Brexit: the visionless vacuum

Here’s a situation I’m sure will be familiar to many of you. You embark on a major organisational change programme. At first things go well but soon you run up against a problem. There are important decisions that need to be made but the overall strategy isn’t clear. How can you restructure an organisation, re-design processes or implement a major system (or even all three at once) without understanding the overall direction of the company? At some point people start asking, “Why are we doing this? What’s the purpose?” Questions get referred up the line and nothing comes back.

This goes on for a while until a bullish and task-focused programme manager (who has been given the role for precisely those reasons) tells everyone to stop whinging and navel-gazing. There are deadlines to meet and work to be done so just get on with it. Like good soldiers, everyone rallies round and a period of feverish activity begins. But, sooner or later, the same problem comes back. You are trying to make far-reaching operational decisions in a strategic vacuum.

Usually, one of two things happens. Either the project grinds to a halt or else the tyranny of the deadline takes over. Senior executives make policy decisions on the hoof just in the interests of getting something done. You bang in the new structure or system and hope that the problems will sort themselves out somewhere along the line. I say ‘bang in’ because it often feels as though you are hammering a large peg into a wrong-shaped hole. Eventually, the organisation’s strategy evolves and it does develop a long-term vision. At this point you realise that, had you known some of this, there are things you wouldn’t have done and decisions you would have made differently. This is why organisations find themselves making the wrong people redundant, building offices where they don’t need them and implementing systems that are obsolete a year after going live.

Of course, some of this is inevitable. The world changes and sometimes it outruns the careful plans you have made. Most well-run organisations aim to keep such risks to a minimum, though. Sequencing is important. Kicking off an expensive operational change programme while not being clear about why you are doing it is rarely a good idea.

Yet this is exactly where the UK finds itself now.  We have to make decisions on all sorts of fiendishly complex detail, from hundreds of trade deals to thousands of regulations without actually being clear what sort of country we want the UK to be and what sort of relationship we want to have with Europe. Every week, something new comes to light. “Euratom, is that a big deal then?” ask the MPs who voted to leave it. “Oh dear, lots of clever people are saying it is. Not sure we really wanted to do that.”

What do the British want?” ask exasperated EU officials. We don’t know, of course, because we are working in a strategic vacuum. We have never discussed what the UK might look like after leaving the EU. Apart from concerns about immigration and, perhaps, about globalisation, it’s not clear why people voted Leave. It’s not even clear what those who led the Leave campaign want, as Stephen Bush says:

[M]ost Leave-backing Conservative MPs don’t really have a plan for after Brexit: leaving is a destination, not a staging post to anything else. It is the end of the process, when of course the most important questions around Britain’s Brexit deal hinge on the shape and size of the British economy and the direction of British policy afterwards.

Like those bull-headed project managers. We’re doing it because we’re doing it.

Yesterday’s report by UK in a Changing Europe assessed the consequences of failure to reach a deal with the EU. One of the authors, professor Anand Menon, concluded:

’No deal’ doesn’t mean the country would come to a stop. But even under relatively benign conditions and with time to prepare, the impacts would be widespread, damaging and pervasive.

Yet the less clear we are about what we want, the more likely we are to get something we definitely don’t.

Some have suggested we need a national conversation about post-Brexit Britain but it’s a bit late for that now. Imagine you are an executive kicking off the biggest organisational change programme in your organisation’s history. The system providers, building contractors and other suppliers have all been locked in and there are legally binding deadlines. You have committed hundreds of people and millions of pounds. Then you say to your exec team colleagues, “I think we need a company-wide conversation about our vision, purpose and future direction.” You’d probably be looking for another job soon afterwards.

The time to have had that national conversation was before the referendum. David Cameron set us off on this path with no thought to where it might end and no contingency planning. He lost and the people who won have no idea where they want to take us. The opposition are almost as clueless. No political leader is giving us any idea of what Britain outside the EU might look like. This is no position to be in when going into negotiations with an organisation like the European Union.

As Mr Barnier says, the clock is ticking. KPMG recently published a Brexit Navigator with decision deadline dates. To be sure of being able to continue their operations in the EU there are a number of things that different types of organisation will need to decide. Because of the lead times, to make sure everything is in place by March 2019, these decisions need to be taken well in advance. According to KPMG, the first of the deadlines are in September of this year. In short, then, when people get back from their summer holidays they will need to start making calls on what they do next. The less clear the government’s direction is, the more likely firms are to mitigate their risks by moving activities to the EU. That applies also to EU companies trading with the UK. If the UK looks like it might become a difficult place to do business, they will look elsewhere. Businesses can’t wait for clarity from the government. They need to make decisions now.

Making decisions in a strategic vacuum rarely leads to good outcomes. But, as David Brent would say, we are where we are. As ever, the soldiers will soldier on and do what they can. Civil servants, companies and public sector bodies will try to make the best of it, second guessing what might happen and making decisions in the hope that they will turn out to be not too wrong. That is what people do when there is no direction from their leaders.

By the time we leave the EU we will be thoroughly sick of wartime metaphors and appeals to the Dunkirk spirit. The analogy doesn’t work. In the Second World War the objectives were clear and we were led by people who understood what needed to be done. Now, we are leaderless and visionless. There will be no hero’s welcome for the little ship of Brexit. It is adrift on an open sea, rudderless and heading for God knows where.

