Opinion: Back to basic principles on welfare reform

"Demand the Beveridge Plan", 1944The basic principles of the Beveridge Report were:

  1. The right of every citizen to a minimum level of subsistence;
  2. The need to preserve incentive, opportunity and responsibility.

The post-war National Insurance system was based on the assumption that there would be full employment, and that wages for men would be sufficient to maintain a wife at home raising children. Now there are more diverse family structures, more women in paid employment, people are living longer, there is widespread unemployment and employment patterns have changed. Many new jobs are often low paid, temporary and insecure. People are frequently forced to switch between the labour market and benefits, and mid-life retraining is often necessary. Debt and financial insecurity are common features of modern society.

National Insurance (NI) benefits have not been maintained at a level sufficient to meet the needs for which they were designed. A social assistance ‘safety net’ of means-tested benefits (MTBs) was set up, initially for those who were not eligible for NI benefits, but now it takes in all those for whom NI benefits are inadequate. Where the MTB system overlaps with the income tax system, it produces many perverse, counter-productive and inefficient results. As income rises, tax has to be paid, means-tested benefits are withdrawn, and many households suffer marginal deduction rates of 95%. This means that, for every extra £1 earned, the household keeps only 5p. The introduction of Universal Credit (UC) seeks to reduce this disincentive, but with the exclusion of council tax benefit from UC, and considering commuting costs and other job related expenses, it is unlikely to do so.

We need a more Liberal integrated approach to welfare reform that starts with Beveridge’s basic principles and is tailored for the conditions of the modern economy, i.e:

  • An approach to management of the economy that targets full employment i.e. a balanced budget at a 5% unemployment rate and a greater tolerance for inflation within a nominal GDP target.
  • A local area planning system that prioritises the development of adequate affordable housing to meet the needs of the population and provides for the necessary local transport, schools and health facilities infrastructure required for sustainable community living.
  • A safety net that provides a self-financing employment guarantee and skills training at a minimum wage, that acts as an effective automatic stabilizer during economic downturns.
  • A revenue neutral universal basic income, as advocated by Citizen’s Income Trust, that largely replaces means tested benefits, supplemented by disability benefits. The Citizens Income would replace pension credit and universal pensioner benefits.
  • An integrated system of income tax and national insurance contributions together with the introduction of land value tax that replaces higher rate income tax and brings into use land for housing development.
  • A strategic focus on investment and productivity as a means of raising median wages in the economy and containing both the direct costs of housing benefit and indirect societal costs of inequality.

* Joe Bourke is an accountant and university lecturer, Chair of ALTER, Chair of Hounslow Liberal Democrats and PPC for the Brentford and Isleworth constituency.

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56 Comments

  • “The post-war National Insurance system was based on the assumption that there would be full employment, and that wages for men would be sufficient to maintain a wife at home raising children.”

    Unfortunately, no party support this. We have the working poor in this country now, people who work very hard but certainly could not afford to keep a family. No party would support this because politicians are generally fairly wealthy people who benefit from the cheap goods and services that this country has as a result of low wages.

    This is why the wealthy are generally OK with the wave of cheap workers we’ve had from Eastern Europe but the working poor who have to compete with them for social housing and low paid work aren’t so keen on immigration.

  • Daniel Henry 5th Jun '14 - 11:41am

    I largely agree Joe, but why do you want the land tax to be used to fund the scrapping 40p rate rather than reducing taxes for the lowest paid or helping fund this citizens income you suggest?

  • mike clements 5th Jun '14 - 11:46am

    Take the Beveridge Report off the shelf, revise and edit it in the light of social change over past 70 years then incorporate it into our 2015 manifesto. Then the public will know what we stand for and have an incentive to vote for us.

  • Stephen Howse 5th Jun '14 - 12:54pm

    “A revenue neutral universal basic income, as advocated by Citizen’s Income Trust, that largely replaces means tested benefits, supplemented by disability benefits. ”

    I found much to agree with in your policy suggestions and this is the one I agree with most strongly. Excellent idea.

  • Simon McGrath 5th Jun '14 - 2:07pm

    A universal income with no requirement to look for work ( for those who can) would kill support for the welfare state. Why should some people work hard and pay their taxes so that others can choose to do nothing ?

  • Daniel Henry,
    “ why do you want the land tax to be used to fund the scrapping 40p rate rather than reducing taxes for the lowest paid or helping fund this citizens income you suggest?”

    The Citizens Income replaces the following benefits, tax and national insurance allowances:
    Child Benefit £ 12 bn
    Child Tax Credits £ 22 bn
    Key benefits (Income support etc) £ 27 bn
    Working Tax Credits £ 7 bn
    Personal Allowances (Income Tax) £ 68 bn
    National Insurance £ 23 bn
    Higher rate tax relief on pension contributions £ 10 bn
    Student grants and student loan write offs £ 3 bn
    State Retirement Pension and SERPS, S2P etc. £ 82 bn
    Pensions Credit and MIG £ 8 bn

    Introducing Citizens Income is not reliant on changes to tax rates, merger of income tax and NI or the introduction of LVT

    Lloyd George introduced the People’s budget in 1909 and the first National Insurance Act in 1911 saying ‘We will draw a line below which we will not allow people to live and labour’. However, to get the legislation through the House of Lords, the costs had to be paid by workers own contributions and not come from general income tax or a Land tax on the landed gentry or merchants. In the 100 years since, that principle has gradually eroded as National Insurance has become a general tax and is now called earnings tax. Increases in NI have been favoured by governments to maintain the illusion that they are not increasing basic income tax. The next Labour government may campaign on an increase in NI to fund extra spending in the NHS.

    There is no good reason why tax on income from earnings should be higher than tax income generated from capital whether they be rents, interest or dividends. There need only be provisions to avoid double taxation of profits distributed via companies.

    The recent increases in the personal allowance have been paid for by bringing large numbers of taxpayers with relatively modest incomes into the 40p tax band. I think a rebalancing of the tax base from incomes to wealth can aid significantly in both reducing inequality and providing a more equitable distribution of the tax burden. A reduction in income tax for this group to the level of 32% (i.e. basic rate tax and NI deductions combined) and a shift to Land Value Tax assessed at a level sufficient to generate the same tax revenues as the supplementary higher rates of 20% and 25% would be how I would advocate achieving this.

    The lowest paid, who do not currently benefit from further increases in personal allowances, will gain disproportionally by receiving a citizens income tax credit in excess of any tax assessed on their earnings and retain a net 68% of their earnings e.g. an individual earning £5k per year tax free now would see their net income rise to £7692, subject only to exceeding housing benefit disregards.

  • paul barker 5th Jun '14 - 2:38pm

    Citizens Income seems politically impossible for now but how about a scheme that rewards Iniative & Honesty ? If you can provide evidence that you have earned £10 legally then you could claim £10 extra. Subsidising people for doing things sounds a lot better than paying them for doing nothing.
    The scheme would be tapered so that the extra money fell to zero at the point where you began paying Tax.

