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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Osborne’s National Living Wage: Why it won’t work and why it just might

Despite all the rhetoric about the Conservatives becoming the workers’ party, George Osborne’s masterstroke National Living Wage (NLW) is really just another deficit reduction policy. The government has realised that the deficit is a labour market thing and that the only way to take big lumps off social security costs is for a lot of people to earn a lot more than they do now. Solution? Get employers to pay more, so fewer people will need in-work benefits and the welfare bill will go down. Or, to put it another way, get employers to cover some of the cost of deficit reduction. That way, you can cut welfare costs without causing social unrest and, with a falling benefits bill, you don’t have to cut as much off public services. Simple eh?

Why it won’t work

This won’t work, says just about everybody. Among others, the Institute for Fiscal Studies, the Resolution Foundation and the Joseph Rowntree Foundation have published reports with charts of doom explaining why most of those currently on in-work benefits will be worse off.

These IFS charts show the changes in income resulting from the tax and benefit changes announced in the budget and from the NLW, spread across the income distribution.

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The problem here is not just the amounts, it’s also the distribution. The NLW won’t increase earnings by anywhere near the amount that benefits are being cut but it will also favour those whose benefits are being cut least. As the OBR explained straight after the budget in July:

Although the NLW boosts individuals’ earnings towards the lower end of the individual income distribution, it is expected to have a more even effect on the distribution of household incomes, since many workers on the NLW will be households’ second earners. Indeed, around half the cash gains in household income may accrue to the top half of the household income distribution.

The Resolution Foundation’s analysis drew similar conclusions. The NLW will mitigate the benefit cuts slightly but those at the lower and of the income distribution will still take a big hit.


The NLW might also lead to some job losses or reduce the rate of job creation. The OBR puts the figure at 60,000 fewer jobs but others believe it will be much higher. Recruitment agency Manpower says that companies are already scaling back recruitment. If employers know they will have to pay higher wages but can’t be sure they will generate the revenue to pay for it, they might be tempted to increase the use of zero hours contracts or outsource more work to the self-employed.

Worse still, as Michael has shown, the cuts to tax credits fall disproportionately on those in-work. It might be that the work incentive, brought about by in-work benefits over the past two decades, goes into reverse. For the government, there is no point in reducing the in-work benefit bill only for the cost of unemployment benefits to rise.

If the government succeeds in taking £12 billion out of the welfare budget it is likely to lead to serious distress for many people and possibly social unrest, even with the rise in the minimum wage. If it fails to do so, it must either take more cost out of public services, increase taxes or abandon it’s deficit target. All these options will be politically damaging.

Why it might

Having said all that, no-one can be sure about the impact of the NLW because the government has never pushed up the minimum wage by so much over such a short-time. Neither, for that matter, has any other country, although a few are now trying something similar. As the Economist says, what might happen when the UK, France, Germany and the US push up their minimum wage is anybody’s guess:

By moving towards sharply higher minimum wages, policymakers are accelerating into a fog. Little is known about the long-run effects of modest minimum wages. And nobody knows what big rises will do, at any time horizon. It is reckless to assume that because low minimum wages have seemed harmless, much larger ones must be, too.

If nothing else, the government is in tune with the zeitgeist and if the NLW fails, Britain will be in good company.

But there were blood-curdling warnings about job losses in many countries when minimum wages were introduced. Most of them came to nought. Economic theory might say that such a wage hike will lead to job losses but we can’t be sure.

There’s also the question of the impact of higher wages on productivity. Do wages rise when productivity rises or do higher wages lead to higher productivity? The efficiency wage hypothesis argues just that, as Ben Chu explains:

First, paying workers more than the bare minimum discourages them from shirking. They give more effort during their working day. And firms don’t need to employ so many managers to supervise their shirking workers, thus saving money.

Second, higher wages mean workers are keener to hold on to the job in question. They don’t hand in their notice so often and that reduces the firms’ turnover costs. It’s expensive and time-consuming to advertise for new employees, to interview them, to process their paperwork and to train them up.

Finally, decent wages relative to the rest of the market can mean workers are more loyal. They feel more valued and are prepared to work harder as a result. Most of us can probably relate to those explanations.

