time? Let’s hope so. But if you know of anyone who hasn’t already signed up to StampOutStampDuty.org, please ask them to add their names to the campaign. It automatically sends a message to your MP for you, adding a little extra pressure for reform and cuts to this truly awful tax! We need all the help we can get.

IEA report shows the shocking cost of tax on the poorest
Oct 2013 14

Households in the the poorest fifth of income distribution spend £1,165 a year on VAT and £1,286 on ‘lifestyle taxes’, according to new research from the Institute of Economic Affairs. The amount taken from the poorest fifth of households in lifestyle taxes represents 11 per cent of their disposable income.

But these averages mask the harsher reality for those who do gamble, drink, smoke and drive as they include those who do none of those things. Between 15 and 17 per cent of the average income of smoker in the bottom fifth is taken in tax on their tobacco. Between two and four per cent of average income is taken from drinkers in that same fifth of the population. And eight per cent of the income of a typical low-income driver is taken in motoring taxes.

That all adds up. People in the bottom fifth of the income distribution who drink moderately, smoke and drive a car will find the Chancellor confiscates almost 40 per cent of their disposable household income through VAT and lifestyle taxes.

The Coalition have taken some good steps towards taking less money from those who don’t have enough to pay for the basics but as ever the story is mixed.

They have raised the tax free personal allowance for Income Tax very quickly so that it will be £10,000 next year. But it still too low and National Insurance still kicks in at around £7,500 a year. They have promised to freeze Beer Duty and Fuel Duty for the rest of the Parliament, but duty on other alcohol will carry on rising Fuel Duty is still too high. And they have cut Corporation Tax, which economic analysis shows is largely paid for by workers in lower wages, from 28 to 21 per cent. But it is still too high and they have not cut employer’s National Insurance, the jobs tax, which remains at 13.8 per cent.

A wide variety of taxes are making life difficult for everyone, and especially for the poor. Whether it’s taxes like Fuel Duty, VAT or alcohol taxes which impoverish people by making the things they need more expensive, or whether it’s taxes like Income Tax, National Insurance or Corporation Tax which mean they end up taking home less of their own money, all of them play a destructive role in the lives of the people the Government is supposed to be helping.

We urgently need lower taxes both to relieve people’s budgets and to encourage enterprise to get the economy back on track. That means cutting back the size of our still far too bloated public sector to a level we can afford.

COMMENT: Energy price fixing and tax hikes would quickly see economic reality bite
Sep 2013 25

Writing in City A.M., Matthew Sinclair argues Labour’s policy announcements on Corporation Tax and energy prices would be economically damaging for Britain.

ED MILIBAND made two big new pledges in his speech yesterday: lower business rates for small businesses, paid for by higher corporation tax on larger firms; and a freeze in energy prices for 20 months from the date of the next election. Economic reality would quickly bite for any government that tried to introduce either policy.

There is nothing wrong with cutting business rates. Lower rates would be a relief for many – particularly small firms and retailers. They often effectively pay half as much again on top of rent. But higher corporation tax rates for larger firms would not raise government revenue, except maybe in the short term. Just as firms in competitive markets cannot increase profits by charging higher prices, governments cannot just hike taxes and expect more revenue in return. Higher corporation tax will drive away investment and mean fewer jobs, lower wages and – in short order – less revenue for the state.

Click here to read the full article

Proposals for a so-called Mansion Tax should be scrapped
Sep 2013 02

New research published today by the estate agency Knight Frank has revealed further weaknesses in the case for a new ‘Mansion Tax’. In 2012 Vince Cable proposed a levy of 1 per cent annually on properties valued at over £2 million. Politicians have suggested such a levy would raise between £1.7 billion and £2 billion annually.

However Knight Frank concluded that the with the proposed threshold and tax rate HMRC would raise just £1.3 billion. Additionally, in order to raise the targeted revenue, the threshold at which homeowners would have to start paying the tax might have to be reduced as low as £1.25 million nearly tripling the number of people affected from 55,000 to 140,000. What is being sold as a ‘tax on the rich’ will eventually drag more and more taxpayers down.