  • Simon McGrath,

    Paradoxically it is the present system that decreases the incentives to work, train, care for others etc. by paying benefits to people only so long as they do nothing, and by penalising and often criminalising them when they try to help themselves.

    A Unicef-funded pilot project introduced a basic income to adults in eight villages in Madhya Pradesh, India, paid directly into bank and co-operative accounts. No food substitutes were allowed. During the scheme income-earning work increased, even among this impoverished community, and women gained more than men. The cash in pockets led to small-scale investments, such as the creation of new businesses.

    The proposed Citizens Income for a UK adult is £71 per week. In the article, I have referred to an integrated approach that focuses on housing provision and a self-financing job guarantee scheme.

    Housing-related Costs:
    Housing Benefit £ 18 bn
    Council Tax Benefit £ 5 bn
    Rent Rebates £ 6 bn
    Total £ 29 bn

    Two-thirds of these costs are notional i.e. they represent the social housing rents and council tax that are simply not collected from social housing tenants. In my view both housing benefit and eligibility for social housing tenancies should be conditional on employment for the able-bodied under retirement age. That employment may be in the private or public sector, self-employment or in the job guarantee scheme referred to and require a minimum number of hours at the minimum wage level. The ability to retain 68% of earnings over and above an unconditional small citizen’s income is the carrot. The requirement for the able-bodied to engage in productive employment to qualify for housing cost support is the stick.

  • Paul Barker,

    Lloyd George’s peoples budget was politically impossible until the Parliament Act cleared the obstacle that was the House of Lords.

    The introduction of Beveridge’s welfare state was politically impossible in a post-war bankrupt Britain in which the establishment of the NHS was opposed by the medical profession until Aneurin Bevan ‘stuffed their mouths with Gold’.

    Putting VAT on Cornish pasties might be politically impossible, but if bringing forward Social policies, in a tradition of over a century of radical liberalism, designed to enable a ‘stronger economy and fairer society’ is politically impossible, then this once great party has reached a sad nadir.

    The welfare and benefits system doesn’t need anymore tinkering, it needs a major rethink to sweep away the demeaning and counter-productive measures that are driving too many to despair.

  • Daniel Henry 5th Jun '14 - 4:49pm

    Joe,

    Your suggested costing for the Citizen’s Income including scrapping the tax free allowance for income tax. I’d rather the tax free allowance was protected than scrapping the 40p rate.

    It seems mad to propose a tax cut that would give absolutely no benefit to the lowest 80% of earners while giving a huge tax cut to the highest earners.

  • Daniel Henry 5th Jun '14 - 4:51pm

    Simon,

    We already pay people to “do nothing” through means tested benefits.
    The Citizen’s Income would give workers that payment too, and end the high marginal tax rates for those coming off benefits into work.

  • Joe Bourke
    I honestly can’t understand why you think making people homelessness unless they work for a pittance in some sort of community service type scheme is a progressive, desirable or even workable policy. It just fails the decency test.

  • Daniel,

    Direct payment of a citizens income (CI) replaces the tax and NI benefit derived from the personal tax allowance and NI threshold for basic rate taxpayers. See link for details Citizen’s Income Trust

    Integrating tax & NI and replacing higher rate tax with LVT means the highest earners will pay significantly more tax as all sources of income are taxed at a rate of 32% and Land holdings are subject to LVT at a rate equivalent to the proceeds currently obtained from the supplementary higher rates of 20% and 25% on incomes. The outcome is that median earners are unaffected and there is a significant redistribution of income from the top decile to the bottom decile.

    By way of example:

    Earning £5k now – income after CI and tax changes £7692

    Earning ,£10,750 net now – income after CI and tax changes £10,750 (same outcome for all basic rate tax payers)

    Those earning above the basic rate threshold will pay tax on all sources of income at 32% +LVT on property holdings at a rate equivalent to the higher rate surcharge. Previously they were paying tax at 20% + a higher rate surcharge of 20+ or 25% and no LVT.

  • Andrew R.

    I just agree with Beveridge’s basic principle that those who are able to work should take responsibility for looking after themselves and that welfare should be for those that need it i.e. disabled and pensioners and the involuntary unemployed. The disabled should receive disability benefits, the retired a pension and the involuntary unemployed a job that pays at least minimum wage. No one has to be made homeless as they are guaranteed work and eligible for housing support.

    As to progressive or desirable, the majority of people express a desire to work if it is for a decent days wage and not workfare for benefits (which I do not believe is reasonable to ask someone to do). As regards workability, Job guarantee schemes have been successfully developed and deployed in other countries and the Labour party are proposing a youth job guarantee scheme if they are elected next term.

  • Joe Bourke
    I am interested in your exchanges with various people in this thread.
    You say —
    “…. No one has to be made homeless as they are guaranteed work and eligible for housing support.”

    Are you serious? The example figures you quote in your explanation of a citizens income in practice do not fit with real costs prices where I live. Perhaps you live a long way from London? I cannot work out how your system would guarantee housing in an area where a citizens income would be inadequate to either buy or rent a home.

    I am sympathetic the concept of a citizens income. But the more I read your comments the more worried I get.
    The UNICEF project in India is interesting but can that be a template for a world city like London?

  • Joe Bourke
    Apologies — I have just remembered that you live in Hounslow, so you will know all about the appalling shortage of affordable housing of any sort in many parts of London.
    So how does your approach work in London?
    How do you factor in those people who are prepared to live in appalling conditions in London so as to be able to send money to the family back home, be it Budapest or Barnoldswick? How do you factor in those people who leave their home and family in the north every Sunday night and trek down the motorway to live in their van until Friday because there is work in London but not at home?

  • John Tilley,

    Citizens income for an adult would be £71 per week or the equivalent of what you would currently receive in JSA or income support. This income is designed principally for living costs excluding housing costs.

    Housing support costs in the form of housing benefit, social housing, council tax benefit or rent rebates would continue as now except for the eligibility condition that able-bodied adults be engaged in employment or self-employment to qualify for such support. A minimum wage job guarantee scheme would be introduced concurrent with this change to ensure that paid work was made available to everyone requiring it. Housing benefit support costs and social housing rent subsidies would be paid by tenants from their earnings. An individual on minimum wage working 35 hours per week would earn (inclusive of Citizens Income and net of Tax) approximately £11,000 per year. As with workers in the private sector earning minimum wage they would continue to be eligible for partial housing benefits in high rent areas like London and parts of the SE.

    The job guarantee allows the involuntary unemployed the opportunity to engage in productive employment on the same terms and conditions as in the private or public sector and pay their own rent with a little help. However, I would not anticipate a massive take up of the job guarantee. Judging by my own area in West London, I expect a goodly number of current housing benefit claimants would find it inconvenient to take up a job guarantee offer and would quite soon register as self-employed complete with transit van, tools of the trade, staff and clients ready to go.