There is evidence from low-paying sectors to back this up. An LSE study in the care home sector found that higher wages reduced the level of shirking and the amount of supervision needed for care assistants. This, concluded the authors, is “indirect evidence of productivity enhancing effects of higher wages”. A NIESR paper earlier this year found:

[T]he increases in labour costs associated with the NMW were associated with increases in labour productivity in all three periods considered and that these arose due to increases in efficiency (TFP) rather than capital labour substitution (capital labour ratio).

But, as with the labour cost increases, there is a concern that these effects capture an element of mean reversion (the tendency for low-productivity firms to catch up to the industry average).

In other words, it could be that a hike in the minimum wage might increase efficiency in that long-tail of poorly managed low productivity firms.

If people cost more, it might also encourage firms to invest more. At an ACAS discussion I went to earlier this week, John Lewis chairman Charlie Mayfield gave an example of this from his sector. In many French supermarkets, the prices are updated with digital displays on the shelves. There is no point, he said, in doing this in the UK as it is cheaper to pay people to go round and update the prices. In France, however, with labour costs being much higher, the investment in the computerised system pays for itself. There is some evidence that the UK’s low wage economy is encouraging low-tech low productivity businesses. Increased labour costs might help to reverse that trend.

More expensive workers might also be an incentive for employers to invest more in them. If you have to pay more for your people, it makes sense to get the most you can out of them. Training them and training people to manage them more effectively becomes more cost-effective if labour costs are higher. Increasing the minimum wage might stop the decline in training which has pretty much tracked the fall in wages since the mid-2000s.

If the NLW were to kick-start a productivity boost it would be good news for George Osborne. As Adam Corlett said, if productivity were to grow at the rate it did in the 1970s and 80s for the next five years, we wouldn’t need any spending cuts at all. That’s unlikely to happen but any productivity growth above the forecast would be a welcome bonus for the chancellor.

Even so, an unexpected productivity boost and higher pay rises probably wouldn’t be enough to offset the benefit cuts. As Paul Johnson said:

[T]he increase in the minimum wage simply cannot provide full compensation for the majority of losses that will be experienced by tax credit recipients. That is just arithmetically impossible. The gross increase in employment income from the higher minimum wage is about £4 billion. Welfare spending as a whole is due to fall by £12 billion and, even excluding the effects of the four year freeze tax credit spending is due to be cut by getting on for £6 billion.

But then again, it doesn’t need to. At least, not completely.

For the National Living Wage to work for the chancellor, all it needs to do is boost incomes and productivity by just enough. Just enough to raise the tax take. Just enough to mean that the hardship isn’t quite bad enough to cause social breakdown. Just enough to lower the benefits bill by just enough to soften the cuts to public services, so that, while they lurch from crisis to crisis, they somehow carry on. In short, just enough to squeak past the deficit target without major civil disorder or service collapse. Just enough for the chancellor to emerge triumphant at the end of the decade. St George of Osborne, champion of the poor and slayer of the deficit dragon.

Now, before you tell me I have taken leave of my senses, I think that even this is unlikely. The numbers the chancellor needs to make up are so big I still reckon he will end up shifting his deficit target or quietly raising taxes.

And yet, I still can’t help thinking what if, what if….?

I can’t quite banish from my mind the possibility that George might pull this one off, that he might just stagger across the deficit finishing line, battered and bruised but having avoided a major political catastrophe. If he does, surely the Tory leadership and the 202o election will be in the bag.

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Nowhere to go on tax credit cuts

The work and pensions select committee asked the Resolution Foundation and the Institute for Fiscal Studies about the options available to mitigate the effect of tax credit cuts. According to the FT, Torsten Bell and Paul Johnson told them there aren’t any. This bit made me laugh, especially the last paragraph:

Frank Field, a veteran Labour welfare reformer who now chairs the committee, suggested that a delay might give people “more time to scramble around to try to mitigate the consequences” by raising their working hours.

However, Mr Johnson argued that rules under which people receive tax credits if they work 16 hours a week for a single parent, or 24 hours a week for a couple, meant there was little incentive to work longer.

Mr Field argued that the changes to tax credits might amount to “shock treatment” and that people “might just cast themselves adrift from the earnings rule” and seek longer hours regardless, given the size of the losses, “if employers had the work to offer”.