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An honest debate about austerity and tax

I first heard the term ‘Candour Deficit’ in a presentation by the Resolution Foundation’s chief economist, Matt Whittaker, shortly before the 2015 election. He was referring to the unwillingness of the main political parties to be honest with voters about the choices the country faces on tax and public spending. He was on the case again last week with a succinct yet comprehensive report Ending austerity?

As Matt’s charts show, the argument that there hasn’t been any austerity falls apart as soon as you look at the detail. It is true that overall public spending fell only slightly after 2010 and will be above its 2010 level by the end of the decade. But the population is rising so, in per capita terms, we are looking at a real terms fall of 3.9 percent.

That might not sound a lot but the balance of public spending is shifting. Public service spending, known in government speak as Departmental Expenditure Limits (DEL), is falling relative to Annually Managed Expenditure (AME) which is made up of less predictable spending elements like social security and debt interest. If overall public spending is flat but AME rises then DEL has to fall.

 The DEL figure includes both investment and the cost of the day-to-day running of public services. If the government decides to increase investment, then the amount left for day-to-day public services falls even further. Per person, it will be around four fifths of what it was in 2010.

But once you protect health spending, which is huge and overseas aid spending, which is tiny, all other services are left competing for a shrinking pot.

As a result, there have already been significant cuts and staff reductions in many areas.

This, then, is how what looks like a fairly modest cut in public spending turns into some major cuts to the provision of day-to-day public services. Because of the continuing upward pressure on public spending, a small overall budget reduction is magnified by the time it reaches the frontline departments.

Still, this is all a far cry from when George Osborne was in his pomp and we were talking about cuts to per capita RDEL of 27.5 percent by 2018-19 or, that December when he went really bonkers, 31 percent. But what looks like an easing of austerity is simply the effect of the government giving itself several years longer to eliminate the deficit. It is now looking at sometime in the middle of the next decade.

Even then, I wonder if it will really happen. I’m doubtful for a number of reasons.

Firstly, the economic outlook has deteriorated. Last week, the OBR warned that Brexit presents a significant risk to public finances. It downgraded its economic forecast after the Brexit vote and then downgraded it again in March. It sees lower than expected growth dragging on, along with trade negotiations, into the 2020s. Might even this might be optimistic, given that we seem to be discovering new Brexit pitfalls by the week? Any shortfall in expected growth will hit tax revenues and increase the gap between government income and spending, which is what happened for much of the last seven years.

Secondly, I wonder whether the government will see the proposed welfare cuts through. As Matt shows, the cuts will fall primarily on those of working age; over 11 million families.

Some of the cuts have yet to be implemented. Those on already low incomes, many of whom are in work, will continue to see their benefits fall each month for the rest of the decade.

The OBR thinks this is a tall order too:

The cumulative scale of these cuts is unprecedented and, on current policy, real per capita welfare cap spending in 2021-22 is projected to be around 10 per cent lower than its 2015-16 level. Roughly half the projected savings come from simple changes to uprating – for example, the four-year uprating freeze from 2016-17 to 2019-20 – while the other half relies on the successful operational delivery of more complex changes to the welfare system. These include structural changes to the delivery of incapacity benefits, disability benefits, housing benefit, and universal credit (UC).

Furthermore, it says, the universal credit rollout isn’t going too well either:

[A]round half the welfare cuts over the five years to 2020 come from more complex reforms. The largest of these are cuts to UC work allowances and payments to larger families, which are taking place while a number of reforms remain unfinished. This type of reform has proven difficult to deliver and is often associated with substantial forecast revisions. Initial forecasts for spending on tax credits, employment support allowance (ESA) and PIP have all been too low. And while the level of savings has tended to disappoint, we have also seen delays in their delivery.

The universal credit rollout in Kensington was halted after the Grenfell fire. Piling an additional burden onto already distressed claimants was deemed too great a risk. As the economy slows, and wages stay flat, might a risk assessment conclude that continued social security cuts pose a threat to social order? When George Osborne proposed cuts to tax credits the outcry forced the government to drop the plan. There is no reason to suppose that the reaction to working-age welfare cuts will be any less vocal as the decade wears on. Given the mood of the country at the moment the opposition may be even stronger. The last thing a government mired in Brexit negotiations wants is angry demonstrations and disorder. I wonder whether the welfare cuts might be modified or even quietly dumped.

But without savings to the social security budget, public services would have to take an even greater share of the spending cuts. Which brings me to the third point. Public service providers have already cut all the easy stuff, or the things that people can’t see, like regulatory and support services. The next round of cuts is likely to fall on far more visible areas, like roads, parks and rubbish collection. It’s not just some whinging lefties who are saying this. Earlier this month the Conservative chairman of the Local Government Association warned that councils would be unable to deliver core services by the end of the decade. The NHS, too, is facing rising financial pressure. People are starting to notice and public opinion on tax and spending is shifting. When public opinion shifts, MPs tend to shift too. Even the projected cuts to public service spending, though way short of those planned by George Osborne, may well be enough to push some parts of the public sector over the edge, along with some weary and angry voters.

And finally, over the medium term, pressure on the public finances, primarily from health and social care spending, isn’t going to let up. Health costs run ahead of inflation in any case and with an ageing population, per capita spending will inevitably rise. Projections vary considerably depending on the assumptions made (see previous post) but in all the OBR’s scenarios, spending grows faster than the economy.