Similar to the TPA’s own research into the Stamp Duty time-bomb, the Knight Frank report highlighted impact of house price rises on who would pay the tax. Liam Bailey, Head of Research at Knight Frank, said: “Over the past 10 years house prices have risen by 69 per cent. Assuming a similar rate of growth in the future, all houses worth more than £1.2 million today would be paying a mansion tax 10 years from now, meaning that the number of homes covered would  nearly triple from 55,000 to 157,300.”

The proposal for a Mansion Tax would further contribute to pre-existing problems in an already over-taxed and over-regulated property market. Instead of making pernicious political gestures the Government should focus on relaxing regulations which would allow more affordable housing to be built.

The key findings of the Knight Frank report are:

  • The Mansion Tax, as currently proposed, will raise approximately £1.3 billion annually, before exemptions.
  • In order to raise the targeted revenue the value threshold for the tax would need to be reduced from £2 million to either £1.5 million (to raise £1.7 billion) or £1.25 million (to raise £2 billion), and potentially even lower once exemptions and the cost of collection are allowed for.
  • Reducing the threshold from £2 million to £1.25 million would more than double the number of properties affected from 55,000 to 140,000.
  • The tax would be levied overwhelmingly on London and the South East of England, with 86.4 per cent of all £2 million+ properties located in those two regions.
  • Heritage properties would be targeted, with 16 per cent of all £2 million+ properties being listed buildings compared to less than 2 per cent of all sub-£2 million properties.
  • With a £2 million threshold nearly one in ten properties defined as “mansions” would be one and two bedroom flats.
  • If the £2 million threshold were adopted and not increased in line with house price inflation, over the next 25 years a total of 775,500 properties would be dragged into the Mansion Tax net, including all properties with a current value of £554,000 or more. This means that some first time buyers buying through the government’s help to buy scheme (upper limit £600,000) would be paying a mansion tax before they finished their mortgage term.
Travelodge expansion plans at risk from the construction tax
Jul 2013 31

The Managing Director of hotel chain Travelodge has written to Communities Secretary Eric Pickles to complain about the high levels of the construction tax in London, known officially as the “Community Investment Levy”. The budget hotel boss’s remarks give a concrete example of how taxes like the Community Investment Levy are choking off growth, destroying jobs and ratcheting up the cost of living.

This additional development charge is being interpreted by some London boroughs as a quick win revenue generator, when in reality by setting such high rates, they are actually losing out on long term growth, revenue and job opportunities. It is unviable for companies such as ours to invest in new developments as a direct result of this extortionate charge…

It is evident that there is a clear need for good quality budget hotel rooms across the capital as many of the existing B&B’s and hostels offer inadequate accommodation, poor value and extortionate prices.

However the levels of tax being proposed by a majority of London boroughs rule out future hotel development and job creation. Therefore Eric Pickles must recognise the damage that the poorly thought through CIL levels will have on future economic growth, and he needs to stop Councils implementing such harmful rates of tax.

The company says it is looking to develop 145 hotels in the capital which would create 4,000 jobs. But 95 of these, involving 2,600 jobs, are in boroughs which have already implemented a construction tax or are planning to. This puts expansion plans at risk because of the significant sums involved. For example, the two developments in Barnet will mean a construction tax bill of £668,000 while the firm’s plans in Islington would mean having to find an astonishing £5.9 million for the council’s tax collectors. This compares to a bill of £1.7 million under the previous system of taxing developments.

Tax gets in the way of economic growth and Travelodge’s explanation of how it affects them illustrates just how it happens in practice. And it’s not just Travelodge or hotels that are being held back from their potential. The effect isn’t even limited to fewer jobs and less growth, either. It means a devastating cost of living, too. The hotel rooms that won’t be built in London will mean higher prices for anyone who wants to stay in London, just as the housing shortage is making rents and house prices so extortionate.

If the Government is serious about getting to grips with an economy that’s producing the weakest recovery in history it really needs to cut spending more and reduce taxes, not introduce new ones.

A Debtor’s Prison
Apr 2013 29

The TaxPayer’s Alliance Bumper Books of Government Waste helped set the national agenda on how Whitehall and local councils spend and sometimes squander our money. I’m hoping my new book on the national debt, just out, will do the same on our deficit. It’s astonishing how commentators defend our being in the red without much of a clue on how we got here this time and what happened to governments who trod this path before.

So how bad is the national debt?