But he added: “I am slightly depressed by the answers you are giving.” The committee had hoped to hear options for mitigating the tax credit changes “and you seem to be telling us it’s all hopeless”.

I’ve worked with people like that. You give them the facts and they shout back, “Wrong answer!”

And the facts are that the government doesn’t really have anywhere to go. The Lords have asked it to reconsider but, as Stephen Bush says, if it wants to keep its pledges not to raise taxes, cuts pensions or run a deficit after 2019-20, it has to cut in-work benefits.

What really surprises me about all this, though, is the surprise.

That any of this should come as a shock to MPs or journalists is a pretty poor show. Anyone with a calculator, a rudimentary grasp of the welfare system and half-an-hour spare to read the OBR’s report should have spotted this months ago. By the time George Osborne promised to take £12 billion off the cost of social security, David Cameron had already promised to protect pensions. It was therefore quite clear that cutting an eighth of the working-age welfare bill would have to hit in-work benefits. If I, as a rank amateur, could see it eighteen months before the budget, so should the people who are paid to understand this stuff.

Part of the problem is the persistent idea that welfare is only paid to people who are out of work. It was this comment in the Telegraph over two years ago that started me banging on about this in the first place.

Several ministers have begun to openly question why the welfare bill is still rising, as unemployment has fallen by about 200,000 since the general election.

If so, a lot of government MPs clearly thought welfare costs were a function of unemployment.

That hasn’t been the case for years though. A report by the Resolution Foundation earlier this year showed just how out-of-date that view is.

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As Gavin Kelly said:

[T]he UK’s longstanding problem of workless families has been transformed since the late 1990s: once viewed as the biggest social ill facing the country, the rate of worklessness in households in which there are no disabled adults has plummeted.

Welfare policy – and ministerial rhetoric – are yet to catch up with this.

The downward trend in the proportion of adults on out-of-work benefits started towards the end of the last Conservative government and has continued ever since. It’s a story that is now twenty years old. Over the last two decades, the welfare system has shifted away from paying people who are not in work and towards paying them to take jobs, even though those jobs might not pay enough for them to live on. This has, as Ben Chu shows, almost certainly mitigated what would otherwise have been a steep rise in inequality. It has also meant that spending on tax credits has steadily increased. After pensions, tax credits now account for the largest proportion of welfare costs.

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Chart by Institute for Fiscal Studies

There is, then, no way of taking £12 billion from welfare without hitting in-work benefits, unless the Chancellor wants to do something even more unpopular like hit the disabled more severely than he already has.

It’s difficult to see how much of this is think-againable. The numbers just don’t add up. If the government insists on cutting the deficit by 2019-20 and is so adamant about not raising taxes that it’s talking about making it illegal, the only way to mitigate tax credit cuts is with even bigger cuts to public services. As Stephen says, the government has boxed itself in. Its dilemma is the same as it ever was. Having closed off all its other options, it has a straight choice between cutting benefits or cutting public services, neither of which will be popular.

Public Spending Venn 2015 v2 - Plain

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Is Britain losing interest in foreign affairs?

The UK’s new golden relationship with China has been met with a mixture of bafflement and contempt by its allies. The FT reports:

[T]he regular encrypted cables sent back to European and North American capitals over recent weeks have been filled with snide remarks and criticisms of the UK’s kowtowing.

But, although there has been some criticism here of the government’s deferential tone towards China, it has been muted and there was almost no discussion of the geopolitical implications before this week. As the Economist remarked:

That this shift is so little discussed in Britain is remarkable. It could transform the country’s role in the world. The Foreign Office is already diverting resources from Europe to China; from political desks to trade ones. Britain’s growing friendship with Beijing appears to be losing it pals in Washington. Its new commercial links hardwire its economy into that of a vast partner whose stockmarket has fallen by almost 40% in the past three months. Mr Osborne points out that Britain is bound to the EU, too. But it is about to have a year-long debate, followed by a referendum, about that relationship. Where are the parliamentary wrangles over China? The prominent sinologists in Britain’s public life? The headlines about the intrusions on British sovereignty by the economic giant to which Britain is, for better or worse, tethering itself?