  • John Tilley,

    The coalition has agreed to cap welfare at £119.5billion next year, rising with forecast inflation to £126.7billion by 2018/19. The new limit will include housing benefit, tax credits, disability benefits, pensioner benefits. incapacity benefits, carer’s allowance, maternity allowance and employment support allowance. State pension and jobseeker’s allowance will be excluded.

    The budget is forecast to be in surplus by 2018-19 with an unemployment level of 5.4% and a tax take of 37% of GDP. The spending forecasts may not be adequate to cope with the rising costs of the NHS and social care provision. Welfare costs, in particular, housing support costs need to be tackled – both as part of the deficit reduction plan and to leave room for increased health spending.

    To deal with the issue of housing we have to be able to ramp up house building and investment in the community facilities that go with. To get the minimum wage up to a living wage level we need to get wages up overall. That means increased investment to generate increase productivity.

    This is what I mean by an integrated economic approach to the welfare and social security system

  • Joe Bourke
    Thank you for those rapid and comprehensive replies.
    I think I can only agree when you say —
    ” To deal with the issue of housing we have to be able to ramp up house building and investment in the community facilities that go with. To get the minimum wage up to a living wage level we need to get wages up overall. That means increased investment to generate increase productivity”
    But this seems a million miles away from anything the Centrist Cleggites would consider.
    People who think a 5p tax on plastic bags is a bold and radical move may not be the best people to ask to carry out the sort of fundamental change that you are suggesting.
    How would you expect to get to where you would like to be from where we are now?
    After four years with Clegg as DPM would you imagine that another six years of Cameron Coaition would take us anywhere at other than a snail’s pace?

  • jedibeeftrix 5th Jun '14 - 9:13pm

    @ JT – “People who think a 5p tax on plastic bags is a bold and radical move may not be the best people to ask to carry out the sort of fundamental change that you are suggesting.”

    Agreed. It is a useful measure as a Pigou tax, but it does not any of the big questions of the day.

  • Joseph Reville 5th Jun '14 - 10:27pm

    @ Daniel Henry
    “We already pay people to “do nothing” through means tested benefits.”

    No we don’t, take JSA, you are payed for looking for work. There are people who don’t want to find work (and often lose their benefit) and are happy to live of this, why should they be subsidised by the rest who do?

  • Stephen Howse 5th Jun '14 - 10:38pm

    “Citizens income for an adult would be £71 per week or the equivalent of what you would currently receive in JSA or income support. This income is designed principally for living costs excluding housing costs.” It needs to include housing costs – the whole point is to a) guarantee a minimum income for all, and b) to allow the poor to make choices for their own lives and to give them some sense of agency.

  • Stephen Howse,

    A FULL Citizen’s Income (FCI) is defined as ‘enough to live on’. If everyone were to receive a FCI, it would cost so much to pay for it that it is unlikely to gain political or public support.

    A PARTIAL Citizen’s Income (PCI) is one that is not sufficient to live on by itself, and it would need to be topped up by earnings. However, those without any other income, or whose other income is insufficient to live on, would need their incomes to be supplemented from public resources via residual contributory and means-tested benefits. The Citizen’s Income Trust has costed schemes based on a Citizen’s Income equal to the current amount of Pension Credit for those aged 65 or over, and on the current levels of Income Support or Job Seekers Allowance for adults. For some households, this Partial Citizen’s Income would need to be supplemented by other provision, especially for housing costs, but far fewer people would need such supplements than need current means-tested benefits. With a Citizen’s Income the marginal deduction rate (the amount of any extra £1 of earnings lost through taxation and benefits withdrawal) would be a lot less than under the current system, it would be far easier for households to increase their net income and therefore to earn their way out of poverty.

    The Citizens income proposed in the article is part of a integrated economic approach that includes management of the economy to target full employment; investment in infrastructure combined with rapid increases in housing supply to reduce rent costs; job guarantees to furnish employment and support consumer demand; a rebalancing of tax collection between income and wealth with the introduction of land value tax; and investment in industrial strategy, training and skills development aimed at increasing median and minimum wage levels.

  • In time of high unemployment why do people wish to force people who can cope on benefits to take jobs away from people who want and need them? In times of low unemployment then it would be fine to “persuade” people to take the jobs that are there.

  • Daniel Henry 6th Jun '14 - 5:44pm

    Joseph, having been through the system a few times myself I can confirm that while the intention is that people are paid to find work, in reality they’re paid to jump through a set of bureaucratic hoops that actually discourages any kind of work other than a stable and steady full time job.

    I can’t say that any of the measures I took to finally find work were motivated by it.

    For similar reasons that Joe gave, I think this would encourage people to work more rather than less.

  • Daniel Henry 6th Jun '14 - 5:47pm

    Joe, I’m familiar with that website and their proposals. I agree partially but would rather see the CI funded through a land tax rather than scrapping the tax allowance.

    I think your claim that median incomes would be unaffected by a switch from having a 40p rate to the land tax comes with assumptions.

    If we’re going to reduce income taxes then it needs to be for the lowest paid, not the richest 15%.

  • Mike Drew,

    First – job guarantees are voluntary – if you can cope on a citizens income of £71 per week and don’t need a housing subsidy then good luck to you, enjoy your life.

    Second – the premise that Jobs will be taken away from people who need them is a profound error known as ‘The Lump of Labour Fallacy.’

    The number of jobs is determined by the amount people want to buy – that is by aggregate demand. Aggregate demand is influenced by many factors, mostly outside the direct control of policy makers. However, monetary policy, in particular, is very important and is set so as to try and ensure that inflation remains low and stable. In a recession, aggregate demand is low and this is reflected in higher levels of unemployment. Monetary policy is then generally loosened in order to stimulate aggregate demand. As the economy recovers, at some stage it runs into labour shortages and inflationary pressure. In anticipation of rising inflation, monetary policy is then generally tightened. There is an unemployment problem if, at this point, unemployment is still high. This is where job guarantees come-in.

    The key issue is how much unemployment remains when labour shortages become excessive and inflation therefore starts rising. This level of unemployment is known as the NAIRU (non-accelerating-inflation rate of unemployment). It is, if you like, the sustainable rate of unemployment and, if there is no trend in inflation up or down, it will also be the average rate of unemployment over a run of years.

    It is these factors which determine the average unemployment rate – in other words they determine how many jobs there will be for a given total labour force. At all times the number of jobs will depend on aggregate demand. But, because of the inflation constraint, aggregate demand will be restricted by the amount of available labour. So, over a run of years, the number of jobs will ultimately depend on the available supply of labour – that is, on the number of those who are ready and willing to take up jobs. This proposition is crucial, and many of the mistakes in employment policy come from a failure to understand it.

