Chancellor cock-a-hoop as OBR finds money behind the sofa

There will be some sense of relief in the public sector after yesterday’s Autumn Statement. According to the OBR, the £42 billion real terms cut in day-to-day public service spending (RDEL) it forecast only half a year ago is now down to just over £10 billion.

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In cash terms, the governments plans imply hardly any cuts at all to the total amount. Overall spending on public services is set to rise, albeit not in line with inflation.

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Of course, the effect of protecting some departments means others will still have to make significant cuts but the overall picture is nowhere near as bleak as it looked only a few months ago.

So what has changed?

Effectively, the something that Dave and George hoped would turn up just has. Or, at least, the OBR thinks it will. It expects slightly higher economic growth than it forecast earlier in the year, together with lower welfare costs and significantly higher tax receipts.

The effects of this can be seen in the OBR’s charts on the sources of deficit reduction. Compare March with November.

March 2015

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November 2015

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In yesterday’s forecast, increased tax receipts and reductions in welfare spending take a lot more of the load so the deficit can be eliminated without the swingeing cuts to public service spending predicted in March.

The next chart shows the latest forecast compared with the March one and with what happened in the last parliament. It’s a bit confusing because the two forecasts are on the outside and 2010-15 in the middle.

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The far left column shows how much more reduced welfare (yellow) and higher tax receipts (green) contribute than in the March forecast  (far right). It also shows the difference between both and what happened over the last five years. Six months ago we thought that public services were due for even greater cuts than those seen in the last parliament. Now it looks as though they won’t be anywhere near as deep.

After the cuts public sector organisations have sustained over the past five years and with increasing pressure on the NHS and councils due to ageing and population increase, even a cut of £10.4 billion will make life difficult. Probably not catastrophically so though. The forecast reduction in day-to-day public service spending is £30 billion less than we thought it was going to be in March. The collapse of a major public service by the end of the decade looks much less likely than it did six months ago.

Of course, holding public service spending cuts down to this level is dependent on the tax receipts rolling in and the welfare costs falling as predicted. The chancellor is still promising to reduce social security costs by £12 billion. Even with improved growth and higher wages, it’s still difficult to see how he will manage that.

Then there’s the question of growth. Firstly, with signs of a global slowdown, can our economy be expected to grow as quickly as the OBR predicts? Secondly, even if it does, how much of it will translate into tax receipts? As Mike Bird says, the OBR has tended to be over-optimistic about government revenues in the past. Is an extra £27 billion realistic?

If welfare costs don’t fall and tax receipts don’t rise by as much as the OBR forecasts, we are back to public service cuts as the only means of eliminating the deficit. Yesterday’s figures look more encouraging than anything we have seen in recent years but it does feel a bit like suddenly finding money down the back of the sofa. Perhaps something will turn up to ease the government’s deficit challenge but it hasn’t yet and there are still some very good reasons why it might not.

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Productivity and the National Living Wage

The CIPD and the Resolution Foundation are collaborating on a piece of research into the impact of the National Living Wage (NLW). According to their first study over half of the country’s employers expect to be affected by it. Around a third said they would meet the increased cost by improving productivity and 22 percent said they would take lower profits. Only 15 percent said they would lay off workers or slow down recruitment.

That all sounds promising but, as Matt Whittaker points out, the productivity increase needed to cover the cost of the NLW could be pretty steep. As you might expect, there is a strong relationship between rising minimum wages and rising productivity. Most countries in the OECD have not strayed very far from this line of best fit.

Screen Shot 2015-11-20 at 16.17.15In the absence of any productivity growth, the proposed NLW would move some way from the line (the green circle) by 2016 and quite a long way (the purple circle) by 2020. The arrows indicate the size of the productivity increase that would be needed to get the NLW back to its current distance from the line. The purple arrow implies productivity growth of 6.6 percent per year.

This is far from an exact science. As Matt says, it really is uncharted territory. No-one has tried a minimum wage hike on this scale before. Nevertheless, it gives us a good starting point for estimating the sort of productivity gains that might be needed to cover the NLW.

