Owen Jones’ wishful thinking won’t solve our deep problems

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.

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