    Consider for example policies to encourage early retirement. If we start at the sustainable rate of unemployment and labour supply is then reduced by early retirement, unemployment will fall at first. But then, as labour shortages bite, inflation will rise and aggregate demand and employment will be cut back until employment is back in line with the now reduced supply of labour. Alternatively, if we encourage more older people to work and labour supply increases, inflation will at first tend to fall, permitting a rise in aggregate demand and in the number of jobs. This is the direction in which the UK has to move if we are to support an ageing population from a reduced flow of births.

    So the starting point is that, if we increase the supply of labour, we will increase employment. This has two implications. First, we can increase employment by increasing labour force participation (for example that of single mothers or older people). Second, we can increase employment by increasing the effective supply of labour from people who are already unemployed and searching unsuccessfully.

    The job guarantee is a temporary transition mechanism that creates demand and maintains the work skills of unemployed workers until the rise in aggregate demand creates jobs in the private and public sector that draws them off the job guarantee program.

  • Richard Dean 6th Jun '14 - 6:43pm

    Real life is more complicated than the text books suggest, Joe.

    First, as others have pointed out, a job guarantee scheme destroys some aspects of motivation, while costing the government money which will need to be retrieved from taxpayers, if not immediately than at some future date. And the reduction in motivation will lead to costs for companies which will need to be passed on to their customers. Thee things mean that a job guarantee scheme can delay the start of any recovery, and may even prevent a weak recovery from starting. Once the recovery starts, the guarantee scheme will continue to provide impaired motivation for some.

    Secondly, you have left out investment. Investment creates both demand and employment, It creates demand because it means premises will be needed, machinery will need to be bought, training will need to be done, raw materials will need to be purchased. It creates employment because all these things need people to do them. The level of investment is a major driver of the level of employment.

    Third, all these things a circular: investment creates employment creates the wealth that creates the demand that is satisfied by the things that have been invested in. So all aspects of the circle generally need to be improved.

  • Daniel Henry,

    I know that several proponents of CI see land tax as the preferred source of funding for the measure and I believe it is perfectly viable and progressive proposal.

    From the perspective of this article, I am looking at Citizens Income and Land tax as integrated elements of a full employment economy and a more equitable tax and benefits system.

    With respect to the tax system you will understand that wealth disparities in the UK (land holdings in particular) dwarf that of income disparity and this alone justifies a rebalancing from income taxation to wealth taxation.

    At present a higher rate tax payer pays 40%/42% or 45%/47% (40% or 45% tax and 2%NI on earnings) on income over the thresholds, With the integration of tax and NI – these taxpayers would pay 32% on all sources of income + LVT on their land holdings. The rate of LVT, would be set at a rate sufficient to recover at least the amount currently collected by way of higher rate surcharges.

    I would not expect median earners to be affected by LVT, by virtue of incorporating a sufficiently high homestead allowance for residential properties,

  • Richard,

    the job guarantee has been tried and proven successful in Argentina and India recently. I expect this is one of the key reasons why the labour party has decided to include such a program in its manifesto.

    It is a self-funding program, minimum wage payments being largely a substitute for housing and other benefits paid to the long-term unemployed together with the multiplier and job creation effects of increasing consumer wage spending in the economy .(as against the current credit-fuelled spending).

    As Daniel Henry notes from his own experience and the experience of other countries, motivation to progress into better employment is typically improved.

    There are six inter-related areas of focus, that include public and private investment as a key feature, referred to in the article:

    – An approach to management of the economy that targets full employment i.e. a balanced budget at a 5% unemployment rate and a greater tolerance for inflation within a nominal GDP target.
    – A local area planning system that prioritises the development of adequate affordable housing to meet the needs of the population and provides for the necessary local transport, schools and health facilities infrastructure required for sustainable community living.
    – A safety net that provides a self-financing employment guarantee and skills training at a minimum wage, that acts as an effective automatic stabilizer during economic downturns.
    – A revenue neutral universal basic income, as advocated by Citizen’s Income Trust, that largely replaces means tested benefits, supplemented by disability benefits. The Citizens Income would replace pension credit and universal pensioner benefits.
    – An integrated system of income tax and national insurance contributions together with the introduction of land value tax that replaces higher rate income tax and brings into use land for housing development.
    – A strategic focus on investment and productivity as a means of raising median wages in the economy and containing both the direct costs of housing benefit and indirect societal costs of inequality.

  • I agree that we need to have a policy on Welfare reform. I start from the position that Tax Credits while sounding like a good idea are in fact a bad idea that just subsidises wages. Universal Credit again sounds like a good idea, but its implementation is problematic. I pointed out during the public consultation that it would be difficult for some people to get access because they didn’t have access to the internet at home. I didn’t suggest increasing benefit levels to cover the cost of home internet access but it would have been a start. Also it subsidises wages.

    I thought that the Liberal party in the 1970’s had a policy of negative Income Tax, which might have looked something like the Citizen’s Income as suggested by Joe Bourke and the Citizen’s Income Trust.

    Having a tapered system of Income Tax should not be abolished as it seems Joe is suggesting with the introduction of Land Value Taxation. If Thomas Piketty is right about inequalities increasing now and in the future then taxation policies have to change so that more is paid by those whose returns are greater than the average.

    Joe’s target of unemployment of 5% is not ambitious enough and means a much higher level of unemployment would apply from time to time. A 3.5% target would mean that when reached the government would stop stimulating the economy and sometime in the future unemployment would begin to rise and the government would decide to stimulate the economy again, but this would take time to work on the economy and unemployment may well rise temporary above 5% during this time. Therefore the economic cycle would still exist but its worse effects would be kerbed.

    Joe’s idea of a job guarantee scheme here seems more radical than his previous versions being coupled with a Citizen’s Income and paying the Minimum Wage. Hopefully it would be voluntary as there seems to be a large carrot on offer here. Also people on these schemes would need to be counted and reported at the same time as the pure unemployed figure or it just become a method to reduce the unemployment count.

    I thought Joe had rejected the idea of raising wages by increased investment in our earlier discussions. While I recognise that effect I wouldn’t want to pursue such a policy aim. Increasing the Minimum Wage would increase median wages without the cost being met by government. Also paying the Minimum Wage to those on the Job guarantee scheme should encourage employers to pay above the Minimum Wage rate.

    Joe hasn’t really mentioned Housing Benefit and I see this as a major problem. Government pays it to people; so subsidising employers and passing the money to those who own the property being rented. Increasing the Minimum Wages would help a little, but dealing with the housing shortage would make the most difference. VAT on improvements needs to be equalises with that charged on new built so properties that are not being renovated will be and so brought into the market. Then more houses need to be built for rent and private ownership. With an increase of the supply of houses to buy the price will fall in real terms at least. With an increase in the supply of houses to rent, rents should fall in real terms at least. And if rents fall in real terms then less housing benefit will have to be paid out.

    I still think it is illiberal to make housing benefit conditional on either being in work or on Joe’s job guarantee scheme. Ensuring that someone on Joe’s job guarantee scheme is better off financially than if they are not while allowing those unemployed still to receive housing benefit would be the more liberal way to encourage people to become engaged.