One of the problems facing us is that people find it hard to think in abstract ledger columns, and billions are frankly sums that only Dr Who can imagine. So let’s try to put both the debt and the deficit into terms that readers can better handle, and can also perhaps more easily remember for debates down the pub and when writing letters to the newspaper. 

The national debt at the start of this year was a very memorable sum. It ran at £1,111 billion. Expressed slightly differently, that’s £1,111,000 million, or £1,111,000,000,000 – four ones, nine zeros.

That’s a heck of a hangover to wake up to after your New Year’s Eve party.

Actually it was £1111.4 billion but with debt that big, what’s £400 million between friends? The state’s new house building budget since you ask, but we’ll let that pass.

Such was the debt but now let’s turn to the deficit. The Government’s tax take was around £547 billion for that year. The additional level of net borrowing on top of that was about £122 billion more. That meant that not far short of one pound in five being spent by the Government had to be borrowed. So the debt level in the ship of state was getting deeper not through a leak but a full briny breach.

Why is this a concern? We’re living through an age where debt-to-GDP is, very roughly, around 75%. That’s comparing the sum that the Government owes with the total of what all of us churn over in the economy in a year. The Maastricht criteria defined an acceptable limit by the way at 60% (and the figures above exclude the off-the-balance-book fiddles).

But the state doesn’t handle the GDP, just its own budget. The debt-to-Government-income ratio is already past 200%, and getting worse. It’s going to have to find that massive shortfall from somewhere, and with incremental damage.

Now let’s try to put the sums owed into a more visual form. What does that £1.1 trillion mean?

A few years ago, EU regulations on recycling electrical waste led to difficulties in disposals and a spate of illegal dumping going on. It created the infamous ‘fridge mountains’. £1,111 billion could, for example, be spent on some fairly respectable brand new Zanussi fridges. Let’s order them from John Lewis (which is where MPs go).

I estimate you could theoretically buy 3,268,823,529 fridges. Three and a quarter billion. Easily enough to put one in every household in Europe … in every room.

Now let’s apply some geometry and build a fridge homage themed on King Tut. We’ll make a giant pyramid. Let’s consider it a late Jubilee event and place it in front of Buckingham Palace, with its edge running the length of the Mall, and stretching out over the Parks.

On that basis our national debt just as it stood at the New Year could, by my calculations, reach up to form a pyramid 3,548 metres high (2.2 miles).  Ben Nevis is only 1,344 metres (4,408 feet). We could guarantee ourselves a Turner Prize and erect a monstrous new Alp.

The local residents might, not unreasonably object, and Heathrow might have issues. So let’s reflect on an alternative spend.

One estimate of the current cost of HS2, the controversial rail link, is £32 billion. Many challenge its viability and value, but let’s take it at face value. Given the length of the project and its cost, we could instead use the £1,111 billion to run a line to beyond Peshawar in Pakistan. In other words, you could build HS2 from London to the Khyber Pass from the national debt as it stood on New Year’s Day 2013. That would make it far easier to commute to take on the Taliban.

Or we can reflect again on our problematic aircraft carrier budget. The bean counters in the Treasury tell us we can only supposedly afford two, and only if they’re empty: not so much aircraft carriers as “air carriers”.

Of course, an aircraft carrier needs planes to go in it, plus a task force to defend it. Let’s say, two submarines, four frigates, two top of the range air defence ships, and four supply ships. We’d thus create a 13 ship battle group to match anything the Americans have, with more firepower than the Falklands task force. I calculate £1,111 billion could build 93 such battle groups. Last time anyone counted, the Americans only have 11 aircraft carriers, so Britannia really would rule the waves.

How about another angle? Tony Blair is a much-in-demand public speaker. He is said to cost £364,000 per hour.

Let’s imagine his mission in life has become to sort out the debt. In turn, we’ll allow him to work for just 8 hours a day as he has to keep his voice. By our reckoning and on those hefty rates, Mr Blair could pay off the national debt (as it stood on 1 January) by endlessly lecturing to the world’s elite – but he’d be at it until the year AD 3047.

