The consequences of Tory tax raids are now painfully clear: no one wants to work
This generation believes it is no longer worth getting out of bed if most of your cash goes to someone else
MAKING work pay has been a political touchstone for Chancellors, both Conservative and Labour, down the decades.
Faced by a post-pandemic surge in illness, idleness and disability among the working-age population, it’s been a particular hobby horse of the incumbent, Jeremy Hunt.
If we could get workforce participation back to pre-pandemic levels, it wouldn’t admittedly be a cure-all for the country’s economic ills, but growth and the public finances would both be in a much better place than they are now.
It was this ambition that underpinned many of the measures in the Budget, including the further two percentage point cut in the employee rate of National Insurance.
Mr Hunt should be congratulated for that at least. There can be no greater incentive to work than allowing people to keep more of their own money.
Unfortunately, the reality doesn’t quite chime with the tax-cutting rhetoric. A low-tax economy may indeed be the Chancellor’s intention, but he’s struggling to deliver it in the face of the combined spending pressures of an ageing population, higher interest rates and an increasingly belligerent world stage.
Mr Hunt wanted to leave voters with the impression of a tax-cutting Budget, and taking all the measures together there may indeed have been a small giveaway. Unfortunately, this is more than cancelled out by preannounced tax rises, and in particular the fiscal drag of the freeze in personal tax allowances. Yes, government borrowing is projected to fall in each of the next five years, but this is only because tax as a share of GDP rises close to a post-war high.
These falling borrowing levels, moreover, are also dependent on spending per capita being held flat in real terms for the next five years, a plan which scarcely anyone outside Downing Street thinks credible.
Had Mr Hunt said not that he was a tax cutter but that his plans entail somewhat smaller tax increases than the likely Labour alternative, he would have been closer to the truth.
There’s an interesting discussion of work incentives in the Office for Budget Responsibility’s latest Economic and Fiscal Outlook.
Having revised up its forecasts for the economy in line with recent projections by the Office for National Statistics for higher population growth, the OBR then goes on to revise them down again to take account of high and rising levels of economic inactivity in the workforce.
The upshot is that GDP per person is left slightly lower after five years than the OBR was forecasting at the time of the Autumn Statement last November.
The explanation for this change of heart is that the number of inactive working-age adults has stopped declining from its post-pandemic peak, and has instead rebounded to an alarming 9.3 million, the highest level in more than a decade and 700,00 more than before the pandemic.
The OBR then goes on to quantify the effects of the Government’s tax, childcare and welfare decisions on the incentives to work, concluding that taken together, they will increase the total labour supply by the equivalent of 193,000 full-time jobs after five years.
In breaking this down, the OBR finds that the cuts in National Insurance contributions will be relatively effective in incentivising work, but that these positives will be more than offset by the freeze in tax allowances, which will decrease the labour supply by 130,000.
You don’t have to accept the spurious precision of the OBR’S forecasts to know instinctively that in broad-brush terms the observation must be correct – if you freeze tax thresholds, you seriously erode the incentives to work.
Without access to OBR modelling, it’s hard to know what the fiscal consequences of an extra 130,000 jobs might be. Presumably it would not be enough to pay for itself.
But it would be a start, and for true believers in Laffer curve economics, it would in time create a virtuous circle of growth and consequent eventual increase in the amount of tax revenue raised.
The disappointment in yesterday’s Budget is that it was not bold enough in this regard. The Chancellor must of course remain realistic. The dangers of going too far are writ large in the disaster of Liz Truss’s mini-budget.
This searing experience has understandably instructed an abundance of caution ever since. Mr Hunt wears it like a badge of honour, and hopes the voters give him at least some credit for “doing the right thing”.
Maybe, yet we are in danger of ending up with the worst of all worlds, with too many people feeling it’s not worth getting out of bed in the morning and falling back on benefits instead. It’s not good for well-being, it’s not good for growth, it’s not good for tax revenue, and it adds further to the burden of public spending.
The dangers of being too bold in your measures are writ large in the disaster of Liz Truss’s mini-budget