    Joe – you interpret the ‘The Lump of Labour Fallacy’ incorrectly. There can be displacement and as you have stated before it only applies in the long run. Also if aggregate demand always increased there would be no recessions and the economy would also be at full employment because as soon as the supply of labour increased so would the economy. This is why some economists don’t accept that ‘The Lump of Labour Fallacy’ is true. Also I am not convinced that inflation has to rise in an economy at full employment if productivity increases and money supply is set at the correct level.

  • Michael,

    it was a recently as 1994 that the Libdem policy on Citizens Income was dropped http://www.independent.co.uk/news/uk/liberal-democrats-conference-citizens-income-plan-dropped-1450315.html on what appear to be rather spurious cost grounds. Then, as now, studies by the London School of Economics and others had shown that a partial scheme would be revenue-neutral.

    Richard Wilkson and Katie Pickett in ‘Spirit Level’ show that among the richest countries, it’s the more unequal ones that do worse according to almost every quality of life indicator. They argue “The countries with the biggest gap between the rich and the poor have the highest level of whatever health and social problem it is we’re looking at. Unequal societies “have more violence, they have higher teenage birth rates, they have more obesity, they have lower levels of trust, they have lower levels of child well-being, community life is weaker and more people are in prison,”. The argument is that inequality actually causes all these social problems, because unequal places like the UK or USA are more socially competitive places to live in than Sweden or Japan.

    Piketty’s argument is that because returns on capital exceed economic growth over time, capital accumulation squeezes the share of value produced that is allocated to wages. Land Value Tax, being a tax on immoveable land, is much harder to avoid then income tax and by taxing capital accumulation directly addresses the issue he raises.

    The 5% target for unemployment is based on the UK experience of the sustainable rate of unemployment. Stimulus, monetary or fiscal, beyond that level has typically led to higher inflation and increased unemployment down the line. Beveridge defined full employment as 3% (being frictional unemployment level). A voluntary minimum wage job guarantee would eliminate all involuntary unemployment and if run through the social enterprise sector as advocated by this economist http://www.levyinstitute.org/pubs/pn_12_02.pdf, will not compete with private or public sector jobs.

    I would not advocate increasing the minimum wage by legislation, but rather increasing wages overall by incentivising investment in skills development via apprenticeships and other training schemes. As median wages rise, so too can the minimum wages be increased with adverse effects on the labour market.

    As noted earlier, Citizens income and a minimum wage job guarantee will ensure that anyone seeking employment can earn an after tax income of £11k. These payments, coupled with a basic qualifying condition of employment for housing benefit or social housing tenancies, will largely supplant the current housing benefit payments and social housing rent waivers that are currently not collected from unemployed and low-wage tenants.

    I would not support the continued payment of housing payment or the granting of social housing tenancies to those capable of fending for themselves and who simply refuse to do so. . It diverts scarce resources from those more in need, causes discontent among communities when they see others living off the state while they are working for a living and is open to widespread fraud and abuse by those working in the black market/cash economy or renting out council housing illegally.

  • @ Joe Bourke

    I wonder how I voted back in 1994?

    Land Value Tax only applies to land and not other forms of capital which needs to be taxed at higher rates. It can be difficult to increase these rates without increasing the higher Income Tax rates as well. I thought Piketty also discussed that something needs to be done with higher rates of income.

    Beveridge defined full employment in his book “Full employment in a Free Society” as “… having always more vacant jobs than unemployed men, not slightly fewer jobs … It means that the jobs are at fair wages, of such a kind, and so located that the unemployed men can reasonably be expected to take them; it means, by consequence, that the normal lag between losing one job and finding another will be very short.”

    Can you accept the following redefinition – the state where there are slightly more vacant jobs than there are available workers, so people who lose their job can find another one quickly? Therefore there is no need to discuss whether this level is at 2.5% as British Governments in the 1950’s and 1960’s seemed to believe, 3% as believed by Beveridge, 3.5% as believed by me, or 5% as believed by you.

    As I have said before when fiscal means were used monetary policy was not set to establish full employment or control inflation. When monetary policy was used in the past, it was used to control inflation and not reduce unemployment. It seems to me that it has only been since 2008 that both fiscal and monetary policies have been used together to control unemployment with the emphasis being on monetary policy (but in a very flawed manner).

    I am surprised that you seem to wish to abolish the mechanism that sets the National Minimum Wage, which I thought is implemented by legislation (even if not Acts of Parliament).

    As I have said before, setting an unemployment level of 5% will result in there always being people who are unemployed and your scheme will force these people into one job guarantee scheme after another. However running the economy where there are always more job vacancies than people looking for jobs would mean that the issue of the long term unemployed receiving housing benefit could be looked at. I might even support housing benefit being time limited for the unemployed when the job market locally has more job vacancies than people looking for work and that person refuses to join a job guarantee scheme that is independently accessed as suitable for that person.

    With regard to the black market and fraud, I thought that the introduction of a Citizens Income in the main would address these issues.

    As I have said the issue of housing benefit needs to be dealt with by increasing the supply of houses.

  • Michael,

    by combining tax & NI – all income, from whatever source including rents , would be taxed at 32%. Income from rents and gains on land would effectively bear an additional Land Value Tax equivalent to the current level of higher rate tax. To raise the equivalent amount of tax from income would mean increasing the higher rate levels to 50% and 55% respectively.

    Beveridge’s definition of full employment being a state where there are more vacancies than available workers does not take account of the economic effects of labour shortages when the economy is at sustainable full capacity – typically around 5% full employment.

    Until 1971, sterling was maintained at a fixed rate to the US dollar under the Bretton Woods System The British government devalued the pound by 30% in 1949 and again by 14% in 1967. The monetary stimulus of 1967 followed by fiscal stimulus in the form of borrowing to implement tax cuts or increased capital spending gave only a short-term boost to employment. The higher Inflation it generated soon led to unemployment at greater levels than had previously been the case prompting Callaghan to note in the 1970’s “you can’t spend your way out of recession”.

    The reasons for this are well understood now. Monetary or fiscal stimulus is only effective when the economy has spare capacity. When the output gap is closed, typically at around 5% unemployment in the UK, adding further significant stimulus has negative effects.

    The way around this is the job guarantee. It can fill the 2% gap between frictional unemployment of around 3% and the stable rate of unemployment of around 5% and provides a modest stimulus to wage spending that allows the economy to increase its capacity over-time and hire workers out of the job guarantee pool.

    What happens with job guarantee schemes can be observed from the experiences of other countries. They typically spend a short-time in the scheme and having developed or maintained work skills go on to find regular employment in the public or private sector.

    The issue of people claiming housing benefit and non-disclosure of earnings in the black market/cash economy is not obviated by replacing means-tested benefit with a universal Citizens Income that excludes housing benefit. This particular abuse would continue in the absence of evidence of employment as a qualifying for social housing and housing benefit applications.