All of which makes me wonder whether it’s actually possible to reduce the deficit much further through spending cuts, even over the less ambitious timescale adopted since the departure of George Osborne. Unless people are prepared to accept much lower levels of state provision, and there is little to suggest that they are, cutting public service spending by the amounts suggested by the government is going to be difficult. Sometime before the end of this decade, we may get to the point where a majority of people decide they have had enough.

The question then is what do you do next? The Resolution Foundation calculates that stopping the cuts to public service and welfare spending from next financial year would cost over £30 billion. That either means more borrowing or more taxes. And just taxing ‘the rich’ won’t solve the problem.

Matt’s report concludes:

Because ‘ending’ austerity comes with large price tags, further major taxes rises are difficult and the Chancellor has ruled out significant extra borrowing, we are set for a debate requiring prioritisation of what spending restraints can be eased.

To put it another way it’s time we had an adult debate not just about what taxes need to rise but what ‘ending austerity’ actually means.

Back to that Candour Deficit again. Which is where we came in.

 

 

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The end of the state-shrinking dream

I’m old enough to remember when the libertarian right in the Federation of Conservative Students (FCS) sang Tomorrow Belongs To Me. At the time it seemed all of a piece with the Hang Nelson Mandela posters and their other leftie-baiting antics. It’s only with the benefit of hindsight that we can see just how much tomorrow really did belong to them.

By the mid-1980s, the libertarians in the FCS had vanquished the other two factions, the moderates (or ‘Wets’) and the authoritarians, the traditional Powellite Monday Club right. Their combination of free-market economic policies and a degree of social liberalism was very much in tune with the zeitgeist. Despite some traditionalist authoritarian rhetoric, the  main emphasis of Conservative policies during the 1980s and 1990s was economic; deregulation, privatisation and weakening the unions. The period since has been characterised by what David Goodhart called the victory of the Two Liberalisms. George Osborne epitomises the post 1980s Tory; a fiscal conservative who cuts public spending and welfare but a social liberal who congratulates a colleague on her same-sex marriage.

The libertarians in the FCS re-defined what it meant to be a right-wing Tory. As a friend of mine put it at the time, “It’s no longer about hanging and flogging, it’s about cutting taxes, busting unions and privatising everything down to the street lights.” Their rivals on the right faded into the background. By the time the Monday Club was finally expelled from the Conservative Party in 2000 it been a busted flush for well over a decade.

Having beaten their right-wing rivals, shaped their party’s agenda and made a good start on redesigning the country in their own image you might have thought that the libertarian right would be happy. They weren’t, though. In the early 1990s I met a few of them on a warm summer evening in a pub in Westminster after some conference they’d been to. They were as frustrated as hell. Sure, John Major was continuing the privatisation policies and there was more trade union legislation in the pipeline but the revolution seemed to be running out of steam. Breaking up “the ultimate socialist bureaucracy”, the NHS, seemed as far away as ever. The British were wedded to it and nothing, it seemed, would change their minds. Furthermore, support for privatisation had been bought. Most of those who took advantage of the cheap shares still didn’t agree with it on principle. They still don’t. The root of the problem was that the British people still wouldn’t buy into the wider libertarian vision.

There was another problem too. Even as wages councils were being abolished, the railways privatised and council services put out to tender, the European Union was threatening to impose ‘socialism by the back door’ in the form of new labour regulations under the Maastricht Treaty. “It will take us right back to the 1970s,” they said. Many on the libertarian right had been opposed to the EU for some time but now their hatred reached a new level of vehemence.

Over time, the EU’s role as the regulation bogey-man seemed to grow. To an extent, the liberal-left colluded with the story. We saw these arguments played out during the EU referendum, with some on the left warning of a bonfire of workers rights in the event of a Leave vote and some on the right cheerfully predicting one. Clearly, the EU was the fount of all red-tape and leaving it would free the libertarian right up to finish the revolution which stalled in the 1990s.

But there was a flaw in this plan which seemed to get lost in the euphoria of the Brexit vote. It was the same one that was there in the early 1990s and it hasn’t gone away. British voters don’t share the free-marketers’ vision.

The important thing to understand about right-wing libertarianism is that it is a very eccentric viewpoint. It looks mainstream because it has a number of well-funded think-tanks pushing its agenda and its adherents are over-represented in politics and the media. The public, though, have never swallowed it. Countless think-tank papers, opinion pieces and editorials, telling us that shrinking the state is just common sense and that re-nationalisation is a loony left pipe-dream, have had remarkably little effect. The majority of people still want the railways and utilities taken back into public ownership and the proportion who want significant cuts to public spending has never even reached 10 percent. After three decades of haranguing by well-placed and well-funded small-staters, public opinion hasn’t budged.

Chart from British Social Attitudes 34, June 2017 

Over the last few decades, public opinion has swung between spending more and spending the same, support for the latter peaking during the period when David Cameron and George Osborne persuaded lots of voters that Labour has crashed the economy by borrowing too much. Yet even at this point, there was no support for cutting the size of the state. As Chris Dillow never tires of pointing out, Cameron and Osborne never really made a coherent case for state shrinkage. The Big Society came and went and the moment passed.