Or let’s review another former Prime Minister. Margaret Thatcher’s statue was a bit of a controversy in Grantham. It’s made of Italian marble and is said to weigh two tonnes. What if it were made of gold? Some comparative calculations indicate that it would come in at a little over £48.7 million. Rather than let Grantham decide whether to have the statue or not, you could just smelt 22,821 pure gold Thatcher statues and send them out to towns and villages across the country (possibly excluding Scotland), paid for out of the national debt. It would certainly be a glittering national memorial, though somewhat missing the point about the baroness.

So much for the debt. But what about the cost of servicing it, or what it means in terms of simply paying off the interest?

In 2012 debt servicing took £44.8 bn from the Government’s budget. This was money it was thus unable to spend on other things. Putting to one side the money spent on new credit that year, it means that one pound in thirteen raised by tax was just being eaten up by past debt. This is going to get worse as debt is accelerating far faster than tax revenues. Realistically, we’re looking at an extra £16 billion on debt repayments from where we are already at today.

So, what could be done with that extra lost £16 billion in annual interest payments coming out of your pockets?

Northampton General Hospital had to make £19.1 million savings in 2012 because of our national debt being shared out and passed down locally. The hospital has a budget of £230 million. Since an additional £16 billion has to come out of the budget somewhere, that means the bigger national debt will lead to the equivalent of the loss of 69 hospitals like this one across the country. Generating bigger deficits won’t protect the NHS, which is why Labour’s plan to create an even bigger deficit than the one we’re getting is pure crazy talk.

Or again we could look at how that £16 billion compares to taxes levied elsewhere.  There’s understandably been a lot of kerfuffle about Government’s tendency to heavily tax our pints. What could £16 billion get you? It’s more than the pre-tax price of the beer sold in the UK every year, so you could hand it all out as free pints to the nation (though we wouldn’t recommend it). Not everyone of course drinks beer, so as an alternative we could buy up all the vino France exports globally, including all the champagne, and just hand it out in the UK. And since it’s causing the world a bit of a problem right now, based on GDP we can just buy a country like Mali with the remainder.

Our national debt is huge. The consequences of having to manage it are considerable. The impact of running a persistent deficit is painful. That’s what our political leaders need to understand, and the sooner very much the better. I hope the book helps.

Lee Rotherham’s new book, A Fate Worse than Debt: A History of the National Debt from Boadicea to Cameron, is available at bookshops.

Sluggish growth shows Big Government still holding back economy
Apr 2013 26

Five years on from the start of the recession, with GDP still 2.5 per cent lower than it was then, it speaks volumes about the feebleness of the economy that today’s announcement of meagre growth last quarter was greeted with relief. But it’s not just the overall level of growth which is worrying, the dominance of Government growth is also a major concern.

GDP was up a paltry 0.3 per cent compared to the previous quarter, and up 0.6 per cent on the same quarter last year. Compared to 2008, it was down 0.5 per cent. But Government was up 0.5 per cent on last quarter, up 1.2 per cent on the same quarter last year and up 6.9 per cent on 2008. Our bloated and still growing Government might give the economy some short term relief from adjusting to new circumstances. But five years on, we’re not in the short term anymore.

130425 GDP components compared to 2008, green back


Instead of a shot of ‘spending hair-of-the-dog’ at every budget, what we needed was a fiscal detox: tougher spending cuts to pay for the targeted tax cuts which would have strengthened the economy by boosting incentives and long term tax reform. The Government chose to allow spending to rise, hiked taxes and put substantial reform on the back burner.

It also failed to take the necessary steps in other areas, too. Instead of getting a third runway, Heathrow gets a report due in 2015. Instead of ending Sunday trading laws, we got a temporary reprieve during the Olympics so we wouldn’t seem so primitive while the world was watching our capital city. Instead of undertaking serious reform to roll back the planning restrictions that are stopping Britain from building the homes we need to end the housing crisis, we are getting a slight relaxation of the rules on single-story home extensions and on converting offices into homes.

But it’s not too late. The TaxPayers’ Alliance constantly identifies wasteful spending, not least in our How to save £50 billion (and still win an election) and our Research Fellow Mike Denham’s book Burning Our Money. We also published The Single Income Tax, which sets out reforms to specific taxes to make the whole system simpler, fairer and more pro-growth.

If The Government wants the the economic numbers to be less awful this time in 2014 and 2015, they need to act now and cut regulation, cut spending and cut taxes.

