Hollowing out the tax base

Reaction to the ONS announcement that 52 percent of households receive more in benefits than they pay in tax was predictable, though not quite as hysterical as it has been in previous years. Screen Shot 2014-07-01 at 08.25.16 This piece in the Daily Mail was quite balanced. A quote from Douglas Carswell, in an otherwise pretty measured Telegraph article, made me smile.

We have not lived within our means for a generation. The ever-expanding redistributive state is pressure down ever more heavily on a diminishing productive base. The financial crisis ought to have alerted the political elite that this model is just not sustainable. We have not made the fundamental changes to the architecture of the state that needs to be made.

So if an MP in the largest governing party isn’t a member of the political elite, who the hell is?

It was left to the Daily Express to wail about the “welfare bonanza” and quote Conservative MP Andrew Rosindell:

Previous governments focussed too much on handing out benefits. This government has been, and is right, to reduce the size of Britain’s welfare bill.

Really? When did it do that then?

As ever, though, once you dig into the figures, the picture becomes a little more complex. First off, the benefits referred to includes the value of benefits in kind such as subsidised education, transport and, of course, the NHS. All of us are beneficiaries of public services. The ONS reckons that the wealthiest 20 percent get more from the NHS than the poorest.


We can see the combined effects of these benefits in kind, together with cash transfers and taxation, on this ONS chart.

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Much of the benefit poorer households get, then, is in the form of the benefits from public services we all enjoy, not of direct cash handouts. If you want to describe the whole lot as ‘welfare’ then we’re all on welfare.

The 52 percent figure also includes retired households. Once you take out retired people, the number of households receiving more in benefits than they pay in tax is around 38 percent.

Household benefits v tax

Source: ONS reference tables

That said, even the figure for non-retired households is a lot higher than it was in the 1970s. You would expect the percentage to go up during recessions, which it did, but there has also been a significant rise over the last three decades or so and a steady increase since 2000. This is consistent with what we know about the labour market. The number of working poor started to rise before the recession as did the number of self-employed people. Sometime around the middle of the decade, earnings began to fall, massively so for the self-employed.

Despite 3 percent growth over the last year, tax receipts have been disappointing. Wages are still stagnant and the increased amount of cash in the economy suggests that some of the self-employed are not declaring all their revenue.

The benefit dependency that government politicians talk about is increasingly an in-work benefit dependency. People may be coming off Job Seekers’ Allowance but they are going onto tax credits. Many of these workers also pay less tax now because thresholds have been raised. Taking the low paid out of tax and subsidising their pay is done for the best of reasons but it isn’t helping to increase the tax take or reduce the benefits bill. The result, as Frances said, is that the fiscal deficit is falling at a glacial pace.

This is all rather worrying, says the FT’s Chris Giles:

Tax revenues have consistently fallen short of expectations in this recovery – unlike public spending, which has been close to the chancellor’s targets set in the June 2010 ‘emergency’ Budget. For the 2013/14 financial year, this year’s Budget estimated public sector net revenues of £607.7bn, more than 8% (or £54bn) lower than the £661.9bn expected back in 2010.

Of course, most of this shortfall was caused by the economic weakness of 2011/12. Economic stagnation is a necessary, but not sufficient, explanation.

In 2010, the Office for Budget Responsibility expected the tax system to be able to collect 38.7% of national income in tax revenues. In fact, this year’s Budget documents show revenues accounting for only 37%. It means that 1.7% of gross domestic product – almost £30bn a year – has gone missing. That is a lot of money.

The trends are no better, even in the most recent year of rapid economic recovery. Taking real growth and inflation into account, the size of the economy grew 4.7% in 2013/14, but revenues rose only 3.5%. Normally, revenues grow faster than nominal GDP.

Weakness in revenue growth matters because if it continues, the shortfall will eventually be recovered through painful tax rate increases or further public spending cuts, meaning the grind of ever-harsher austerity will continue for longer.

The growing economy was supposed to have increased the tax take and reduced the welfare bill by a lot more. The longer it takes to do either, the more the government has to borrow.

Then there’s this:

If you talk to Treasury officials about the missing tax revenues, you get one of two responses. In public, there are many explanations for weak revenue: more low-paid jobs have been created that are not so tax-rich because the government has increased the income tax personal allowance; housing transactions remain weak, leading to shortfalls in stamp duties; oil revenues have taken a hammering from the slump in North Sea production; and financial companies are still offsetting past losses against current profits, hampering the growth of corporate tax revenues.