The BSA survey, showing that public opinion had swung back to higher spending, was greeted with dismay on the libertarian right. “The British people have forgotten the perils of big government,” said Kate Andrews of the Institute of Economic Affairs.

“Alas, the big state is coming back into fashion,” said City A.M.’s Christian May:

Depressingly, support for “reduce taxes and spend less” has never broken above 10 per cent since the survey’s inception in 1983. This, as they say, is the ball game. A large and growing percentage of the population now favours an increase in taxation and a hike in state spending.

Coming so soon after the Labour Party’s much better-than-expected performance in the election, it had some people very worried. “All that matters now is stopping Corbyn,” cried Andrew Lilico. And what if a radical socialist government, backed by propertyless millennials, were to start seizing property? The prospect is so terrifying that he would almost rather stay in the EU to keep some legal protection from the red menace.

 

It wasn’t supposed to be like this. The aftermath of the Brexit vote hasn’t turned out the way that those on the libertarian right, who largely organised and financed the Leave campaign, hoped.

Firstly, the right-wing populism they fuelled to win the vote has turned out to be more like that of their old Monday Club rivals; nationalist and statist. As the Economist’s Bagehot column said, after a long absence, the shadow of Enoch Powell is back. The result was the most interventionist Tory manifesto for a generation, aimed at winning and keeping those voters who care more about security and immigration than tax cuts and deregulation.

Secondly, the idea of turning out to vote in large numbers to upset the political establishment has caught on among the young. The libertarian right tried to claim the anti-establishment rebellion as its own. It would have been fine if it had been restricted to older and more conservative voters. But young and younger middle-aged voters decided to have a go too and they gave their votes to Jeremy Corbyn.

And, of course, were there to be a socialist government after the UK leaves the EU, it could tax, spend, nationalise and intervene in whatever it liked. It could even bring in a Brexit Retribution Act to seize the property of all the wealthy old men who persuaded us to leave the EU. That’s parliamentary sovereignty for you.

Lurid dystopian fantasies aside, though, the zeitgeist is definitely shifting back towards the big state. There is talk on all sides of easing up on spending cuts and the public sector pay cap. The initiatives on employment, led by Matthew Taylor and on productivity, led by Tony Danker, may be the beginnings of a greater role for the state in the workplace; a more interventionist policy than any seen since the 1980s. And that’s just the Conservatives.

So far from Brexit being the cue for the Thatcher revolution’s last phase, it may mark the end of it altogether. The period that Jeremy Gilbert dubbed the Long 90s, that were shaped so much my the libertarian right, may now be drawing to a close. It’s no wonder the small-staters are so exercised. They have now realised that tomorrow belongs to someone else.

 

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A UK-EU customs union: An option most of us could live with?

Michael Barnier laid it on the line today. In a short but direct speech he emphasised that the UK leaving the EU will inevitably increase friction in trade:

Why do our Member States benefit from ‘frictionless’ trade in goods with other Member States?

  •  Because they form part of the internal market. This has made it possible to harmonise rules and ensure their mutual recognition, guaranteeing that goods legally produced in one Member State can be sold in all the others without any other formal requirement.
  • But also because, as members of the EU, they form part of our customs union, with a common external tariff and no customs controls at all between our countries.
  • What would be the point of not having customs duties if, at the same time, divergent national rules prevented the free movement of goods?
  • It is clear that only the combination of the customs union and the rules of the internal market allow this free, ‘frictionless’ trade between our States. One does not go without the other.

By choosing to leave the Union, you move to the other side of the external border that delineates not only the customs union but also the area in which the rules of the internal market are adopted and implemented.

Essentially, there is a balance to be struck between preferential trading agreements and political control. This applies to any trading agreement. Even membership of the World Trade Organisation requires submission to a supra-national arbitration panel in the event of a dispute. As George Magnus explained before the referendum:

There is a trade-off to be made, then. In light of this, you cannot have an abstract discussion about sovereignty without saying what you are going to surrender in terms of economic integration and benefit. Brexiteers are free to discuss “taking back control,” but they are then under an obligation to discuss the potential economic disadvantages of doing so.

Broadly speaking, the further away the UK moves from the EU’s orbit, the more political control it will have but the less preferential the trading conditions will be.

The Institute for Government has produced a handy chart mapping all the things the government says it wants against the various post-Brexit scenarios. Essentially, as you move from left to right, the ticks start to appear in the control bits, like immigration and escaping the jurisdiction of the ECJ but they disappear in the trade bits, like trade in services and the frictionless border.

Given the importance of immigration to the Leave vote, the Norway and Switzerland options must be off the table. Any post-Brexit agreement that doesn’t allow the UK government to control immigration from the EU runs counter to the spirit of the referendum result. Likewise, any arrangement that involves the UK continuing to pay into the EU budget. Frankly, if we remain in the single market and customs union, as some are suggesting, we might as well not bother to leave the EU.

The other stumbling block is the Northern Ireland border. As Mr Barnier says, the moment you move to the other side of the border there will have to be some kind of border control. The EU cannot have a customs border with a hole in it. If there are checks at airports, ports and the Channel Tunnel, the idea that you could still drive across the Irish border without any checks is plainly ridiculous.