Now here’s the problem. 6.6 percent per year is a huge amount. Increasing productivity is extremely difficult to do in a single year. Pulling off a 6.6 percent productivity improvement year-on-year for half a decade would probably require some form of sorcery. As Matt says, average productivity growth in the UK between 1991 until the crash was around 2.2 percent per year. Productivity growth is also more difficult in service industries where most of the lower paid jobs are. As this Bank of England report shows, it’s difficult to find many examples of sustained productivity gains much higher than about 3 percent per year. Getting even half way to 6.6 percent looks unlikely.

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Furthermore, many of the employers likely to be most affected by the NLW are small firms. As this Resolution Foundation report shows, small and micro businesses will see the highest rises in their wage bills.


Despite the prime minister’s claim that small businesses are the economy’s magic ingredient, many of these companies took a severe hit during the recession. Britain’s small firms are not in great shape and have, if anything, seen more of a productivity fall than larger businesses. Turnover per worker for firms with under 50 employees has been on the slide for some years.

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Chart by New Policy Institute.

As UKCES reported earlier this year, there is a long tail of poorly managed businesses among Britain’s small employers. It is doubtful that they have the ability or the capacity to make the sort of productivity improvements needed to cover the cost of the NLW.

For the same reason, taking lower profits won’t be an option for many either as they are probably not taking very much out now. People often assume that all business owners are minted but many don’t pay themselves that much more than they pay their workers. The leader of the gang of cleaners I spoke to recently reckoned she took home less. A survey of small shop owners a couple of years ago found that 55 percent of them earned less than the minimum wage.

At around the same time as the NLW comes in, small business owners will have to deal with a tax on dividends and the obligation to enrol their employees in a pension scheme. And all this is before I’ve even considered the specific pressure faced by the care sector, which deserves a post of its own.

In my admittedly mischievous and slightly flippant post a couple of weeks ago, I raised the prospect of the NLW kick-starting a productivity boost and digging the chancellor out of his fiscal hole. In reality, though, this looks very unlikely. It’s difficult to see how the level of productivity increase required could be achieved, particularly by the sort of employers that need it most. As anyone who has tried it will know, talking about productivity improvement is easy. Actually doing it is teeth-grindlingly hard.

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The incredible shrinking gig economy

The New Policy Institute has some interesting charts based on the government’s business population statistics, looking at the rise of businesses with no employees, .

Given what we know about the rise in self-employment, we would expect to see an increase in the number of no-employee businesses and that is what has happened over the last fifteen years.

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Despite this, though, the share of turnover accounted for by these businesses is actually less than it was in 2000. Their share of total employment has risen from 13 to 17 percent while their share of turnover has fallen.

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Turnover per worker has increased for the largest companies, fallen significantly for small firms and collapsed for microbusinesses. The number of non-employee businesses has increased by 74 percent, their total turnover is only up by 24 percent in real terms. That means a lot more businesses needing to be fed from a pot that hasn’t grown by very much.

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Again, this corroborates what we know from the analysis of ONS, DWP and HMRC figures about the drop in self-employed earnings. The number of self-employed might have increased but, relative to the size of the economy, the amount of business they have generated hasn’t. The numbers don’t look all that great for small businesses either, while medium-sized ones have just about held their own.

On average, according to the NPI research, businesses with no employees turn over £53,000 a year, which is well below the VAT threshold. As the BIS figures show, this is where most of the growth in the number of businesses has come from over the past 15 years.

Private sector businesses 2015

Source: BIS Business Population Estimates

What seems to have happened is that the usual churn of small and very small businesses has slowed down so the number of people who might normally have been expected to stop running businesses has fallen. As the NPI’s research earlier this year showed, people are staying self-employed for longer.

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At one time, a hairdresser or fast food outlet might have folded once there was one too many on the high street and its owner either gone back into employment or retired. Nowadays they tend to keep going. This acted as one of the shock-absorbers for the economic downturn. Whereas some countries saw their unemployment rate rise after the recession, the UK’s self-employed gritted their teeth, hung on for dear life in barely viable businesses and buoyed up the employment figures.

There was a heated argument between Frances Coppola and Tim Worstall last month about whether the gig economy would create much economic growth. These figures suggest that, when you consider how many more of them there are, one-man businesses in this country haven’t created all that much growth between them over the past decade-and-a-half. In terms of people employed, this may be the age of the gig economy but in terms of money, despite a huge increase in their number, Britain’s microbusinesses have a smaller share of the economy than they did fifteen years ago. In that sense, our gig economy hasn’t grown, it’s shrunk.


