Conservatives claim to be completely focused on reducing the budget deficit while at the same time promising another tax cut. Their economic policy is incoherent.
Hats off to whoever came up with this one. The repeated use of the phrase ‘a tax on jobs that will kill / wreck / ruin the recovery’ has been relentlessly pounded out across all media, with support from ‘business leaders’ adding to Mr Cameron’s glee. How on earth have the Conservatives managed to be both completely focused on reducing the budget deficit while at the same time promising another tax cut (to add to those on marriage and inheritance tax) at a time of serious fiscal pressures?
With ease, apparently – and given the sometimes astonishing inconsistency that emerges from CCHQ (‘we’re fine with homosexuality – just not in our homes and not when we’re in Europe’ and ‘let’s help poor people get rich by selling them shares in dodgy banks at a loss to the taxpayer’) this does not come as a surprise.
But the electorate deserves better than to have a vague and impotent sentence dominate election debate for days. So put politics aside and consider the facts:
1) Income tax is a tax on jobs. Both parties supported the rise to 50 per cent this year. VAT is, in the end, a tax on jobs. So is corporation tax. Basically, all tax is a tax on jobs – either companies have to pay it or individuals fork out, directly or through lower wages. So singling out NI as distinct from other taxes in this respect is nothing more than an attempt to trick us into an uneducated, emotive response. Indeed, today we learned that the Tories’ planned efficiency savings would also lead to around 40,000 job losses – more than even the British Retail Consortium estimated would be lost from the NI increase.
2) The number in question (around £6 billion) is big. But in the context of the expected size of the economy next year (£1.5 trillion) it is 0.4 per cent – within the margin of error of Treasury forecasts. By April 2011, the OECD expects the economy to have picked up. So whether the NI rise is kept or cut, it is absolutely not going to ‘kill the recovery’.
3) But the Tories are also proposing to make their efficiency savings in 2010-11 while the economy stands on a knife edge. No one knows with any certainty what the effect on the economy will be of withdrawing £6 billion from the economy this year. Not even the brightest economists in the world can say with any great confidence whether the Keynesian multiplier (how much government spending increases aggregate demand in the economy) is the best way to stimulate growth at the moment or if the private sector will allocate resources more efficiently (note from recent financial crisis – the market is not always best). But the Conservatives are taking a significant risk in withdrawing money from the economy this year.
The respective positions of Labour and the Conservatives on NI mean little in economic terms. But if you must spend time on the issue, focus on what the difference tells us about each party’s fundamental beliefs. Gordon Brown believes that it is government spending that is supporting the economy. Some of this is ideological, some of it fact given the current rate of unemployment in the private sector. He also thinks that in order to cut the deficit (which all agree it would be sensible to do relatively quickly) tax rises, along with ‘efficiency’ savings (which, in the end, will mean jobs), are unfortunately required.
The Tories are historically, and ideologically, not inclined to support tax increases. They also disapprove of “big government“, and are strongly in favour of reducing the deficit. So opposing an NI increase is not unexpected. But their timing and the manner in which they are conducting the debate is telling. Having spent the last year talking up the likelihood of Britain defaulting on its debt and the desperate need to plug the deficit, now that the economy appears to be slowly recovering they’ve immediately slipped in a tax cut as a sop to the faithful. Having decried efficiency savings as a “trick” in the past, David Cameron is now basing his entire economic policy on them. And by pretending that £6 billion will not cut into public services and will be found from other mystery sources of extravagant government waste, rather than just admitting that they are happy to bear public sector unemployment, they are not telling us the truth.
The electorate is not stupid. We know that there is pain to come. We are starting to appreciate that the government is not trying its best to throw our money away, but equally have doubts as to their ability to spend effectively while controlling the budget given our recent negative experience. But we should also be deeply concerned that the opposition, with power almost in their grasp, are saying things that simply don’t make sense in the hope we won’t notice. Tory economic policy is incoherent. And they are treating us like fools.
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19 Responses to “Tory NI plans treat us all like fools”
Henry
Gosh, I’d never heard that one about ‘socialists’ before. So original.
Let’s get rid of corporation tax (a tax on jobs, obviously), income tax (deters people from spending, so destroys jobs), VAT (ditto), IHT (stops dead rich people from spending money). And so on.
huh?
You are being deliberately dishonest. National Insurance is made up of two components: one part is paid directly by employees (11% of your salary) and one part is paid by your employer (currently 12.8% of your salary). Accordingly if you are paid £100 a week by your employer – the actual cost per week of employing you for the employer is really £112.80 as the employer also needs to pay a NI contribution on your behalf to the HMRC. This doesn’t matter so much in small companies, but in large companies which employ hundreds or thousands of employees (i.e. the kind which are currently writing letters in support of not raising the employers contribution to NI) a 1 percentage point increase can add up to a heck of a lot. There is no room to question that this is a tax on employment – it patently is.
Labour then attack the Tories by saying it is impossible to cut £6 billion (the amount of ‘lost revenue’ from not putting up the employer’s contribution to NI by 1% point) from the government’s budget without affecting frontline services. This year the Government is budgeting to spend £655 billion. £6 billion is therefore 0.9% of this total. Its ridiculous to say that you can’t reduce this budget by less than one percent without endangering frontline jobs.
Labour then say you can’t afford to take £6 billion out of the economy at a time like this. Firstly it is not being ‘taken out of the economy’ – its actually just not being taxed out of the productive side of the economy and eaten up by government. The money remains in the hands of companies who can use it to boost their profits and thus potentially hire more employees, spend it on developing new products, etc. etc. Secondly, the UK’s GDP in 2010 is estimated to be about £1,200 billion. The so called £6 billion ‘cut’ is only 0.5% of that total. Even if that sum was to be magically ‘taken out of the economy’ (which it isn’t) it wouldn’t make any difference.
How this can actually be a ‘debate’ mystifies me.
Evidence based? Really?
Tyler and Mr Furious are spot on. Will the author admit that these charges are not evidence based?? NI is vastly different to income tax and VAT, to claim otherwise is plain wrong.
I’m honestly not sure how £6billion giving money back to consumers and business will endanger the recovery- surely it is a perfectly valid stimulus to get people spending more and not to discourage employers from hiring?
“the respective positions on NI means little in economic terms” Really?? Why then have all business groups, GB’s own advisors (no they are not tories before you try that old hat) said that it is?
Simple economics; the more you tax employers on the staff they take on the less profitable it is to do so. Companies are motivated by profit, decrease the profit margin on an activity an decrease the incentive.
I REALLY REALLY want to see the author respond to mine, Tyler and Mr Furious concerns.
Varun
FT Economics Editor Chris Giles on the same topic, with the same argument – quote: “national insurance cannot be described as a tax on jobs that will wreck the recovery…this is elementary textbook stuff”
http://blogs.ft.com/money-supply/2010/04/08/uk-election-2010-national-insurance-nonsense/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ft%2Fmoney-supply+(Money+Supply)
Mr. Sensible
Guys, would those retail businesses prefer an increase in VAT?
After all, all Tory governments increase VAT and, tellingly, the Director General of the British Chambers of Commerce said on the radio that VAT was the lesser of 2 evils.
Despite the fact that an increase in VAT would directly effect those retailers!