Against this background, then, the value-for-money options on this chart would seem to be a customs union, similar to Turkey’s arrangement, or a Deep and Comprehensive Free Trade Area like that agreed with Ukraine. (In both cases, the detail would be different for the UK, given the size and shape of its economy and its previous relationships with the EU.)

The customs union option is making its way slowly up the political agenda. According to  the Guardian:

Officials and business leaders are anxious to puncture what they see as myths about a customs union that have deterred ministers from considering it as a much-needed economic option after Brexit.

While leaving the existing EU customs union is a direct consequence of Brexit, civil servants believe that agreeing a new customs union with the EU is not only possible but still compatible with key aims of Liam Fox’s Department for International Trade.

“There is a crucial difference between the [existing] customs union and a [future] customs union and [chancellor Philip] Hammond understands this now because the Treasury have taken him through it,” said one official familiar with the process.

A customs union with the EU does have some attractions. It removes us from freedom of movement obligations, the European Court of Justice and the requirement to pay into the EU. It would also allow the continuation of tariff-free trade in goods and would minimise the impact of border checks. It would also mean that we still have the benefit of all the EU’s free trade agreements, including the one just negotiated with Japan.

As Charles Grant explains:

Britain will have to leave the customs union of the EU, but could, like Turkey, create a customs union with the EU’s customs union. That would mean maintaining the common external tariff and accepting any changes made to it by the EU. Goods would then move easily across frontiers, as today, without the need for checks to see that tariffs had been paid, rules of origin respected or customs forms filled in. This would be hugely beneficial to firms that use just-in-time systems, notably those making cars and aircraft, and many retailers; to small businesses that have grown used to exporting to the EU without any paperwork; and to farmers who need to move food across frontiers speedily.

Britain should continue to benefit from the 50-odd FTAs that the EU has negotiated with other countries (though concerning the EU’s future FTAs, the UK would have to ask for special arrangements so that it was included; given the size of the UK economy, both the EU and the third country concerned would probably want to include the British). One major dividend of an EU-UK customs union would be to obviate the need to re-establish a hard border between Northern Ireland and the Republic of Ireland; without a customs union, it is hard to see how border controls of some sort can be avoided.

The downside is that the UK’s trade in goods would be determined by EU agreements. We would have to impose the EU’s common external tariff and would not be able to conclude any trade deals in goods with any other country.

But how much of a problem is that, really? How much of the talk of trade deals is just fantasy? According to Vince Cable, many of our supposed deal partners are bemused:

According to the FT, the Treasury isn’t convinced either:

Treasury officials have written an unpublished paper which challenges the DIT to prove it can line up free-trade agreements with non-EU countries that can outweigh the loss of European trade associated with leaving the customs union. Mr Hammond is likely to use the findings of that paper later this year to press home his case for staying close to the customs union.

Others have looked at this and their conclusions are pessimistic. NIESR’s study at the beginning of this year concluded that, even if we had trade deals with the Anglosphere (Australia, Canada, New Zealand, USA) and the BRIICS (Brazil, Russia, India, Indonesia, China and South Africa) it still wouldn’t offset the loss of EU goods trade.

Even with a free trade agreement with the rest of the EU, NIESR calculates a loss of 20 percent of the UK’s goods trade. Without a trade deal that would be 32 percent. The gain on goods trade from other trade deals would total 6.2 percent. Even if NIESR is only half right, that is a lot of ground to make up. It will take a lot to compensate for geographical proximity and 25 years of integrated trade.  These trade deals, about which there has been so much puffed up chest beating, may not amount to much.

That said, a customs union is not a have cake and eat it option. It does nothing for our EU trade in services. There are a number of other downsides, not least of which, is that it would not enable the UK to open up its goods markets in return for access to trade in services. As John Springford says:

The benefits of trade deals are often exaggerated, and may not be enough to offset the cost of leaving the customs union. But the UK’s advantage in services – which now make up more than 40 per cent of total exports – means that services trade policy is unusually important, and Britain would lack the ability to open its goods markets in exchange for other countries opening their services markets. In short, without control of goods tariffs, the UK would have less negotiating power over services trade.

Nevertheless, none of the post Brexit options is without its negative points. A customs union at least gets around the immigration problem with what seems to be the least amount of disruption. Whatever we do, we will have to swap trade terms for political control. If we really must leave the EU, a customs union arrangement may prove to be the least painful way of getting an agreement most of us can live with.

 

 

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Has insecurity peaked?

Have we passed Peak Insecurity? The Resolution Foundation reckons we have. Britain’s labour market is at a tipping point, says director Torsten Bell.

[T]here is good reason to believe that the labour market shifts over the next decade will be different to the surprises we’ve seen over the past decade.

Hidden behind the noise of Brexit, the labour market is entering a new phase. In the second half of 2016 the number of workers on zero-hours contracts flatlined and agency worker numbers actually fell by 50,000. The most fashionable form of work in Britain, accounting for just shy of 100 per cent of employment growth this year, is good old-fashioned full-time, employee jobs. We appear to have passed peak insecurity.

As Torsten shows, the number of workers in what the OECD calls non-standard work, which means anyone not in a full-time employee job, has fallen recently. After steep rises since the recession, the numbers in self-employment, agency work, part-time employment and zero hours contracts have levelled off.

This, he says, is due to the tightening of the labour market. Rather than falling unemployment leading to pay rises, as happened in previous decades, the falling labour supply is encouraging employers to offer better employment terms and a better quality of work.