In private, there is greater concern that the structure of the economy and the UK tax system no longer easily generate tax revenues.

The IFS said something similar in its Green Budget:

One way in which the current recovery has been different from previous recoveries is that in recent years there has been remarkably strong growth in employment given the relatively weak growth in the UK economy. This mix of relatively strong employment growth and weaker average earnings growth has implications for growth in tax revenues – particularly from income tax and NICs. The main determinant of growth in these revenues is the growth in total employment income in the UK economy, which is the product of employment and average earnings growth. However, because of the progressivity of these taxes – in particular of income tax – growth in average earnings creates a larger boost to tax receipts than equivalent growth in employment. This means that the distribution of total employment income, as well as its headline growth, matters for tax receipts.

So, in other words, a 1% increase in employment income that comes from a boost to average earnings would be expected to increase income tax and NICs receipts by about £1 billion more than a 1% increase in employment income that comes solely from an increase in employment.

Just increasing employment doesn’t help much. Average earnings growth is what boosts the tax take. Furthermore:

The increase in revenues over the next five years is forecast to come largely from income tax and capital taxes. The UK is increasingly reliant on a few very-high- income individuals for the former – for example, the top 1% of contributors (around 300,000 individuals) contributed 27.5% of income tax in 2011–12 – while capital tax receipts are particularly hard to forecast and are also disproportionately paid by a relatively small number of individuals.

HMRC data released in September 2013 estimated that the share of income tax contributions made by the top 1% of contributors (ranked by contribution size) would rise to 27.5% by 2011–12, compared with 21.3% in 1999–2000 and 11% in 1979.11 To put it another way, the income tax paid by 300,000 or so very high-income individuals accounts for 7.5% of all tax revenue. These individuals will of course also pay large amounts of VAT and, in all likelihood, pay a large fraction of total capital taxes.

Increases in average earnings boost the tax take but what we are seeing instead is rising incomes at the top and rising employment at the bottom. The hollowing out of the tax base reflects what is happening in the labour market.

Given that forecasts for increasing wages increases and falling benefit spend are also glacially slow, it’s difficult to forsee much improvement over the next few years.

Fig 3 - median earnings_jpg_400x265_upscale_q85

Source: Resolution Foundation

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Source: Parliamentary briefing

On top of all this, the proportion of retired people is likely to increase too, putting additional pressure on the tax and benefits system. 

As the UK comes out of recession, it’s starting to look as though there are some structural weaknesses in our economy. We will probably see ‘More than half UK households receive more in benefits than they pay in tax’ headlines for some time yet. To blame all this on a welfare bonanza or the ever-expanding state is to miss the point though. It’s much more serious than that.

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Public spending mitigates inequality – at least, for now

The ONS published a report on the effects of taxes and benefits on household income last week. It showed a recent slight increase in inequality, as measured by the Gini coefficient, though nowhere near the sort of steep rise we saw in the 1980s and still not quite where it was in the early 2000s.

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It also indicated that, after a drop during the recession, the incomes of those at the top have started rising again while those of the bottom 80 percent have continued to fall.

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It is probable, given what we know about the income shares of the top 1 percent and the ‘just belows’ that the rise in top quintile incomes shown here is largely due to increases at the very top. HMRC projections show the share of the next 9 percent continuing to fall for the next couple of years.


Chart via Michael O’Connor.

The data on taxation suggest that the tax system isn’t as progressive as we sometimes think. As you might expect, for the most part, people pay a lower percentage of their income in tax the further down the scale they are, until the bottom 20 percent, who pay the most.

The Guardian has put this data on a chart.

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When it comes to redistribution, though, it’s not just taxation that matters, it’s what you do with the money afterwards. What makes our system progressive is the redistribution through welfare and public services. In this report, ONS uses the term ‘benefits’ in its widest sense to include not just cash payments bout also benefits in kind, like the NHS, education and subsidised transport.

Taking all this into account, the system does a reasonable job of mitigating the disparities in income.

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As I was trying to catch up with the latest developments in the Piketty row, I came across the Chartbook of Economic Inequality, which has been developed by Tony Atkinson and Salvatore Morelli.