I wonder, though, if this is a symptom of a wider change in Britain. We seem to be losing interest in foreign affairs. The 2015 election was the first I can remember in which foreign policy was barely discussed. I wasn’t the only one to notice this. It was just as well for David Cameron because his performance over the last five years has been lacklustre, to say the least. After his Billy no-mates G20 summit in 2012, one former US government official commented:

What’s really striking to me is the extent to which Cameron seems to be taking the UK out of the game. London’s relevance on the world stage seems to have declined since he became prime minister.

A scathing piece in the Economist just before the election, entitled Little Britain,  suggested that things hadn’t improved since.

Margaret Thatcher saw herself, and was seen, as an essential partner of two American presidents. She stoutly defended nuclear deterrence when she thought her friend and ideological soulmate, Ronald Reagan, was getting carried away in talks with the Russians. Tony Blair pushed NATO and Bill Clinton into military action in Kosovo. Ill-fated though the later invasion of Iraq proved, Mr Blair was never an American poodle. He believed that Britain should be in the first rank of countries prepared to counter the threat of Saddam Hussein’s supposed weapons of mass destruction. Even the maligned Gordon Brown co-ordinated the international response to the financial crash of 2008.

But under David Cameron:

Britain has run down its armed forces: its defence budget has slipped from being the world’s fourth- biggest to its sixth (see chart).

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Britain has become ever more unwilling to deploy the diplomatic and military resources it does possess. For a country that has long been respected for the skills of its diplomats, the professionalism and dash of its armed forces, the global outlook of its political leaders and its ability to punch above its weight, the decline has been unmistakable.

The Foreign Office’s puny annual spending of about £1.6 billion (a cut of 16% in real terms since 2010, nearer 30% if the money that used to fund the BBC World Service is included) compares with the largesse showered on the Department for International Development (DfID), which will enjoy a budget of over £11 billion, and rising, this year. While refusing to commit Britain to the 2% target for defence spending, the government was nonetheless happy last month to confirm that, regardless of circumstances, DfID would receive each year 0.7% of GDP. Professor Sir Lawrence Freedman, a leading academic strategist, reports “a striking decline in interest in international affairs at the senior levels of politics. It was surprising to see the parties tie their hands in this way. DfID doesn’t do foreign policy.”

From Little Britain to Littler England in the latest issue of Foreign Affairs, the journal of the Council on Foreign Relations.

Historically, the United Kingdom has been an active player in world politics. After the loss of its empire, the country was a founding and engaged member of the institutions of the postwar Western order. British governments have led the way in pressing for, and undertaking, humanitarian interventions from Sierra Leone to Kosovo. And the United Kingdom’s relationship with the United States has been a great asset to both sides since World War II.

Recently, however, factors including fatigue following the wars in Afghanistan and Iraq, a recession, and a prime minister with little apparent interest in foreign affairs have conspired to render the British increasingly insular. The British diplomatic corps and military have seen their capabilities slashed amid harsh austerity measures. In its limited contribution to the campaign against the self-proclaimed Islamic State (also known as ISIS), in its mercantilist approach to China, and in its inability to formulate a real strategy to respond to Russia’s aggression in Ukraine, the United Kingdom has prioritized narrow economic interests to the detriment of broader considerations of international security.

Again, the shrinkage of the defence and Foreign Office budgets:

Budget cuts are the most visible sign of the United Kingdom’s retreat. The budget of the Foreign Office has been cut by 20 percent since 2010, and the ministry has been told to prepare for further reductions of 25 to 40 percent. The armed forces have also been downsized, with the army alone expected to shrink from 102,000 soldiers in 2010 to 82,000 by 2020. The former head of the Royal Navy has spoken of “uncomfortable similarities” between the United Kingdom’s defenses now and those in the early 1930s.

So much have British capabilities declined that during NATO’s 2011 mission in Libya, the United Kingdom was painfully dependent on U.S. support to fight a third-rate military. In the current campaign against the Islamic State, a shortage of already antiquated Tornado ground attack jets has kept the British contribution to the air strikes limited, with only eight aircraft being deployed. And the United Kingdom’s decision to scrap its Nimrod maritime surveillance aircraft in 2010 has left the country vulnerable to the incursion of Russian submarines in the Irish Sea.

And the pursuit of short-term commercial interests:

As British policymakers have lost interest in engaging with the outside world, they have embraced a shortsighted conception of economic interests. The Foreign Office has had its ambitions lowered, with its main role now to promote trade as part of the government’s so-called prosperity agenda.