But is there more to insecurity than the type of employment contract people are working under? After all, full-time employees are still the majority of those in work. The proportion is slightly lower than it was during the decade leading up to the recession but we certainly haven’t seen the sort of shift towards non-standard work that features in some of the more hyperbolic commentary.

Source: ONS Employment Statistics, 14 June 2017

When the Resolution Foundation looked at this in 2015, they found that the proportion of people in insecure work had risen over the past decade from 30 to 32 percent while at the same time the proportion of workless people had fallen.

Which leaves me with a question. How much of the general sense of insecurity people are feeling is due to the lack of security in their job contracts and how much is due to something else going on in the workplace?

The RSA’s Jake Thorold has similar thoughts:

While the dial may be shifting back towards better security in a strict contractual sense, major transformations being wrought by technology, digitalisation and globalisation have also broadened what it means to be and feel insecure. As Anthony Painter has recently argued, ‘the experience of insecurity is subjective as well as objective. Insecurity is about your access to a sense of agency and resilience in your life.’ This applies no matter your employment type.

It’s little surprise that between 2005 and 2015 the number of routine and semi-routine workers reporting stress at work increased by a third. Many of these employees would be considered secure by conventional measures yet are anything but.

I think he and Anthony may be onto something here. Some aspects of this sense of insecurity are not captured in the employment data. You can feel insecure when in a full-time permanent job and there is evidence to suggest that a lot of people do.

As Anthony says, the British Social Attitudes Survey shows rising levels of stress and insecurity at work. Older workers and those in more routine occupations feel less secure and less in control of their work than their counterparts did ten years ago.


Charts via British Social Attitudes Survey

The five yearly British Skills and Employment Survey also showed increasing concerns about the likelihood of job loss but also about management behaviour.

From “The hidden face of job insecurity“, Duncan Gallie et al, 2016

This suggests that, even for those in full-time work, there is more of a sense that bosses can get away with treating people unfairly than there was a decade or so ago. Technology, declining union membership and, more recently, the neutering of employment protection have probably played a role in heightening these fears.

A report on poverty published by the ONS earlier this week might give us some clues too. Compared to the rest of Europe, the UK has one of the lowest rates of persistent poverty. We have relatively high rates of entry to and exit from poverty which means that most of our poor people don’t stay poor for very long.

The flip side of this is that, over time, quite a lot of people will have had a taste of poverty. While only a small number of people remain in poverty for over a year, 30 percent have experienced poverty level incomes over the last 4 years. To put it another way, we do a much better job of distributing our poverty than other EU countries. Over a 4 year period, three in ten of our people have been given the chance to try it out.

This figure has ranged between 30 and 35 percent for the last decade. This is what the Joseph Rowntree Foundation called the ‘low-pay, no-pay’ phenomenon, as people cycle in and out of low paid work.

It got me thinking about the point Paul Johnson made when discussing the repressive labour laws of the early 19th century (see previous post).

The annual chance of a working-class household suffering criminal prosecution for breach of labour contract lay between 1 in 150 and 1 in 200 – a sufficiently high rate for knowledge of the risk to be well known within working class communities.

Could high rates of short-term poverty be having a similar deterrent effect in the early 21st century? If 30 percent of people have experienced poverty incomes in the last 4 years, many people will know someone in their workplace who has found themselves in financial difficulty relatively recently. Could low pay therefore be self-reinforcing in that the prevalence and fear of it is contributing to feelings of insecurity in the workplace and a reluctance to ask for higher wages?

I also wonder to what extent this wider sense of insecurity has contributed to the fall in job-to-job moves since the recession. Despite record levels of employment, people are not changing jobs as frequently as they did before 2008. Even the job hopping millennials have started to worry about job security.

Chart by Resolution Foundation 

Perhaps there is a ‘there but for the grace of God’ phenomenon going on here. People see others in and out of low pay while working on precarious contracts and hang on to their jobs for dear life.

The hysterical commentary on the labour market is probably not helping either. Headlines saying that half the workforce will be freelance by 2020, sometimes in publications that really ought to know better, add to the sense that the labour market is in a state of insecurity and flux. Likewise, the noise about immigration. Almost everyone who has ever looked at this seriously has concluded that immigration only has a small impact on pay. However, (and this is admittedly anecdotal) I hear stories of people being told by managers that there are thousands of Poles queuing up to do their jobs for less. There aren’t, of course, but that doesn’t matter. If people think there are then that will only add to their nervousness.

Finally, there is the question of housing. Feelings of insecurity at work are not just the product of what happens in the workplace. As an ever larger proportion of working age people move into private rented accommodation and housing costs take up more of people’s incomes, there is bound to be an impact on work.

Chart by Resolution Foundation

The private rental sector is notoriously insecure. Being at the whim of their landlords on one side and their bosses on the other, is it any wonder that today’s workers lack the confidence and security of their forebears? A full-time permanent job might look the same on paper as it did 30 years ago. It might even pay better in real terms. But 30 years ago the job holder was more likely to be unionised and have a secure tenancy. Asking for more pay or challenging arbitrary behaviour by managers is a lot harder if, at the back of your mind, there is the fear of losing your home.