Owen Jones’ wishful thinking won’t solve our deep problems
Apr 2013 12

Last Sunday on BBC One’s The Big Questions, TaxPayers’ Alliance research director John O’Connell faced plenty of wishful thinking from other participants on the programme, not least from author and polemicist Owen Jones:

The real problem we’ve got is lack of demand in the economy. People aren’t spending money because demand has been sucked out. We’re now in the longest economic crisis not since the 80s, not since the 70s, not even since the Great Depression in the 1930s. We’re now in most protracted economic crisis in modern history in Britain.

This is why I think this is a false debate:  because the reality is that we all want to bring down welfare spending but the reason it’s so high at the moment is that we’re spending billions of pounds of taxpayers’ money on housing benefit which has lined the pockets of wealthy landlords charging extortionate rent because they know you and I the taxpayer will step in.

Instead we should be building council housing which will create jobs, stimulate the economy and bring down housing benefit.

Another example, tax credits. They’re a lifeline for millions of people in this country but they are a subsidy for low pay because bosses aren’t paying their workers properly. So if we had a living wage we’d bring down spending on tax credits and also on housing benefits because 93% of new claimants are in work.

There is plenty of truth sewn up within Mr Jones’ argument. We are in the most protracted economic crisis in modern history. We do spend far too much on Housing Benefit. It is indeed lining the pockets of wealthy landlords. Rents are extortionate. And if the poor had higher incomes then the need for benefits would be reduced.

He’s right about all that. The problem is that he’s just spectacularly wrong on his analysis of why all these problems exist and what could be done to solve them.

WRONG: “The real problem we’ve got is lack of demand”

This is the opposite of the truth. The problem isn’t that we’re not spending enough money we don’t have. We’ve tried that. The Bank of England has slashed interest rates to 0.5 per cent, below inflation. It’s pumped £375 billion into the economy through ‘quantitative easing’, buying financial assets with newly created money. And of course government spending has soared in recent years, remaining far above tax receipts. This is the third year in a row that the Government plans to spend £120 billion more than it has coming in. So it’s not because the Government hasn’t been desperately inflating demand with hundreds of billions of pounds that we’re in trouble.

The problem is that we’re not making enough money and the reason for that is because we’ve put too many obstacles in front of people. Our infuriatingly complicated tax system is the most obvious area where we sap people’s incentives to get on. But planning restrictions, market regulations and employment rules all serve to make work and entrepreneurship much less attractive than it could be. The real problem is an uncompetitive supply.

WRONG: “we should be building council housing”

The answer to sky-high welfare spending is not to spend even more on a different bit of welfare, this time building council housing. Yes, if more homes were built then rents would come down and Housing Benefit expenditure would fall as a result. But there’s a reason why house-builders aren’t building enough: rules and regulations have made it too expensive so it’s only worth building if the rents that can be achieved can pay for all the expense of the planning restrictions, regulations and taxes. Saying that the public sector is better placed to get on with it and build them anyway, because it doesn’t pay attention to costs and value for money, isn’t the answer. The answer is to strip out unnecessary costs for house builders. Cut taxes, relax planning laws, ditch fiddly rules in towns and on brownfield sites, stop banning taller buildings, scrap silly requirements to build affordable housing that actually mean less of it is built.

WRONG: “council housing which will create jobs”

The Government cannot create jobs. It can reallocate jobs, it can destroy jobs, it can even reduce the number of jobs that it destroys. But it can’t create any. Money spent building council houses will have to come from somewhere else. Either it will come from existing spending, from tax rises or from borrowing money. So that means job cuts in other areas of government spending, jobs cuts as businesses lose sales as a result of tax rises leaving less money in customers’ pockets, or job cuts from lower investment spending as credit is sucked out of the private sector to fund government borrowing.

WRONG: “if we had a living wage we’d bring down spending on tax credits”

Suppose a salesman earns his company £3.10 extra profit for each product that he sells, and he sells two products an hour. He will earn his company £6.20 an hour. If he is willing and able to work for £6.19 (the current National Minimum Wage), the company might hire him, because it will earn one penny an hour more in profit than it costs to hire him. But if the National Minimum Wage was increased to the so-called ‘living wage’ of £7.45 an hour, the employer would lose £1.25 for every hour they paid him. Obviously, it would be great if he could sell three products an hour so that his employer could pay him more and still make money. But just because politicians pass a law to increase the minimum wage does not mean he will sell any more. What it means is that the employer will face the brutal choice: make him redundant or lose money. It shouldn’t take a genius to work out which option employers will chose.