This narrow focus can be seen most clearly in China, where the British government has pursued political appeasement for economic gain. In July, the United Kingdom initially refused to grant a visa to the Chinese dissident artist Ai Weiwei, which many saw as an attempt to curry favor with Chinese President Xi Jinping before his visit to London in October. Although most parts of the Foreign Office have faced severe cuts in staff, the British embassy in Beijing has become bloated with commercial employees.

Observers could be forgiven for thinking that the notion that China may pose a geopolitical challenge has not occurred to the British foreign policy establishment. On his recent trip to Indonesia, Malaysia, Singapore, and Vietnam, Cameron said next to nothing about the security concerns troubling that region, but he did oversee the signing of several trade deals.

The term Little England is well used in this context. In recent years, Little Englander has become a term of abuse used against those who want to withdraw from the EU. It’s original use, though, was a jibe by High Tory imperialists against those who put commercial interests before empire. The term originates in the mid-nineteenth century when it was used to describe Liberal businessmen who did not want to pay taxes to defend Canada and to anti-imperialist free market radicals like Richard Cobden and John Bright. If, as some have argued, the Thatcherite Conservative Party is the reincarnation of the nineteenth century Liberal Party, the move towards a purely commercial view of foreign affairs may be the logical conclusion of this ideological shift.

The trouble is, all this is happening with hardly any political scrutiny and debate. It is left to generals and admirals to bemoan “the lack of strategic understanding by our leaders”. Britain seems to be sleepwalking away from its historic global role and into a strategic partnership with a country our traditional allies regard as an opponent. As the Economist says, this could transform our role in the world but there was nothing about it in the government’s manifesto or in the political debates during the election.

There are historical precedents for countries withdrawing from the game. Denmark, Sweden and the Netherlands all, at one time, had imperial ambitions. Nowadays they are quirky though prosperous monarchies on the fringe of northern Europe. Perhaps that is the future of Britain and people are happy with that. In his fascinating book about the British and their empire, Jeremy Paxman suggests that public indifference was one of the things that finally did for the empire. People simply lost interest in it. Even by the 1930s the crowds weren’t coming out to wave flags like they did in the 1880s. Perhaps we are seeing the final phase of that indifference to Britain’s world role. Maybe the interventions in Iraq, Afghanistan and Libya have put people off the whole idea. I wonder, now, if there would be as much public support for a mission to defend the Falklands as there was in the 1980s. Or, indeed, if our military would be capable of mounting such an operation. It could be that this drift away from Britain’s global role is simply a reflection of a change in British attitudes to world affairs.

Recent studies suggest otherwise though. A Chatham House report earlier this year found that the majority of voters and opinion formers still think the UK should be a world power.

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It concluded:

The Chatham House–YouGov survey shows that the narrative that the United Kingdom is becoming more insular, or even more isolationist, in its foreign policy outlook is not borne out in the data in a consistent way. More than in previous editions of the survey, majorities of the public and opinion-formers aspire
for the country to be a great power. The public says the UK should play a leadership role in international security and the fight against climate change. More support a rise in the defence budget than a cut.

The British public, then, is not yet ready to see the country step back from its global role. In which case, if it is not reflecting a long-term shift in the zeitgeist, the drift in foreign affairs must simply be down to lack of strategy and direction. It’s not that the British are losing interest in foreign policy, it’s just that their leaders are not very good at it.

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The jobs miracle: digging deeper

The job figures have been looking much better recently. The employment rate continues to rise and wages have even started picking up. The number of full-time employee jobs passed its pre-recession level sometime last year, so the recovery no longer looks as dependent on self employment as it did a year or so ago.

If we look a bit deeper, though, it is clear that some things have changed since the recession. The shape of the labour force is different. These charts from the ONS Economic Review in September show how the composition of the workforce has shifted away from full-time employment and towards self-employment over the last decade and a half.

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The proportion of full-time employees in the workforce started falling in the mid-2000s and fell sharply after the recession.

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The gender split is interesting too. It is only in the last few months that the number of male full-time employees passed its previous pre-recession peak and it hasn’t shown much sign of rising any further.


Chart via Resolution Foundation.