    I agree that increasing the supply of houses is an essential aspect of reducing housing benefit costs and the article proposals include – A local area planning system that prioritises the development of adequate affordable housing to meet the needs of the population and provides for the necessary local transport, schools and health facilities infrastructure required for sustainable community living.

  • @ Joe Bourke

    I think you have misunderstood my posting on Income Tax. I didn’t say I was against Land Value Taxation. I wouldn’t be against a top Income Tax rate of 55%. In fact I wouldn’t be against one above the Universal Credit tapper level. What is good for the poor is good for the rich!

    I am disappointed that you can’t accept Beveridge’s definition of full employment and continue to assert that 5% is the correct level and you haven’t even accepted that there is no evidence that it even works for London.

    How did the Labour government increase the monetary supply in 1967 and why didn’t the Heath government understand the money supply in 1971 when it introduced its banking reforms?

    My point is that a fiscal stimulus to boost the economy should be linked to control of the monetary supply that is linked to that stimulus and does not produce inflation. I therefore disagree that managing the economy to produce full employment means there has to be runaway inflation.

    I don’t understand why you think there is no spare capacity when unemployment is at 5% and at this level there is no output gap. I still believe you have these beliefs because you haven’t recognised that the output gap and spare capacity exist mainly outside of London. However I am pleased that you have accepted my 3% figure for frictional unemployment.

    I haven’t said that everyone who joined your job guarantee scheme would have to go from one to another, but currently there are people who go and in the past there were people who went from one government scheme to another and I have met some of them over the last ten years.

    I am not aware of the exact figures but I have heard it said that the number of people who claim benefit fraudulently is very small and would be smaller still with the Citizens Income and full employment at 3%. It doesn’t seem very liberal to remove benefit from people because a small number of other people claim it fraudulently.

    The idea that only people who meet a certain criteria should be housed and some people are undeserving and so shouldn’t be housed doesn’t seem to be liberal to me. This seems worse that the Poor Law Amendment of 1834 which at least set up workhouses for the undeserving poor.

    A local plan without any money will not produce one additional house. However building 300,000 new houses a year as part of a fiscal stimulus would. The fiscal stimulus could also be used for the necessary infrastructure.

  • Michael,

    Beveridge has given a definition but not a sustainable means of achieving a target of 3% unemployment. Experience with unemployment in the UK in recent decades suggests a sustainable rate of around 5%. Fiscal or monetary stimulus beyond that level has proven counter-productive. To temporarily increase government borrowing for a fiscal stimulus aimed at increasing aggregate demand while simultaneously tightening monetary policy to dampen demand would be an unintelligible economic policy. Public Investment in infrastructure and housing development should be maintained at a steady rate across the economic cycle to maintain fiscal stability with monetary tightening or easing the principle tool used for managing cyclical fluctuations in demand.

    Social Housing and Housing benefit are by definition for people that are in need and not a Universal benefit that can be made available to all regardless of their ability to work and/or provide for themselves. With 5m people on housing waiting lists across the country, rationing and prioritising is a necessity.

    A local area planning system that prioritises the development of adequate affordable housing to meet the needs of the population and provides for the necessary local transport, schools and health facilities infrastructure required is an essential element of the dealing with the housing shortage. So too is the reform of council tax bands; bringing Public Sector Net Debt (PSND) accounting rules into line with other EU countries so that local authority borrowing is not constrained by central government debt targets; and finance guarantees for local authorities and housing associations to provide for replacement of social housing stock to pre-eighties level.

  • @ Joe Bourke

    Again you assert that an unemployment rate of 5% is the only sustainable level. I don’t believe there is a sustainable level as the economy has no state of equilibrium (didn’t Keynes say that) and there can be no end of the economic cycle. I believe that it has to fluctuate and I would be content for it to fluctuate between 3% and 5%, which accepts that the rates of less than 2% shouldn’t be aimed for as in the 1950’s and 1960’s. There is no evidence that 5% is the correct level. Unemployment only fell below 5% between 2000 and 2006 after 1979.

    A targeted fiscal stimulus say in north-east England while using monetary policy to control demand in London wouldn’t be unintelligible economics. I hadn’t realised that you rejected Keynesian economics and that you only believe that monetary policy should be used to manage the economy, while I believe both should be used to complement each other because Keynesian economics on its own failed in the 1970’s and monetary economics can’t produce a low enough level of unemployment.

    Keynesian economic is clear that infrastructure investment by central government is a method of influencing the economy and it would be stupid to have a large infrastructure investment programme if there were less than 2.5% unemployed. It would just cause more inflation.

    I agree with party policy that Public Sector Net Debt (PSND) accounting rules should be brought in line with other EU countries. I am not sure about central government giving financial guarantees to local authorities and housing associations because then wouldn’t they end up having to be counted as part of the central government public debt?

  • Kelly-Marie Blundell 10th Jun '14 - 1:09pm

    Joe Bourke – perhaps you could drop me an email on this? [email protected]

  • Michael,

    I do not assert that 5% unemployment is the only sustainable level. I assert that based on the record of recent decades that is the approximate level we get to when the economy is running at full capacity. The remaining unemployment in the economy at that level is made up of frictional and structural unemployment – structural unemployment being largely potential workers lacking the work skills or work experience that most employers seek. Stimulus programs will not tackle structural unemployment – that is why job guarantees and training programs are required as transition paths to regular employment.

    Fiscal (whether tax cuts or national projects) and monetary stimulus are necessarily UK wide . Regional Investment programs are designed for specific areas and are not sufficiently large to significantly impact the economy of the country as a whole at a macro-economic level.

    Keynesian economics involves both fiscal and monetary stimulus in a slump and relies principally on monetary policy to manage the economic cycle in normal economic conditions.

    The UK economy is currently picking up pace and firms are starting to invest and hire across a broad sector including retail, business services, manufacturing and construction. I believe unemployment will reduce to around 5% over the next two or three years and get stuck there without measures aimed at tackling structural unemployment.

    Central government finance guarantees to social landlords are already being used and could be expanded further to spur affordable housing development http://www.insidehousing.co.uk/government-to-extend-35bn-guarantees-scheme/7001546.article

  • @ Joe Bourke

    I think I have made the point that there is no evidence that your 5% is correct and you haven’t produced any. What you have said is that when unemployment was 5% there was still large numbers of unemployed people in London. You have conceded that 5% is not full employment as defined by Beveridge. You haven’t produced any evidence that at 5% unemployment there is only structural and frictional unemployment.

    Your job guarantee scheme is not just a re-training scheme and therefore even according to you some of those on it will not be people who couldn’t be employed if the jobs were there for them. Having a 5% target means you believe there will always be structural unemployment. I believe that the amount of structural unemployment should decrease over time so by 2020 we can have an unemployment target of 3%. I also believe that having a target of 3% will reduce the amount of time those who are frictional unemployed are unemployed.

