The U-turn that wasn’t

George Osborne’s headline-grabbing U-turn on tax credits wasn’t really a U-turn at all. To stretch the analogy, he put the indicator on to make it look as if he was going to pull a u-ey but then he just slowed down and kept going in the same direction.

The clever folk at the Resolution Foundation spotted this within minutes:

By scrapping tax credits but moving people onto universal credit, the overall effect by the end of the decade is pretty much the same.

Screen Shot 2015-11-27 at 09.05.31As the IFS said, “the reversal of tax credit cuts makes no difference in long run.” The government still plans to cut in-work benefits but not just yet.

In the short-term, therefore, those on low incomes get a reprieve.

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By the end of the decade, though, they are more-or-less where they would have been under the original plan.

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Of course, the chancellor couldn’t possibly have U-turned on cuts to in-work benefits minutes after he had promised that his £12 billion welfare cuts would be “delivered in full“. With most of the other big chunks of benefit spending already off limits it would have been arithmetically impossible.

The social security cuts are even more important now that the chancellor has eased up on cuts to public services. As the OBR’s report shows, welfare forms a much bigger proportion of the planned spending reduction than it did in the last parliament.

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I still can’t see it happening though. Taking £12 billion off the welfare bill, even allowing for pay increases later in the decade, still looks like a tall order. As Matt Whitaker noted, the OBR has slightly downgraded its forecasts for household income and average wage growth since the last budget.

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Even if the National Living Wage boosts incomes for the lowest paid it will be nowhere near enough to offset the benefit cuts.

Cutting £12 billion from welfare will be difficult to do without causing considerable distress to millions of people. At best this will be politically damaging, at worst it could lead to serious social unrest.

But if the government can’t make its welfare savings and it is only taking £10 billion off public service spending, how will it meet its deficit target?

I suspect this is where the real U-turn will occur. More crafty tax increases, some of them outsourced to local government and the new devolved authorities, together with some blarney about why welfare costs didn’t come down, probably blaming employers for not stepping up. If the chancellor has ruled out extra borrowing, is cutting less from public services and then finds he can’t cut welfare, the only option left is to increase tax. For all the hullabaloo, Wednesday’s U-turn wasn’t really a U-turn at all. The tax U-turn will be slower and a lot quieter. More like one of those long gentle bends in the road that you don’t even realise has taken you in a different direction.

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Osborne not the Dick Dastardly of state-shrinkage after all

A year or so ago, some of us got into a discussion about whether or not George Osborne is an ideologically driven state-shrinker. Some people think he is, others, including Chris Dillow and me, think he isn’t. Wednesday’s Autumn Statement must surely have settled that argument.

Firstly there is the extra £27 billion in tax receipts the OBR found down the back of the sofa. What would a small state ideologue have done with an extra £27 billion? Not what the chancellor did, that’s for sure. He spent most of it on public services and welfare.

As Chris Giles points out, the chancellor is also planning to increase taxes:

There are 31 policy measures outlined in the official documents. By 2020-21, all but two of these are the equivalent of tax increases to improve the public finances.
The most significant increases are the implementation of the apprenticeship levy, forcing companies rather than taxpayers to pay for training, at £3bn a year. Other significant revenue raisers are the higher stamp duty rates on additional properties and large rises in council tax bills earmarked to shore up the social care and police budgets. The OBR expects the Autumn Statement directly to increase council tax revenues by £2.2bn a year at the end of the forecast.

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The result of this is that, while the last parliament could reasonably be described as one of state-shrinkage, with most of the deficit reduction load falling on public services, this one will be a lot less so, with tax contributing more to the reduction of the deficit.

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This is still austerity but it is pragmatic austerity. We no longer hear the blood-curdling war cry demanding even more cuts over the next five years than the last. In one year, George Osborne’s plan for public service spending has gone from utterly bonkers to might-just-be-doable.

As Gavin Kelly said yesterday, the chancellor is so pragmatic he will nick ideas from anyone:

[L]ook at the overall reduction in public service cuts and it’s clear: things just got more plausible.

Indeed the plans now look more like what we might have expected to see had Labour won power. Mr Osborne has confirmed in his Summer Budget and then Autumn Statement not just his political pragmatism but also his openness to ideas from a variety of sources: he’ll steal ideas from both Ed Miliband or Ed Balls.

To the surprise of many people, including me, the level of satisfaction with public services hasn’t changed much since 2010. Recent research by IpsosMori found that three-quarters of the population have barely noticed any difference.

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The Local Government Association’s survey found something similar. It noted a slight decline in satisfaction with council services but nowhere near what you might have expected given the level of funding cuts.

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In other words, the government pretty much got away with it last time round. There are signs that people are beginning to get worried about further cuts though. The IpsosMori survey shows that people are less optimistic when asked about the future of specific services.

In general, the voters don’t share politicians’ and think-tankers’ enthusiasm for much smaller government. Opinions may fluctuate on whether spending should increase or stay the same but there has never been much enthusiasm for shrinking the state.


Source: British Social Attitudes Survey

With local government and the NHS likely to struggle over the next five years we may be getting close to the point where the British decide they have had enough state-shrinkage for now. George Osborne, being an astute politician, has probably sensed that.

I’m not sure that the chancellor ever really wanted to shrink the state in the way that some of the people in his party would have liked. The measures in the Autumn Statement are hardly the actions of someone hell-bent on small government. The chancellor was boxed in by his promise to eliminate the deficit by 2019-20. The first chance he got to do so without chopping off parts of the state, he grabbed with both hands. 

I suspect this has much to do with the Conservatives’ unexpected re-election and with it the very real prospect of George Osborne becoming prime minister. With Labour in such a mess, there is also a good chance that he might be prime minister until 2025. Destroying bits of the state doesn’t look like such a good idea when you are the one who is going to have to deal with the consequences.

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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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