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Dr Cameron’s advice to councils: apply more leeches

The Oxford Mail has published an exchange of letters between David Cameron and the Conservative leader of his local council, Ian Hudspeth, in which the prime minister expresses his concern about cuts to local services. In reply, the council leader politely explains that he is simply implementing the prime minister’s policies and that the amount he needs to save means that frontline services will inevitably be hit.

David Cameron tells the council chief that he is “disappointed” by the scale of the proposed cuts and asks him why he can’t make savings to back office services instead.

There is sense of deja vu about all this. David Cameron was banging on about back office savings five years ago. The problem is, councils have already made most of the back office savings they can safely get away with. As the council leader explains, Oxfordshire has done all the things the government recommended. It has set up back office service centres, cut its top two tiers of management by 40 percent, shared services with Hampshire and frozen pay. There isn’t much more left to squeeze out.

It is, as George Monbiot says, as though he’s talking to a slow learner. The prime minister is still talking about things were being discussed years ago. It’s like the kid who hasn’t been paying attention asking a daft question in class. No, Dave, we did King Alfred last term. We’re on the Normans now.

As the IFS reported just before the election, local authority budgets were cut by around a fifth during the last parliament, more if you exclude health, education and emergency services.

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Councils coped with this by digging into reserves and by making some of the biggest cuts in percentage terms to services that are not very visible, such as planning and regulatory activities.

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Cuts to planning and building control will go largely unnoticed until, at some point, someone asks why so many sub-standard houses were built, so many flood plains developed or so many nightclubs and betting shops opened in a given area. The reduction in safety and environmental health inspections will only come to light when people get injured or there is an outbreak of food poisoning.

The National Audit Office calculated the real-terms reduction in local government income to be 25 percent between 2010-11 and 2015-16. It broke down the impact on services in a slightly different way.

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The only service to get an increase in spending was children’s social care which is, of course, one of the most visible and high-risk of all council services. Mess that up and you are in serious trouble.

None of this is going to get any easier. Earlier this week the Resolution Foundation published a report on the future shape of the state. Rising debt payments and a social security bill kept high by pensioner benefits means that the only way to eliminate the deficit is to cut public service spending.

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As the overall public service pot gets smaller, protected services take up an ever greater proportion of spending which squeezes everything else. Local government funding is part of that shrinking pink bit at the end.

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This time last year the National Audit Office raised doubts about the financial sustainability of more than half of the country’s local authorities during the 2015-20 parliament.

Analysis of the auditors’ statements indicates they have growing concerns about the capacity of certain authorities to continue to identify savings given the scale of reductions they have already made. They have also raised concerns about the capacity of some authorities to make the savings they have already identified.

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It also remarked that the Department for Communities and Local Government was not monitoring the impact of the cuts, that “its knowledge of service sustainability is limited” and that it “risks becoming aware of serious problems with the financial sustainability of local authorities only after they have occurred”. In other words, it really has no idea what effect the spending cuts have had so far.

Neither, it seems, does the prime minister. If you fail to understand what local councils have done over the past half decade, you can have no idea whether or not they will be able to cope during the next one. As Giles says, if you take a pint of blood from someone once they will probably be fine. Take another one a couple of days later and they might feel a bit sick. Take a third pint a few days later and they will probably fall over. It’s much the same with organisations. There is only so much you can take. A lot of local authorities are getting close to the falling over stage. Homilies from a prime minister, five years out-of-date, are not really going to help.


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Herding wildcats – good luck with that one!

The Trade Union Bill has its third reading this week. It will almost certainly be passed, now that some of the unworkable bits of it have been dropped. The bill is a political stunt. There is no practical reason for it as strikes are at an all time low. There is no moral reason for it as a strike vote is not binding on those who don’t vote or who vote no. The argument that strikes are inconvenient is a red herring. A strike voted for by 80 percent of the workers is just as inconvenient as one backed by only 30 percent. Probably more so as it is likely to be more solid. Inconvenience is an argument for banning strikes altogether, not for adjusting the ballot threshold.