So have we passed peak insecurity? I think the Resolution Foundation may well be right in that we will see a continuation of the move back to more full-time employee jobs. But there is also insecurity among those in permanent jobs. As Anthony Painter says, “insecurity is a deeper state than just a measure of employment”. It may be that the feelings of insecurity last for a lot longer than the levels of non-standard work reported in the employment statistics suggest.

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When trying to increase your pay was dangerous

Andy Haldane’s speech in Bradford this week made headlines because of his comments about interest rates but what he said about stagnating wages is much more interesting.

He looked at the evolution of the Phillips curve, which shows the relationship between wage inflation and unemployment. In what we used to think of as normal times, if unemployment went up, wages fell. As demand for labour picked up, the reverse happened  because employers had to pay more to attract people from a shrinking pool of labour. Worker bargaining power increased as unemployment fell and reduced as it rose.

At least, that’s what used to happen. As Mr Haldane said, somewhat mischievously:

Historically, there has been a reasonably strong and stable relationship between unemployment and wage growth – the so-called Phillips curve. As unemployment has fallen recently, this Phillips curve relationship would have led us to expect wage growth to pick up. That, plainly, has not happened. Over recent years, the Phillips curve relationship has been anything but strong and stable (Chart 3).

In the last couple of decades, and especially since the recession, the unemployment rate doesn’t seem to have had much impact on wages at all. Whatever else has happened, pay has stagnated.

Something similar, seems to have happened before the industrial revolution. The data we have available seem to indicate that there was a long period before the industrial revolution when there was little wage inflation and not much of a link between pay and unemployment. The Phillips curve for this period was also flat.

Chart 11 plots UK Phillips curves over three periods: 1500-1700 (pre-Industrial Revolution); 1860-1950 (post-Industrial Revolution); 1950-1977 and 1977 to date (post-war period). In each case, wage inflation is measured on the y-axis and an estimate of the output gap on the x-axis. In the post-war period, the Phillips curve conforms to type. Since 1950, it has a clearly positive slope (less slack in the economy is associated with higher wage inflation) and an intercept which is positive (reflecting positive trend inflation).

The post-Industrial Revolution Phillips curve has a conventional upward slope, similar to that operating after 1950. Higher growth or lower unemployment is associated with higher rates of wage and price inflation. The pre-Industrial Revolution Phillips curve is altogether different; it is as flat as a pancake. Indeed, it bears a close resemblance to the Phillips curves which have operated, in the UK and globally, since 2008.

Could we be seeing a return to the power imbalances of the pre-industrial period? The pattern of the last few years, says Mr Haldane, looks remarkably similar to that of pre-industrial Britain:

The move towards greater self-employment and less unionisation is, in some respects, a shift back to the future in the nature of work. Prior to the Industrial Revolution, and indeed for some years after it, most workers were self-employed or worked in small businesses. There were no unions. Hours were flexible, depending on what work was needed to collect the crops, milk the cows or put bread on the table. Work was artisanal, task-based, divisible.

While the read-across to work patterns in the 21st century is far from exact, there are some parallels. That being the case, one question is how wage- and price-setting behaviour operated during this earlier period of more “divisible” labour markets. Were any of today’s wage patterns evident then? The data we have on wages and output in earlier centuries are partial and imperfect, but nonetheless tell an interesting story.

The difficulty he identifies in comparing today’s work patterns with those of the 18th and 19th centuries may go some way to answering his question. As Simon Deakin said, employment contracts are a 20th century development. Our forebears would not have understood work relationships in the same terms. From the 16th century until 1875, employment was governed by master and servant law. The feudal idea that workers were bound to their masters was a long time dying.

In today’s language, probably the best way of understanding employment under master and servant law is as a series of fixed-term contracts. These could vary in length and often started and finished on quarter days. In theory, they gave a measure of security to workers who would at least know that they had a job until Michaelmas. In practice, as Professor Deakin explains, the courts often found that, while the worker was bound to the employer, the employer was not bound to provide work or wages:

The employer was found to have an implied right to lay off without wages, even in the case of an annual pit bond binding the workers to a year’s exclusive service. In this sense, long- service agreements effectively benefited only the employer; the worker was bound without having the protection of security of income or employment.

To make life that bit more difficult for the workers, they didn’t even have the same rights in court as their masters. As Paul Johnson points out:

A master sued by a worker could be a witness in his own defence, but until 1867 a worker prosecuted by an employer could not give any evidence on his own behalf.

But the power imbalance doesn’t stop there. Under master and servant law, workers were subject to criminal sanctions for breaches of their contracts while masters were only subject to the civil law. In cases of breaches of contract, workers had to pursue employers through the courts, while employers had the entire apparatus of criminal law enforcement at their disposal.

According to Professor Johnson, there were around 10,000 prosecutions a year for breach of contract in the mid-19th century. These were concentrated in the industrial areas so the likelihood of a worker knowing someone who had been brought before the court was high:

The annual chance of a working-class household suffering criminal prosecution for breach of labour contract lay between 1 in 150 and 1 in 200 – a sufficiently high rate for knowledge of the risk to be well known within working class communities.

And, of course, where contracts were for a fixed term, breach of contract could simply mean leaving your employer for another job. Suresh Naidu and Noam Yuchtman studied the master and servant prosecutions during the nineteenth century and found that most were brought for absconding.