This gets stranger still when you look at the employment differences between the UK-born and those from outside the UK. This chart, posted by Michael O’Connor, shows that the rise in UK-born employment was stopped dead by the recession and it struggled to recover afterwards. It returned to pre-recession levels late last year only to fall again in recent months. Non UK-born employment, after a slight fall in 2008-09, has continued to rise.


Breaking this down further reveals an even sharper split. There are still around 300,000 fewer UK-born workers in employee jobs than there were before the recession, while there are close to 1 million more non-UK  born employees. Take away the self-employed and the job recovery among the UK-born has been slow.

Emp by country of birth

Source: Labour Force Survey, figures from Apr-Jun for each year.

Why might this be? No doubt some will put forward the taking-our-jobs theory but I suspect this has a lot to do with where most of the job growth is happening. Since the recession, most of the net job increase has been in London. Again, once you remove self-employment from the picture, job growth in some of the regions is poor. The North-East, West Midlands, Yorkshire and (surprisingly) the South East still have fewer people in employee jobs than before the recession.

Emp by region

Another slant on this comes from the Business Register and Employment Survey published by the ONS last month. This surveys businesses rather than households. Its employment figures therefore include employees and the self-employed running registered businesses but leave out the self-employed whose turnover is under the VAT threshold. It is therefore a reasonable measure of viable and stable jobs. On this basis, the figures for the Northern regions don’t look very good at all while London and its surrounding area has seen most of the employment growth.

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And, of course, London is where most migrants to the UK go. As Feargus O’Sullivan noted earlier this year, Europe’s population is shifting to the North-West and a lot of that migration is coming to London. The UK’s capital is the biggest city in the EU by some distance and it is a magnet for the young and ambitious.  As this chart from the Resolution Foundation’s new Earnings Outlook dashboard shows, the share of jobs going to those born outside the UK is much higher in London than anywhere else in the UK.

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What seems to have happened is that jobs disappeared from some places in the recession and haven’t come back while, at the same time, there have been a lot more new jobs created in London. This has hit some people particularly hard. Those born in the UK and living in northern England have seen slow or non-existent employment growth and have filled the gap with self-employment, much of it low-paid and precarious. Which might go some way to explaining things like this.

How the jobs miracle looks depends on who and where you are. It might look miraculous when viewed from London, where most journalists live. Lots of good jobs are being created and lots of new people are arriving to take them. In other parts of the country, though, things are still slow and people feel bemused when they hear commentators announce that the slump is over. If there is a jobs miracle, a lot of people are still waiting to see the magic.


I was accused of being “a bit shady” yesterday (well it wouldn’t be the first time) for using absolute numbers in the change in employment by region chart.

Here, then, are the same numbers expressed as a percentage change. As you would expect, the percentage change in self employment is much bigger everywhere as it started from a lower point in the first place.

Emp by region percentages

My intention here, though, wasn’t to emphasise the hugeness of London’s job gains compared to everywhere else. It was to point out that, in some parts of the country, the employment increase is almost entirely due to self-employment.

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Selling Britain by the yuan

Apparently the Chinese state media rather liked George Osborne when he visited a few weeks ago. “Humility is the right attitude,” said the the Global Times, according to this translation in the Spectator, which went on to comment:

The article draws a contrast between Western public opinion, reflected in the media, where there are (unwelcome) concerns about Chinese human rights, and Osborne’s uncritical and polite approach. The Chinese version, however, oozes arrogance, saying that Osborne’s more deferential tone is “only indicative of a natural order”.

Britain’s allies find this deference worrying, says the FT, as the government rolls out the red carpet for the visit of China’s president:

In what is being seen in other western capitals as an unprecedented act of kowtow, almost every aspect of the British state will be thrown open to Mr Xi: Buckingham Palace, 10 Downing Street, Chequers, the Palace of Westminster, even the country’s critical infrastructure, including nuclear power.

Britain’s traditional allies regard this behaviour as bizarre at best and craven and dangerous at worst, while old China hands at the Foreign Office are in despair. “We will just have to hold our noses,” said one grandee as he contemplated a week in which Mr Xi will be feted in London and Manchester.

We use kowtow as a general term for subservience but its original meaning was the ritual act of prostration before the Emperor of China, performed by nobles, officials and, of course, the representatives of tributary states. Such was the natural order.

So why the kowtow? The Americans are in no doubt.