Fortunately, John O’Connell was able to highlight the real problem:

“Look at the harm we’re placing on somebody who wants to create a job. Say they value it at £25,000: they can’t pay that employee £25,000 because of employer’s National Insurance.”

The best way to increase wages is to reform the education system so that the workforce is more skilled, and cut the taxes that reduce the amount employers can pay in wages: Corporation Tax and employer’s National Insurance.

ONS figures show more jobs and lower wages. Time for more competition and lower taxes
Feb 2013 20

Official statistics released today show that wages have fallen again after accounting for inflation. While consumer prices rose by 2.7 per cent last year, wages were just 1.4 per cent higher in the last quarter of 2012 compared to 2011. This means real wages are down 1.3 per cent. The silver lining to the squeeze on wages is that workers are becoming more financially attractive to employers, who are hiring more. Employment in October-December last year was up 154,000 compared to July-September and up 584,000 compared to 2011.

That is great news. Unemployment levels are shocking and the fact that wage restraint appears to be holding it down means hundreds of thousands of families will not have to suffer the many problems that come with it. But the grim prospects for better wages in future gives no cause for celebration. Less wasteful spending, a simpler, fairer tax system and policies to strengthen market competition are all required to shock the economy back into life and restore growth in living standards.

The TaxPayers’ Alliance constantly identifies wasteful spending, most recently highlighting the rise in the number of town hall middle managers paid over £50,000 a year. And our 2020 Tax Commission’s Single Income Tax has comprehensively set out the case for serious tax reform.

The Centre for Policy Studies yesterday published a report by Dominic Raab MP calling for the Government to phase out subsidies and make it easier for consumers to switch companies in health, water and energy markets. It also recommended allowing for-profit companies to offer academies and free schools to parents who want them.

These are the types of ideas that ministers should be working towards and implementing now if they want to restore underlying productivity growth to the economy so that employment can rise in future not because real wages and living standards are falling but alongside higher wages and better living standards.

IFS Green Budget brings grim news for Osborne
Feb 2013 07

The Institute for Fiscal Studies yesterday published their 2013 ‘Green Budget‘, detailing their assessment and predictions of both the public finances and the wider economy. The document makes for depressing reading for the Chancellor, George Osborne. In particular, they noted:

* Borrowing up, not down. Government borrowing this year has a better than 50/50 chance of being higher than last year. Their prediction is for annual borrowing to rise to £125 billion, up from £124 billion last year.
* Taxpayers’ austerity. While 79% of planned tax rises have already been implemented, just 30% of planned cuts to spending have. Meanwhile, private sector earnings have flatlined while earnings in the public sector continued to rise as if we weren’t in an economic crisis.
* Grim prospects for taxpayers. Tax rises in the year following elections have averaged £7.5 billion over the last 30 years. Political pressures may prompt the next Government to delay spending cuts again, with yet more tax rises to plug the shortfall.

However, as well as pouring cold water on the idea of taxing pension contributions more heavily, implementing a wealth tax or raising stamp duty, they have also drawn up some suggestions for cutting spending on social security.

* Freeze all benefits for three years from April 2013. The IFS estimate this will save £7.9 billion a year by 2015-16. Even exempting the State Pension and Pension Credit from this would still save £3.4 billion a year.
* Means-test Winter Fuel Payments and free TV licences by adding them to the Pension Credit. Estimated saving between £1.5 and £2.0 billion a year by 2015-16.
* Integrate Child Benefit within Universal Credit and end additional entitlements after the second child. Estimated saving: £7.6 billion a year by 2015-16.
* Abolish remaining contributory benefits, paving the way for National Insurance to be abolished. Estimated savings: £500 million a year by 2015-16.

There’s plenty here for the Chancellor to think about as he prepares for the Budget in March. Against a backdrop of a spluttering economy that is in urgent need of a tax cutting shock, it’s time for Mr Osborne to start thinking seriously about cutting spending sooner rather than later.

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