Given that it is difficult for unions to get high voter turnout in postal ballots this legislation is likely to make strikes more difficult to call. A 40 percent threshold effectively counts non votes as no votes. An apathetic majority can therefore deny a committed minority its right to strike.  Using the law to stop people going on strike doesn’t solve the underlying causes of industrial disputes though. If people are disgruntled enough to go on strike, preventing them from doing so legally will only make them resort to other means.

Boris Johnson describes action by London Underground workers as “wildcat strikes”. This is a misuse of the term. Wildcat industrial action is that which is in breach of agreed procedures and not officially sanctioned by the union. Talk of banning wildcat strikes is ridiculous because wildcat strikes are, by definition, already banned. I suspect that Boris knows this and is simply using the term as a smear.

He should be careful what he wishes for because the more difficult you make it to strike within the law, the more likely people are to resort to wildcat action. The trouble with wildcat strikes is that they a lot more difficult to manage than official ones. Because wildcat action is illegal, people tend to be more creative about it. For example, continuing to work but refusing to collect fares. This tends to go down well with the public while blowing a big hole in transport operators’ budgets. Then there was the action by prison drivers in Ireland earlier this year. One day they all forgot to bring their driving licences and so were unable to work.

Whereas there is plenty of warning about official action, wildcat strikes just happen. The first thing you’d know about it would be when lots of train drivers called in sick on a Monday morning. In London, that would be enough to bring the city to a standstill by 8am. No time to make alternative arrangements, no scheduling of working from home or out-of-town meetings, just lost of people stuck at stations with nowhere to go.

The other problem with wildcat strikes is finding out who to negotiate with. Because they are illegal, people are reluctant to admit to organising them. The union certainly won’t if it wants to avoid being fined. Workers risk being sacked or sued. If a strike is unofficial employment protection doesn’t apply. It can therefore be difficult to negotiate and almost impossible to know whether the people you are negotiating with have the power to stop the strike if you reach a settlement.

Official strikes operate within a structure that allows them to be planned for and managed. They act as a safety valve for workplace discontent, allowing it to be channelled, focused and managed. Remove that and the alternative may be less predictable and more disorderly forms of industrial action. Communications technology and social media have made it easier to organise large groups of people at short notice. A few weeks ago, for example, hundreds of motorcyclists appeared on the streets of London, taking the authorities completely by surprise. Flash mobs have been used very effectively against supermarket chains by German trade unions. An attempt by employers to have them banned was thrown out by the courts. Making traditional forms of industrial action more difficult might encourage people to think more creatively about how to make their protests.

Evidence from British history and from around the world history tells us that, even when the penalties for striking are severe, they still occur. Trade unions in this country were formed at a time when workers could be imprisoned and, at least in theory, flogged, for walking off the job. Governments can outlaw strikes but they can’t legislate away workplace conflict. It has a habit of making itself known by other means. Making legal and official strikes more difficult makes it more likely that the discontent behind them will appear in ways that are much more disruptive and difficult to manage.

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How the government could avoid tax credit cuts

The Resolution Foundation published a paper on tax credits yesterday. Just in case anyone is still in any doubt, it showed that the combined effect of tax cuts, the National Living Wage and cuts to tax credits will pivot at somewhere around the 50th percentile in the household income distribution. The richest half will be better off and the poorest half worse off. For the poorest third, the income loss is likely to be severe.

Tax credit winners & losers

None of the fudging options will compensate for this, says Torsten Bell. Extra tax cuts, increases in the minimum wage or phasing the cuts over a longer period won’t make much difference. The brutal arithmetic of this means that, eventually, a lot of lower-income households will get very badly hit.

Last week I said that the government has nowhere to go on tax credits if it is to keep to its pledge to eliminate the deficit without increasing taxes. Maybe I was wrong though. The Resolution Foundation reckons there might be other ways the government can find the money. For example:

Res Foundation Savings

Reversing the rise in the thresholds for paying basic and higher rate income tax would save £6.2 billion, more than enough to avoid having to cut tax credits at all. This would also have the advantage of not taking any money away from people. Slowing down increases in tax thresholds is the nearest governments get to a fiscal free lunch. People only cross tax thresholds when they get pay rises. They might be a bit disgruntled if they pay a bit more tax than they envisaged and, over time, if too many people who don’t consider themselves rich find themselves in the top tax bracket, things can get a bit awkward. But nowhere near as awkward as taking away large amounts of cash from people who were not earning very much in the first place.