Atkinson and Morelli both work with Piketty on the World Top Incomes Database and I found their site quoted by Chris Giles in a piece following up on his criticisms of Piketty. They have come up with the simple but brilliant idea of putting different measures of inequality on the same chart.

Here is the chart for the UK. (Click on it to make it bigger.)


This shows the household income Gini coefficient rising in the 1980s then levelling off in the 1990s. At the same time, though, the income share of the top 1 percent and top 0.1 percent rose steadily, albeit with a rude interruption during the recession. Both are now roughly where they were at the end of the Second World War.

A gap has also opened up between the 90th percentile and median earnings but, after a sharp rise in the 1980s, the number of households below 60 percent of the median fell during the 1990s and 2000s.

Despite the lines on the chart moving in different directions, these figures are not necessarily telling contradictory stories. As both sets of charts show, our tax, benefits and public spending system has softened the effects of the rise in the top 1 percent income share by redistributing income to the poor.

However, as we know, public service spending is to be cut severely and the next government, whatever its colour, will probably attempt to slash the social security budget too. This will reduce the redistributive effects of the system at a time when a gap is opening up in income levels.

You have probably read about the arguments over Thomas Piketty’s data. Those interested in picking over the stats will already have read everything they can find on this. For those with a passing interest and/or not very much time, there is a summary of the row here.

It’s important to remember, though, that the arguments over Piketty’s book are not about his data on income. They are about his figures for accumulated wealth and how much the top 1 percent’s share is rising. Here, for a number of reasons, the data don’t give a clear picture. 

Whatever the inequalities in wealth up to now, though, the direction of income inequality is pretty clear. Given the increasing share of income gained by those at the top, it would be astonishing if, over the next few decades, an equally sharp division in accumulated wealth didn’t open up. Add in slow economic growth and the dismantling of the welfare and public spending transfers that have mitigated the effects of inequality so far and Piketty’s prediction of a rising wealth gap looks likely, even if, perhaps, it doesn’t happen quite as quickly as he says.

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In praise of … covering your back

I have read three very good pieces on the phone hacking trail. This one from Nick Davies, explains the power dynamics. James Doleman, who sat through the whole thing, explains why Andy Coulson was found guilty and why Rebekah Brooks wasn’t.

Put simply, Brooks said she didn’t know about the phone hacking or payments to officials and no-one could prove otherwise. There was, however, plenty of evidence against Coulson, so he was convicted.

All three articles give a flavour of how both Brooks and Coulson conducted themselves in the corporate world and their very different styles of management.

Here’s Nick Davies:

[Brooks] had remained oblivious to the whole saga, she said, even when she returned to the office the following week, never reading the story which the paper had published quoting the voicemail verbatim, never knowing that managing editor Stuart Kuttner was still hectoring Surrey police to confirm the tale. Kuttner, also on trial, was himself found not guilty of conspiring to hack phones.

Coulson always had more to deal with. While evidence of his three years as Brooks’s deputy was hard to find, there was a wealth of phone records, emails, voicemail recordings and Mulcaire notes about the hacking that happened when he was in charge, from January 2003 to January 2007. And Coulson had got himself dangerously close to the action.

At the News of the World, Coulson showed little enthusiasm for politics, according to former Downing Street officials, one of whom remembers him being invited for breakfast with Gordon Brown and showing so little interest in policy that the two men ended up talking about newspaper circulations. Brooks, however, was a different story.

Far more than Coulson, she played the game of power, exploiting her extraordinary social skills to build an unrivalled network of connections.

James Doleman on Brooks:

Brooks’ role, she told the jury, was to oversee the whole process; not to “police” the experienced journalists and news editors who worked under her.

Not inquiring may be questionable but it was not a crime.

And on Coulson:

Journalists and lawyers have been speculating for weeks about what the outcome of the phone-hacking trial would be, and of the dozens I have spoken to, not one thought Andy Coulson would be found anything but guilty. The former head of communications for Number 10 had a fine legal team, reluctantly paid for by News International after he sued them at the High Court, but it was not enough; the evidence of his involvement in hacking was too much and too strong.

Early on in the case a veteran journalist described Andy Coulson to me as a “good soldier”, and nothing I have seen in this marathon trial has ever led me to disagree with that assessment.

I’ve known a lot of good soldiers. And the trouble with good soldiers is that they tend to get shot.