The typical goal of a prosecution was to use the threat of incarceration and hard labor to prevent workers from leaving an employer, and to pursue and punish those who were not deterred.

The threat of prosecution was credible; not only were prosecutions common but they were also largely successful.

The use of the word absconding reflects the attitudes of the time. Workers were deemed to be bound to their masters. Those who tried to improve their wages by looking for work elsewhere could expect severe punishment, backed up by the criminal law.

The penalties could be harsh and, during the late 18th and early 19th centuries, the Master and Servant Acts became more punitive. Usually workers were ordered back to their masters or were forced to pay compensation but in some cases imprisonment and even beatings could be imposed. The law was reformed in 1867, replacing the more brutal punishments with fines. However, as most of these workers were poor, the effect of a fine may simply have meant that they later ended up in prison for being unable to pay it.

Chart by Suresh Naidu and Noam Yuchtman

Perhaps unsurprisingly, Naidu and Yuchtman also noticed a relationship between the level of unemployment and the incidence of prosecutions:

[P]rosecutions and the unemployment rate move in opposite directions throughout the period for which we have data.

They also found that, once master and servant law was abolished in 1875, wages rose fastest in the counties with the highest rate of prosecutions.

This, then, might account for the different shape of the Phillips curve after 1860. Once criminal sanctions were removed for workers who tried to seek employment elsewhere, the labour market outcomes began to reflect supply and demand more closely. The rise of trade unions, who played a major role in the campaign to abolish master and servant law, increased the bargaining power of labour.

To put it another way, it is likely that Phillips curve was held flat until the 1860s by draconian labour laws. It is difficult enough for workers of limited means to challenge their employers at the best of times but laws preventing them from giving evidence against their employers and imprisoning them for leaving their jobs made for a very lopsided balance of power. Any countervailing power that falling unemployment might have given to the workers could be neutralised by the criminal law. Servants who got above themselves could, quite literally, be captured and brought back. If we think there is an imbalance of power in the workplace now, it’s nothing compared to the mid 19th century. In those days, trying to get a pay rise was a very dangerous game.

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Is austerity over?

Is austerity really over? That depends what you mean by austerity, of course. Certainly the aggressive deficit reduction targets that George Osborne set and kept missing have been abandoned. As the Resolution Foundation’s Adam Corlett pointed out before the election, going by the OBR’s most recent forecasts, it is now unlikely that the deficit will be eliminated before the middle of the next decade.

This means that the cuts to public service spending will not be as severe as they were in the first half of this decade. As this next chart, from the Institute for Fiscal Studies shows, real terms public service spending is forecast to increase slightly during the next few years. However (and its surprising how often this gets missed in discussions about public spending) the population is forecast to rise so spending per person is still likely to fall.

Departmental expenditure limits since 2007–08Once you take out capital investment, there is a sharper fall in the amount left for day-to-day public service spending. The Office for Budget Responsibility expects it to fall by around 6 percent by 2022.


The trouble is, these shallow cuts will come on top of deeper ones made earlier in the decade. A report by the Institute for Government earlier this year warned that the ability of the public sector to maintain services while cutting budgets has “run out of steam”. Warning lights are flashing in the NHS, in schools and in local councils. Even this scaled back austerity might be enough to tip some public services over the edge.

And what of the other half of public spending, social security? This, too, is set to fall, as this IFS chart shows.

However, it might not fall by as much as the government thinks. Look at this chart closely and you will see that, in spite of the employment rate being at a record level and benefit entitlements having been reduced, working-age benefits are still slightly higher relative to national income than they were before the financial crisis. A combination of low wages and high housing costs means that, even though they are in paid employment, many people still rely on some form of state support.

This is unlikely to change much over the next few years. When George Osborne planned these benefit cuts, he assumed that the economy was set for a period of steady growth for the rest of the decade. That now looks very optimistic. Since the Brexit vote, the OBR has downgraded its growth forecast.

Inevitably, this will have an impact on earnings. The Resolution Foundation does not expect average pay to return to its pre recession level until the next decade.

Furthermore, it forecasts that the combined effect of low pay, inflation, high housing costs and benefit cuts will lead to a significant fall in income for those in the lower half of the income distribution.

Until now, our tax and benefit system has been doing a reasonable job of levelling out the UK’s income inequality. If these cuts go through, all that will change.

Which is why I’m not convinced that they will. The question of cuts to tax credits was kicked down the road when there was a row about it in 2015. At the time I suggested that the distress caused by the cuts might be politically damaging and could even cause social unrest. Looking at the mood of the country at the moment, that looks even more likely now than it did a couple of years ago. The government backed off in 2015. Is a minority government, mired in Brexit negotiations and with a slowing economy, likely to show more resolve?

But if the government can’t cut the cost of benefits, it either has to borrow more, increase taxes or make even deeper cuts to public services. Perhaps that is why the chancellor has made gentle hints about tax rises. If they happen, it is unlikely that they will only hit ‘the rich’.

So, while  George Osborne’s aggressive deficit target has been abandoned, when it comes to people’s experience of public services and the tax and benefits system, austerity is far from over. Taxes may rise and benefits will almost certainly be cut. The public sector will find it ever more difficult to provide services to a rising population. Such is the brutal arithmetic of public spending. After the cuts of the last few years, even the relatively mild ones to come are going to hurt.

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