    Neither a fiscal stimulus nor a monetary stimulus is necessarily UK wide. With a monetary stimulus it will depend where the extra money enters the money supply. Building HS2 will create a stimulus in the areas where it will be built and the further from this area the less will be its effect.

    Again you make an assertion that Keynesian economics involve both a fiscal and monetary stimulus, but I thought economists do not all agree on this. Also it doesn’t make sense to have two different bodies one controlling fiscal policy and one controlling monetary policy.

    You may be correct that by 2017 or 2018 there will be 5% unemployed, but I still assert that some of these people will be frictional unemployed who can’t get a job in the area in which they live, but do have the skill and experience to get a job.

  • Michael,

    I have quoted several times the basis for the 5% being the actual experience of recent decades. See attached link for further discussion http://www.bbc.co.uk/news/uk-politics-26817000 “…full employment which economists define as that level of unemployment which does not fuel a rise in inflation – the so-called NAIRU or non accelerating inflation rate of unemployment which is often put at around 5%.”

    Beveridge used a full employment estimate of 3% unemployment based on the claimant count. That is the level of claimant count achieved with a 5% rate of unemployment based on the Labour Force Survey measure adopted since 1971.

    Budgeted capital expenditure, such as HS2, paid from taxation or planned borrowing is by definition not a stimulus. The expenditure is contained within the governments existing forecast for spending and growth. Major capital projects of this nature do. however, provide the basis for forward planning by the construction and professional services companies and material suppliers engaged throughout the country and overseas.

    Keynes magnum opus was ‘The General Theory of Employment, Interest and Money’. As the title suggests it has a lot to do with the effect of changes in interest and money supply on employment.

    Frictional unemployment refers to the short-term unemployment that is always present as a consequence of people changing jobs/moving etc. Structural unemployment is that element that persists due to lack of work skills or experience that accounts for a higher level of youth unemployment than average across the workforce. Regional unemployment is the variation in distribution of employment across the country – typically higher in older former industrial areas and lower in the South-east and addressed by regional development initiatives such as the Cities deal scheme.

  • The main argument against ubi has always been that many people will decide not to work. (Never mind for the moment that the experimental evidence shows this fear is unfounded) . I would make 2 observations:
    (1) what do we mean by “work”? Is work of no value unless it is paid? What about carers, volunteers, musicians, amateur scientists, budding entrepreneurs?
    (2) can’t we allow people with jobs to swap places with people without jobs if they want to? Then participation in this scheme, from either side, ought to qualify the participant to receive ubi. If nothing else, it would be an interesting new way to find jobs for unemployed people.
    (3) where does this myth come from that ANYONE would actually want to live a life of idleness?

  • Paul,

    agree entirely with your comments and conclusion that it is a myth that anyone would actually want to live a life of idleness.

    Milton Friedman had apparently convinced President Nixon of the benefits of introducing UBI in the late sixties/early seventies. However, according to Friedman, Nixon balked at the last minute because he was worried at how it would look politically if some Hippie groups pooled their incomes and self-sufficient communes started to spring up in the Western deserts, Would have been a good counterbalance to over-the-top American consumerism, in my opinion.

  • @ Joe Bourke

    I don’t understand how you can claim that 5% is the level experienced over recent decades, when it has only been that low for a couple of years between 2000 and 2006 since 1979. Also you conceded that the 5% level for the Non Accelerating Inflation Rate of Unemployment (NAIRU) is not accepted by everyone when you and others use the phrase “often put at around 5%”. Also if you read carefully what I have written recently you would understand that once 5% has been reached my position isn’t that full employment has been achieved but that we need to do more to continue to put pressure on unemployment to reduce it further and get some more frictional unemployed into jobs and there being jobs for those who are undergoing re-training. This therefore will mean that the NAIRU will reduce over time. This is a more flexible position than what could have been interpreted from my older posts.

    You assume that the figures I am using are not consistent across time. I am not sure this is true and the figures for the past I am using were published in the 1990’s and give figures for a very wide time scale.

    I find it strange that you can say that any investment is not a stimulus to the economy. We discussed before that if a new job is created then the employee when spending the salary increases total demand in the economy – i.e a stimulus. HS2 is not being paid for from taxation, it is being paid from borrowing and therefore is a Keynesian stimulus. I would expect all investment and Keynesian stimuli would be planned. Therefore any new jobs needed for HS2 will increase total demand and so be a stimulus.

    I was surprised that you think “it is a myth that anyone would actually want to live a life of idleness” because of your position on housing benefit and linking it to taking part in your job guarantee scheme. Maybe one day you can change your position on the financial penalties for not joining your job guarantee scheme and accept that it is a myth that anyone would want to continue to claim housing benefit and have a life of unemployment.

  • Michael,

    the 5% figure or approx 1.5m is that rate/number of people seeking work when the economy is at full capacity i.e. the full employment level.

    Frictional unemployment will always be present in the economy. It is the time period between jobs when a worker is searching for, or transitioning from one job to another. It is sometimes called search unemployment and is normally voluntary.

    To compare like with like figures you need to distinguish between the claimant count and the more recent unemployment survey measures. See link for detail http://news.bbc.co.uk/1/hi/business/92830.stm

    Fiscal stimulus is a government measure, normally involving increased public spending and/or lower taxation, aimed at giving a positive jolt to economic activity. Government borrowing and investment is happening all the time in the economy. It only provides a stimulus if the level of deficit spending increases and is funded by increased borrowing. If spending and borrowing remain the same there is no new stimulus effect. We are currently running a deficit and increasing debt annually, but the level of deficit/stimulus is being decreased year on year with a balanced budget or small surplus expected by 2018/19.

    I don’t think people want to live a life of idleness and will much prefer to take a job guarantee if it was made available to them and they can earn a decent wage after tax and benefit withdrawals for their effort. Nonetheless, there will be those who insist the opposite and there is always an element of fraud in the system from housing benefit claimants not declaring casual income. The Citizens Income, job guarantee and qualifying condition of employment for new social housing tenancies/rent support resolves the issue and aids in determining the allocation of scarce resources.

  • @ Joe Bourke

    The time someone is unemployed can vary with the economic activity. When unemployed is low the time someone is unemployed for decreases and that is what I was talking about. Therefore the time spent unemployed as frictional unemployed is not voluntary but can be much longer than the person desired.

    “It is sometimes argued that there is a limit to how low unemployment can go without sparking inflationary pressures, the so-called non-accelerating inflation rate of unemployment, or NAIRU.
    “But others argue that recent changes in the economy, for example the weakening of trade union power, may have altered this figure.” From the BBC article you gave a reference to.

    I don’t understand why you don’t accept that the 5% level is a guestament and accept that it could be reduced further.

    Maybe we should look at the economy from 1999 to 2008 to see whether there is any evidence that 5% is the correct level for NAIRU.