The irony of the British tabloid press focusing on “one rogue editor” as being responsible for all phone-hacking will not be lost on Andy Coulson.

[T]here are worrying signs that the former News of the World editor will become the scapegoat for a Fleet Street culture that relied on the routine invasion of privacy not just to generate stories, but also to gain political influence.

As I’ve said before, there is no such thing as a rogue operator. Whether or not senior managers know about the detail, they are the ones who set the tone for the organisation. Employees rarely deviate far from this. If they do, they don’t last long. OK, some may be a little over-enthusiastic and cross a line but it’s usually within a framework of what is generally regarded as acceptable. The rogue trader fallacy is an attempt to individualise what is almost always a systemic problem. If managers set aggressive targets and tell people to do whatever it takes, they usually have some idea of what ‘whatever it takes’ means, even if they don’t (or choose not to) know exactly who is doing what.

The good corporate soldier can get taken in by all this. Hands on, leading from the front and keen to do a good job, they can lose their sense of perspective. It’s very easy, after a bit of pressure and the odd nudge, to find yourself putting your name to something which ends up screwing you. At which point, your empowering bosses are nowhere to be seen.

I know it’s unfashionable but covering your arse is really important in any organisation, even more so when managers claim to be delegating and empowering. Most of us will never be encouraged to do anything illegal but we often find ourselves pressured into bending the rules or doing stuff which isn’t quite right. Massage the figures, change a few lines in a report, cut the odd corner on health & safety, leave a few things out when you make your statement for the employment tribunal. I’m sure you have your own anecdotes.

Whenever you are cajoled or encouraged to do anything even a bit dodgy, it’s essential to make sure someone further up the hierarchy knows about it. For example, if you are asked to ‘just change the figures on the chart to make them look a bit better, then send it to the CEO’, send a note to your boss, telling him you did as he asked but that you don’t think the figures would stand up to detailed scrutiny. You never know, your chart might end up in the annual report! If someone picks it apart and finds it’s wrong, if it’s only got your name on it, it’s your problem. (And yes, that is a real example.)

I have no idea what really happened at News International and we will probably never find out. I would be very surprised, though, if phone hacking was a feature of Andy Coulson’s newsroom and no other. People don’t just decide to do this sort of thing. The culture grows up slowly, over time. This week, Coulson is being condemned by almost everybody but I can’t help feeling a bit sorry for the guy. Is he really a rogue who would stop at nothing or just a soldier who went a bit too far and didn’t think to cover his rear?

Update: Two articles from Donna Boehme on a similar theme.

The ‘Rogue Employee’ and Dogs That Eat Homework includes this wonderful sample press release:

“We regret that the actions of a single rogue employee, Mr. BadGuy, were contrary to the values of this company. Our long ­established principles of integrity, honesty, truth, motherhood, and apple pie have been offended by the scandalous acts of Mr. BadGuy. We condemn the actions of Mr. BadGuy. Mr. BadGuy has left the building.”

The Rogue Employee Strikes Again is also a good read:

Since Barings, a long parade of well- known companies have jumped on the Rogue Employee bandwagon in times of trouble. These include: Wal-Mart, Barclays, SAC Capital, UBS, Societe Generale,6 JP Morgan, Pfizer, NewsCorp and GlaxoSmithKline.

The Rogue Employee defense is convenient because it instantly identifies a culprit, or culprits, and absolves “management” of any wrongdoing.

She also links to this excellent paper from Susan S Silbey at MIT, Rotten Apples or a Rotting Barrel:

Microsoft Word – Silbey, Ethics Education Comments.2

Professional and corporate misconduct derives, at least in part, from features of the organizations and social settings in which they take place. Those situations and settings provide both the opportunities and incentives for misconduct. The barrels have particular shapes and not all barrels produce the same kind or amount of rot.

A rotten barrel yields rotten apples. They don’t just go bad by themselves.


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Zero hours contracts: How far can (and should) the law go?

Not everyone is happy with the government’s proposed legislation on zero hours contracts. The TUC said it doesn’t go far enough, UNISON called for much tougher measures and John Philpott dismissed it as kitten toothed.

Of the recommendations in Norman Pickavance’s report, published in May, the only one the government plans to bring into law is the ban on exclusivity clauses. These are clauses which prevent employees from working for another firm, even though the employer does not guarantee to provide them with work. Workers therefore can’t even cover their risk of low hours by taking on a series of contracts with different employers.