A senior adviser to US policymakers described the UK as “the only place where China is truly influential right now because they are so desperate for Chinese investment.”

One senior western intelligence officer commented: “The most charitable spin we can put on the current China policy of the British government is to say it is a pure mercantilist, unprincipled, self-serving decision aimed at attracting short-term investment. The big question is whether it actually works.”

That gets us to nub of all this. Leaving aside the national security implications of letting the Chinese state own a third of Britain’s nuclear power stations, it’s far from clear that this level of foreign investment in infrastructure makes economic sense in the long-term. As the Economist noted:

Mr Osborne may also calculate that Hinkley Point will create numerous jobs and building opportunities, the economic benefits of which would accrue quickly. The costs, meanwhile, would not become apparent until the plant is completed and bills rise. Future governments would reap the fallout, not this one.

Infrastructure investment always involves some form of state guarantee. If foreign companies put money into nuclear power plants, high-speed railways or the Northern Powerhouse, they will have to be paid back with taxpayers’ money at some point in the future. These are, effectively, giant PFI schemes. They might not show up as government debt but they amount to the same thing. Companies, either private or owned by foreign states, put money into UK public services in return for payments from the government in the future. As it is, much of our recent GDP growth has left the country in the form of payments to foreign investors. This will see our taxes going the same way.

If that’s the case, though, why doesn’t the government simply borrow the money at today’s record low interest rates? As the FT’s Giles Wilkes put it succinctly last month:

If the Chinese are so desperate to invest in Britain’s infrastructure, why can’t they just buy government bonds? Surely that will work out cheaper in the long-run and it wouldn’t give the Chinese state direct access to our nuclear power industry and other strategic assets.

That might be so but the Conservatives, and George Osborne in particular, have made eliminating the deficit their raison d’être. The state deficit was the political stick the Conservatives chose to use against Labour and now they have to see it through. They have, therefore, just passed a law ruling out borrowing for investment after 2019. Of course, this is pure baloney as all governments in modern times have borrowed to fund infrastructure but it means that the capital spending the country needs must be funded through the disguised borrowing of foreign investment and PFI deals.

But while the expedient may be short-term the ramifications of China taking a stake in the UK could be huge. The Economist wonders why there has been so little scrutiny in the media or parliament, given the fuss we make over sovereignty and the EU.

That this shift is so little discussed in Britain is remarkable. It could transform the country’s role in the world. The Foreign Office is already diverting resources from Europe to China; from political desks to trade ones. Britain’s growing friendship with Beijing appears to be losing it pals in Washington. Its new commercial links hardwire its economy into that of a vast partner whose stockmarket has fallen by almost 40% in the past three months. Mr Osborne points out that Britain is bound to the EU, too. But it is about to have a year-long debate, followed by a referendum, about that relationship. Where are the parliamentary wrangles over China? The prominent sinologists in Britain’s public life? The headlines about the intrusions on British sovereignty by the economic giant to which Britain is, for better or worse, tethering itself?

For reasons of ideology and political expediency, the government is sleepwalking into a potential geopolitical shift. No-one can be sure where this will lead or what the implications might be. At best, it will leave future generations paying some of their tax money to a foreign dictatorship. At worst, well, who knows?

At the FT’s Camp Alphaville in July, I saw the former Enron CFO speak. He seemed a little aggrieved that he had been punished for keeping borrowing off his balance sheet when everyone else, be they companies, banks or governments, seemed to be getting away with it. The Americans sent Andrew Fastow to prison for hiding debt. We will probably make George Osborne prime minister.


“Very ‘umble, Mr Xi…”

Update: Just seen this from a recent IPPR report:

Original modelling by Frontier Economics for IPPR suggests that public ownership during the construction phase, followed by selling the completed asset to the private sector, could lower the cost of capital by a 0.2–0.4 per cent, which would save consumers £1.2–1.8 billion (in 2012 prices) between 2015 and 2035. If public ownership were to continue through the operational phase, but a private company was contracted to run each individual plant, costs could be lowered by a further 0.8–1.2 per cent through to 2035, producing additional savings for the consumer of £2.5–3.7 billion over this period. Since this is money that would otherwise be taken from households and businesses through their energy bills, this amounts to projected savings of £35–57 per household over the next 20 years (in 2012 prices).

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