Which is why I would not be surprised if, eventually, the government does something like this, perhaps not abandoning tax credit cuts completely but easing off on both the tax credit cuts and the tax threshold rises at the same time.

On Conservative Home last week, Andrew Grimson remarked on the work of the Resolution Foundation in providing the critics of tax credit cuts with “high quality ammunition”. He concluded:

The Resolution Foundation intends to think not only about fairness now, but about living standards for future generations, which takes it into the question of how to make the British economy more productive and thus more prosperous. It will have the freedom to range very widely over Government policy, and to comment much more authoritatively, and at times much more damagingly, than Jeremy Corbyn and John McDonnell seem likely to do.

During the last parliament, the think tanks often scored more direct hits on the government than the opposition managed. High quality ammunition is only any use if you have people in your army who can shoot straight.

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The gig economy: don’t give up your day job

Everybody seems to be talking about the gig economy at the moment. It’s an ill-defined term but basically it means more people making their living by picking up bits of freelance work through online marketplaces.

Every so often, a survey, usually by an agency or a freelancers’ organisation, tells us that a large proportion of the US workforce (usually somewhere between 30 and 40 percent) is now self-employed and that the number will inevitably rise, possibly to 50 percent, by the end of the next decade. This has perplexed many American economists and business writers who point out that there is no evidence behind these claims and quite a lot to suggest the opposite. As Bloomberg’s Justin Fox points out, the surveys with these big numbers include anyone who has done some freelance work over a given period and would include “an 18-year-old who lives with his parents and plays video games all day but occasionally mows neighbors’ lawns or walks their dogs”.

Josh Zumbrun, in the Wall St Journal, says the US economy is actually getting less giggy, with the proportion of self-employed people falling in recent years.

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The gig economy might fit with the American legend of independence and self-reliance but the data show that, just as the US is not a country of small business, it’s not a country of freelancers either.

In the UK there is at least has some data to support the notion of the gig economy. The proportion of self-employed workers rose to a record high last year and, though it has eased off slightly since, it is still high by historical standards.

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Chart via ONS Economic Review, 3 November 2015

Even so, says Laura Gardiner, it is not clear whether this represents a new economic model or just the lack of employment opportunities after the recession. The data give mixed messages:

Maybe there are signs of the gig economy in the jobs self-employed people are doing? Here, the picture is mixed – the three biggest growth sectors for self-employed workers since 2009 have been hairdressing, cleaning and management consultancy. Granted, these services could be traded in the gig economy, but they’re also jobs with a history of growing self-employment incidence that pre-dates the birth of the online marketplaces we’re talking about. The next biggest riser is ‘renting and operating real estate’, which – promisingly – could reflect people offering their homes and driveways online. On the other hand, taxi operation is the biggest faller, perhaps quelling the suggestion that Uber is taking over.

That said, it is possible that some of the gig economy doesn’t get picked up in employment stats. It could be that people in employment are doing bits and pieces of freelance work, using online marketplaces. The standard figures on who is employed or self-employed, full-time or part-time and permanent or temporary might be hiding a lot of freelance activity.

My hunch is that some of the rise in self-employment reflects a longer term change in the nature of work. As the Economist said a couple of weeks ago, if the jump in self-employment had been caused by the recession it would have fallen more quickly once employment started to recover. All the same, the idea that, five years or so from now, many people will earn their main living from picking up bits of freelance work is fanciful.

The astonishing collapse in self-employment income over the last decade or so shows just how difficult it is to make a living from freelancing. There may be a record number of self-employed people but their share of the UK’s turnover and the overall cash amount they earn between them have fallen. It’s rather like one of those nature documentaries where, as the drought sets in, more and more animals arrive to drink from an ever-shrinking water hole. As Paul Nightingale and Alex Coad point out, the typical British startup just adds to the churn by putting another small firm out of business. It’s likely to be the same with giggers. The more of them there are, the less each one will earn.

That’s the trouble with gigging. A few big bands make good money from but most play in small venues for beer money, or sometimes just for fun. The gig economy might be good for supplementing income but it is no substitute for proper paid work. As the old showbiz saying goes, don’t give up your day job.

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