This is the most obviously unfair abuse of zero hours contracts. There will be little opposition to outlawing it. That said, even in the harsh world of zero hours employment, such clauses only affect a minority of workers. According to the CIPD, around 10 percent are prevented from working for other employers with a further 15 percent facings some restrictions, though the data is somewhat hazy. (See Page 23 here.)

Furthermore, not everyone is convinced that the ban is workable. Here’s employment lawyer Elizabeth George:

Banning exclusivity clauses will result in precisely NO benefit at all to the overwhelming majority of zero-hours workers.

Yes it is ludicrous for an employer to think it can demand exclusivity from someone when it is offering no guaranteed work in return, but exclusivity clauses (which are not particularly widespread amongst the million plus zero hours contracts out there) are not the real issue here.

The crux of the matter is why are employers choosing to use contracts that provide their staff with no security and the bare minimum of employment rights in situations when work is clearly available and demand not the least bit unpredictable? The answer is – because they can.

And this means that, even if there is no longer an exclusivity clause, employees who works for someone else can simply have their hours stopped. There is no guarantee of work so, if you piss off your employer, you don’t get any more.

Darren Newman agrees:

What this means (I suppose) is that an employer will not be able to sue a zero-hours worker who has – out of some selfish determination to earn a living – gone off and done some work for somebody else. I’m sure I won’t be the first to point out that they won’t need to. The clause might be legally unenforceable, but that will hardly matter if a worker can be denied any further work as a result of breaching it and there is nothing in the Bill, so far, which creates a right for a worker not to suffer a detriment for breaching an exclusivity clause.

In reality this provision will be inserted into employment law with little practical effect. It will gather some headlines but do next to nothing to improve the lives of those who are trapped in precarious and low-paid employment.

The trouble is, these objections apply to many of the other recommendations in the Pickavance Report too. 

1. Ensure that workers on zero-hours contracts are not obliged to be available over and above their contracted hours

Fine, you’re not obliged to be available but if we call and you’re not free, it’s the last call you’ll get.

4. Give zero-hours workers a right to compensation when shifts are cancelled at short notice

Sorry, your shift has been cancelled. What? You’re taking us to a tribunal for compensation? OK, here’s an hour’s pay. Yeah, I know you’re entitled to 2 hours but is it really worth going to court for the extra? Oh, and don’t expect a call next week.

The only recommendation with any force is Number 3, which recommends that zero hours contracts automatically become permanent after 12 months. (Also recommended in the Resolution Foundation’s report.) Even this doesn’t help those in their first year, though, and might well lead to contract termination after 11 months becoming the norm.

That phrase “because they can” is important. It sums up the imbalance of power in the relationship. Zero hours contracts grew out of a weak labour market where employers hold the power over those desperate for work. The contracts themselves are one-sided because the employer has a pool of labour. People need the hours more than the employer needs any one individual. Because the contracts don’t guarantee work, the employer doesn’t even need to discipline or sack a worker, he can just stop calling them.

As I said last time I looked at zero hours contracts, they reflect an economic power imbalance and, short of banning them completely, I’m not sure how far the law can go to mitigate the effects of their abuse. Banning them seems draconian when, by a number of measures, most people on them are satisfied with the arrangement. According to the CIPD, only 27 percent are dissatisfied and a UKCES study found that only a third were on zero hours contracts because they could not find a job with regular hours. (As an aside, these figures are broadly similar to the numbers of people who say they are dissatisfied with self-employment.)

Even if zero hours contracts were banned, the casual labour market might simply shift to other forms; yet more self-employment, for example. To stop employers abusing their workers requires some form of Big Power pushing in the opposite direction. That used to be what the trade unions did. We now assume the state will take that role but, without the sort of far-reaching powers that few politicians would be prepared to grant, legislation is unlikely to achieve much.

The government’s ban on exclusivity clauses might scare a few employers away from some of the worst abuses but the exploitation associated with zero hours contracts will continue. Employment relations are determined, largely, by social and economic factors with the law simply providing the scaffolding. Set against low growth, low investment, low pay and underemployment, there is only so much the law can do.

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Stop bashing the young and try giving them work experience

Everybody knows that young people lack the basic skills needed in the workplace. It’s not just a problem with skills. They have bad attitudes too. These reports appear every few months, gleefully covered by the newspapers and providing soundbites for grandstanding MPs. It’s no wonder, then that youth unemployment is so high. Surely, no employer in their right mind would want to recruit such people.

I have long been sceptical about all this, though, because I first heard it when I was one of the people being complained about. Employers have been banging on about the poor skills and bad attitudes of young people since the 1980s, at least.

Yesterday’s report from the UK Commission for Education and Skills (UKCES) provides some useful background to the debate. It found that, while the UK’s unemployment rate is below average when compared with other EU countries, relative to our adult unemployment rate, it is high.

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In other words, countries like Greece and Spain have high youth unemployment rates because they have high unemployment rates generally. The UK doesn’t have that excuse. Furthermore, compared to our wider labour market, our youth unemployment rate has been getting worse for some time.

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So, although the UK’s youth unemployment rate is around the EU average, it’s much worse than it ought to be, given our overall employment level.

Doesn’t this just prove that our young people are even more useless than those elsewhere in Europe?

Some of the employers surveyed by UKCES probably think so. This bit of the report made me laugh:

Just under a quarter of those taking on 16 year olds from school say that their recruits lack work experience.”

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Well, yes, they are 16. What the hell do you expect?

More importantly, though, most of the 90,000 employers didn’t say any of this. The majority thought that even their 16-year-old recruits were well prepared for the world of work.

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This figure rises with education level or, perhaps, simply with age. It could be that 21-year olds are just more adept and confident than 16-year olds, whatever they have done in the intervening years. I was gobby, awkward and, frankly, a bit of an idiot at 16. Slightly less so by 21. I’m not sure how much my Huniversity Heducation had to do with the improvement though.

When it comes to skills, international surveys have shown our young people to be well down the league table.

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The rankings are not quite as bad for the general adult population. But here is the interesting bit. There is not much variation in scores by age across the UK population as a whole. On numeracy, for example, in England and Northern Ireland, there is no difference at all.

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In literacy, too, there is little variation between the generations. This chart, from the OECD Skills Outlook,  compares England and Northern Ireland to South Korea.

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The low-level of basic skills, then, is not a problem with our young people. It’s a feature of our general population. Other countries score more highly and push our young people down the league table because they have made greater improvements over the generations, not because our youngsters are stupider than their elders!

As the OECD says (my emphasis):

[P]rogress has been highly uneven across countries. In England/Northern Ireland (UK) and the United States, improvements between younger and older generations are barely apparent. Young people in these countries are entering a much more demanding labour market, yet they are not much better prepared than those who are retiring. England/ Northern Ireland (UK) is among the three highest-performing countries in literacy when comparing 55-65 year-olds; but England/Northern Ireland (UK) is among the bottom three countries when comparing literacy proficiency among 16-24 year-olds. In numeracy, the United States performs around the average when comparing the proficiency of 55-65 year-olds, but is lowest in numeracy among all participating countries when comparing proficiency among 16-24 year-olds. This is not necessarily because performance has declined in England/Northern Ireland (UK) or the United States, but because it has risen so much faster in so many other countries across successive generations.

Academic skills are not everything though. UKCES found that skills like problem solving, communication and conflict management are just as important and that these are better developed in the workplace than in the classroom. The report’s main finding was that Britain’s students need more work experience.

In essence, this report contains one simple message: genuine experience of the workplace is vital for young people. As a result, small jobs make a big difference to young people’s chances of securing work, starting careers and progressing within them.

Those countries offering more work experience to their youngsters tend to find fewer of them without jobs in their early 20s. Britain is around average here but, given our high ratio of youth unemployment and the OECD’s comments about skill levels, we need to give our youngsters all the help they can get.

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Combining education and work experience is partly about the design of courses in further and higher education but there is also an onus on employers to work with colleges in providing employment that, as UKCES says, is not just making the tea. All too often, the problem of youngsters with poor skills is thrown back on schools. This report suggests that employers need to do more too.

In short, if we want young people who have working world and life experience we have to give them working world and life experience. Who’d have thought it?

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NHS – close to the edge

The £2 billion NHS funding gap made headlines this week. It’s a story we will probably hear every year from now on, with the amount getting slightly bigger each time. Two graphs from the King’s Fund report earlier this year explain why.

Firstly, the NHS isn’t getting anywhere near the level of funding it used to. The King’s Fund reckons, depending on how you measure it, rising costs and demand mean that NHS spending runs somewhere between 3 and 6 percent above the rate of inflation. In other words, it needs at least a 3 percent real-terms increase just to stand still. With a simple inflation-linked budget increase, then, eventually the NHS will either run out of money or have to stop delivering some services.

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Unless, of course, it can make up the difference through efficiency and productivity improvements. This brings us to the second chart. The productivity improvements needed are massive and way ahead of anything the NHS has achieved in its entire history.

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It is true, the service got off to a good start; 3.2 percent and 2.1 percent in the first tow years of the Coalition government. According to Andrew Street, this is the first time it has achieved savings in consecutive years for over a decade. But, while those numbers are heading in the right direction, they still don’t get us to an annual 3 percent improvement, let alone a 4.7 percent one.

The trouble with year-on-year productivity improvement is that, after the first year, it gets much harder. Giles’s bloodletting analogy illustrates the problem. If you give a pint of blood, after a sit down for a few minutes, you’re OK. But what if the doctor said, “You seem fine after that. How about coming back tomorrow to give another one?” After a week, you’d be feeling very poorly. Taking cost out of organisations is a bit like that. Hit the easy wins in the first year, sack your contractors and cut your training budget in the second and, in the third, well, that’s when it gets really hard.

As this Bank of England report showed, across the major economies, for service organisations, sustained, year-on-year, sector-wide productivity gains of this size are extremely rare.

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There might be some great case studies and people doing some excellent work, but replicating their gains across the entire NHS will be difficult. We are asking a sector with very little history of making major long-tern productivity gains to achieve improvements that would be pretty unusual anywhere in the world.

The King’s Fund points out that making savings of this size through productivity improvements needs some investment. In other words, you have to spend to save. Just switching off the cash and letting people get on with it is unlikely to work. Its conclusion is stark:

The NHS productivity challenge: experience from the front line

The question therefore is not whether the NHS will run out of money but when, and how this can be avoided. In a context in which organisations with a history of good performance are struggling to cope, there is every prospect that problems that have so far been found in a small number of providers will become much more common. The risk of contagion – of the NHS reaching a tipping point where only a minority of organisations are able to sustain acceptable levels of performance – is a clear and present danger.

As with other areas of public spending, we are back to the 2015 dilemma again. Unless the NHS makes some near-miraculous productivity improvements, its protected budget will be nowhere near enough. It will either have to stop doing some things or we’ll have to stump up some more tax to keep it going.




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Small is not powerful

Adam Lent has written a wonderful piece, Small is Powerful: Escaping the 20th century love of big poweron the end of “big business, big government and big culture”. The future, he says, is small. Smaller businesses, smaller state and a diffusion of power.

It’s written in that fine English tradition which grounds its radicalism in the past. Parliamentarians in the Civil War invoked Magna Carta and those who framed the Magna Carta cited the laws of Edward the Confessor. The idea that, somewhere a long the line, ancient freedoms have been curtailed by the powerful is a recurring theme in English history.

A Brief History of Big Versus Small

Our modern notion of individual freedom and rights was forged in the seventeenth and eighteenth centuries by the great liberal thinkers and movements of that era. But at the time these ideas were widely regarded not as a modern vision of the future but as answering an urgent need to protect ancient respect for diverse local practices, traditional constraints on the power of the state and an economy built around the agricultural smallholder and artisan. In fact, it was monarchical absolutism that presented itself as fresh and radical with its goal of placing all power in an efficient centralised state that would break with tired medieval ways, unite fragmented nations in a common purpose and secure economic well-being at a time of growing imperial conflict. The early assertion of liberal rights and freedoms were as much a reaction against this new wave of absolutism than a break with the past.

Ultimately, of course, liberalism gained the upper hand over absolutism by the middle of the nineteenth century with democracy, the rule of law, legal recognition of human and civil rights and free trade and the free market very gradually securing gains across Europe and achieving full acceptance in the United States.

But just as an ideology that had its origins in respect for ancient diversity, small government and the independent trader seemed to be on the rise, a counter-trend was slowly emerging that valued entirely the opposite. It would be easy to say that absolutism regrouped and fought back but that is too simple. This was the emergence of a new consensus around the value of concentrations of political, social and economic power which was both far more intellectually sophisticated, more politically complex and more deeply rooted in major technological and economic changes than the belief in the divine right of kings. And, as it would turn out, it would also prove far more ambitious.

This isn’t a history of Big versus Small though. The constraints on the medieval state’s power were the church and the nobility, in other words, rival concentrations of big power. The agricultural smallholder and artisan had very little power. Whether they were being oppressed by the king, the church or the local baron didn’t really make much difference. The Whiggish anti-monarchism which evolved into liberalism came first from the aristocracy’s resentment of royal power, not from a desire to promote diversity and protect the independent trader. Again, this was one form of big power confronting another.

The nineteenth and twentieth century didn’t mark a growth in big power. It’s true that corporate power became more concentrated as mergers created bigger companies but this was just a different sort of big power. Corporations grew and the relative wealth and power of the aristocracy declined, unless they too were canny enough to invest in the new industries. For the voteless worker, the small shopkeeper or the artisan, it just meant they had a different sort of master to whom they had to kowtow. There was a different type of chap in t’ Big House but it was still t’ Big House.

For the majority of people, things only began to change when they got big power of their own. Here’s Adam’s view, with mine in brackets:

Particularly on the left the notion took hold that the concentration of power and resources in the state would mean that working class conditions could be improved more rapidly, [they were] that the power of the capitalists could be matched more effectively [it was] and that the economy could be controlled to create the full employment and price stability that ordinary workers needed [well 2 out of 3 aint bad].

All over the industrialised world, it was big power, in the form of trade unions, mass reform movements and political parties that delivered the political rights and economic improvements that we now think of as making the a good society. Even where autocratic regimes granted workers rights and welfare, as in Imperial Germany, it was through fear of revolution and social unrest.

Big power, says Adam, began to decline in the 1960s.

Cultural and social conformity also began to fracture at this time. The 1960s had seen an upsurge of interest in alternatives to the stifling conventions of the post-war era but the real challenge came in the 1970s as those long disempowered and marginalised because of their ‘otherness’ – women, black, gay and disabled people – established forthright movements demanding the same respect, rights and freedoms as dominant groups. The long-term impact on people’s sense of themselves and their attitude to others of these early movements against concentrations of cultural and social power has been enormous. It is maybe unsurprising that it was during the 1970s that the decline in membership of the big civil society and political groups that had reinforced those concentrations began.

Two things to say about this. Firstly, you can’t blame the big 20th century government, corporations and trade unions for cultural conformity. Were conventions more stifling in 1958, 1858 or 1758? Read the novels of the periods and work it out. At least, in 1958, the money in people’s pockets gave them a few more options. That’s why the 60s happened as they did. And people had money in their pockets because the postwar big state, big corporations and big trade unions had helped put it there.

More importantly, though, big power didn’t decline everywhere. As Adam acknowledges, during the same period the concentration of corporate power continued. A Swiss study a few years ago identified a small number of companies with a huge amount of power over the global economy. Just as people were abandoning those institutions that had served them so well for so long, to ‘do their own thing’, others carried on amassing their power, leaving us with the imbalance we see today. Hardly surprising, then, that the era Adam describes as ‘Small Fights Back’ saw the decline of wages relative to capital, increasing inequality and a rising share of income for those at the very top. If small was fighting back, it was getting a damned good kicking.

The thing about big power is that it gets stuff done. The organisation and concentration of resources is what made rich countries rich (which is why places with lots of very small companies are poor). The countervailing power of unions and other social movements made the owners of these concentrated resources agree to share the fruits with everyone else.

Small might be very fashionable but small is not powerful. Furthermore, whatever Merrie England image you may have of autonomous yeomen and artisans, small has never been powerful. Small is only powerful when it gets together with others. Crucially, too, it only stays powerful when it stays together. Crowdsourcing and flash mobs might briefly unnerve the powerful but they are ephemeral. To maintain that pressure requires some sort of organisation. Our ancestors understood this. That’s why they formed trade unions, co-operatives and mechanics’ institutes.

Adam presents a rose-tinted view of a the pre-industrial past and of the last thee decades. In between is the late nineteenth and early to mid twentieth century which he sees as a dark period of big power. It’s a very strange stance for someone standing up for the small and condemning the power-hungry. Whatever its faults, during that period, wealth and power in Britain were re-distributed further than at any other time in this country’s history. It’s hard to Adam’s ‘Small Future’ delivering quite so much.

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