    Government deficit was
    1999 – £1.3 bn – 2.29%
    2000 – £6.2 bn – 2.47%
    2001 – £33 bn – 4.8%
    2002 + £3.1 bn – 1.24%
    2003 + £31.6 bn – 1.12%
    2004 + £35.7 bn + 1.38%
    2005 + £41.2 bn + 1.96%
    2006 + £39 bn + 1.05%
    2007 + £37 bn + 0.72%
    2008 + £94.9 bn +1.04%

    Bank rate
    1999 6 – 5.5
    2000 5.75 – 6
    2001 5.75 – 4
    2002 3.75
    2003 3.5 – 3.75
    2004 4 – 4.75
    2005 4.5
    2006 4.75 – 5
    2007 5.25 – 5.5
    2008 5.25 – 2

    Unemployment

    1999 6.02%
    2000 5.532%
    2001 5.106%
    2002 5.199%
    2003 5.048%
    2004 4.788%
    2005 4.799%
    2006 5.406%
    2007 5.4%
    2008 5.558%

    Inflation
    1999 1.4%
    2000 2.5%
    2001 0.5%
    2002 2.6%
    2003 2.5%
    2004 3.2%
    2005 1.8%
    2006 4.0%
    2007 3.7%
    2008 0.5%

    Inflation was lowest in 2001 when unemployment was 5.1%. Unemployment was lowest in 2004 when inflation was 3.2% (not the highest level) and the bank rate was increasing and the government was running a deficit of over 1%. 2005 has inflation falling to 1.8%, while unemployment was up only a little to 4.8% and the bank rate had decreased to 4.5% and the government deficit was still about the same, rising a little. I can’t see how these figures support your position that inflation increases when unemployment is less than 5%.

    I don’t think your position on investment makes any sense. Private and public investment even when coming from savings or income can create new demand in the economy. If this wasn’t true we would only get economic growth when there is a government deficit.

    I don’t think your position on people not wanting to have a life on benefit supports your position that there has to be financial penalties to force people onto your job guarantee scheme.

  • @ Joe Bourke

    I have just read your post on another thread – https://www.libdemvoice.org/the-lib-dems-are-setting-out-plans-as-if-they-may-have-to-deliver-them-giles-wilkes-on-cleggs-economic-plans-40838.html#comments
    I have then gone to the link you provided – http://niesr.ac.uk/blog/largest-and-longest-unemployment-gap-wwii#.U5pCDfldUUh
    Jonathan Portes provides a graph which includes the NAIRU. However the figures he uses give a variable level for it from a height of nearly 12% in about 1985 to below 5% in 2004. He states, “the NAIRU is an estimate … that change(s) only relatively slowly over time”. Therefore I don’t understand why you can’t agree with him and me. Also isn’t the point of your job guarantee scheme and re-training programme to make these structural unemployed people employable again and this will reduce the level of NAIRU and so make an unemployment target of less than 5% possible without increasing inflation?

  • Michael,

    I think you may be looking at actual unemployment levels in the graph.

    The Nairu was estimated at about 5% in the mid-seventies and started to increase then, peaking in the mid-eighties at around 10% as deindustrialisation and the closure of shipyards, steelworks and coal mines gathered pace. Labour market reforms and increased employment in the services sector have seen the Nairu gradually reduce to around 5% by 2003 and it has held steady at the level ever since. This is where the economists consensus of about 5% for the UK comes from. It is possible it may have increased somewhat as a consequence of the recent recession.

    The point of the job guarantee and re-training scheme is indeed to tackle this issue of long-term structural unemployment without increasing inflation and permanently lower the unemployment level to a point where we have voluntary frictional unemployment only.

  • @ Joe Bourke – “I think you may be looking at actual unemployment levels in the graph.” Quite.

    As you accept that NAIRU can change and that the job guarantee scheme and re-training programme you suggest is to tackle this issue I don’t understand why you didn’t accept last night that there was very little difference in our positions on what the level of unemployment should be reduced to. I posted “This therefore will mean that the NAIRU will reduce over time.”

    You seemed to say that full employment exists when unemployment reaches 5% and this has been true since the 1960’s. Now it appears this is not your position. Hopefully now you can agree with me that full employment does not have to leave 5% of the working aged population unemployed and that once unemployment is at 5% re-training and job experience schemes can make it possible to reduce it further.

  • Michael,

    I have always agreed with the view that we do not have to consider 5% as an acceptable rate of unemployment. Where we differ, however, is how we would go about tackling the problem of reducing unemployment further. I do not think monetary or fiscal stimulus will be effective in reducing unemployment significantly below the level of 5% and such stimulus will in fact be counter-productive , causing more harm to the economy then good- whether in stoking inflation or misdirecting scarce resources.

    That 5% level is based on the current economic environment and structure of the Labour force. The Nairu level has been higher from the late seventies to the early noughties for the reasons noted above, but has been relatively constant for over a decade now and much closer to the Beveridge post-war environment of a 3% claimant count i.e. approx 5% unemployment under the Labour Force Survey measure. Hence, the focus on job guarantees and re-training to tackle both persistent structural unemployment and act as a direct automatic stabiliser during cyclical downturns as argued in this policy note http://www.levyinstitute.org/pubs/pn_12_02.pdf

  • @ Joe Bourke

    I feel like I am hitting my head against a brick wall. Even where we agree you want to disagree. Not an inch of modification can you take on board. I have accepted that NAIRU exists and that it can change over time. We have a small difference of opinion in that you believe that the estimate of 5% is correct while I think it might be a bit lower than this.

    We both agree that one of the purposes of the job guarantee and re-training programme is to make unemployed people more employable. The difference is that I believe this will reduce NAIRU and so we need to reduce the target of unemployment downwards in line with the fall in NAIRU. Please can you explain why it would be right for the government to only aim to reduce unemployment down to 5% if your policies had reduced NAIRU down to 3%?

    The new point you now make seems to be that the job guarantee is for the cyclical unemployed during the down side of the economic cycle. I have accepted that the level of unemployment cannot be held at any figure. I have no problem with the cyclical unemployed being on a job guarantee scheme while waiting to the economic stimulus to take effect, but I can’t accept that there would be no economic stimulus at some time in the future.

  • Michael,

    the article above focuses on an integrated approach to welfare reform of which management of the government budget and a job guarantee scheme are inter-related parts.

    I have tried to explain the reasons why I believe that 5% appears to be a reasonable estimate of the Nairu (the OBR and OECD estimates, the Portes analysis, the BBC link, the recent record etc.). The actual level might be slightly higher or lower but for budgeting and policy action purposes that is a decent guideline.

    I don’t believe it would be right for the government to only reduce employment to 5%. What I have said in the article and the comments is – “An approach to management of the economy that targets full employment i.e. a balanced budget at a 5% unemployment rate and a greater tolerance for inflation within a nominal GDP target.” The key point here is a balanced budget at the current Nairu Level i.e. the government should be funding expenditure fully from taxation at this point and not increasing borrowing through deficit financing in an attempt to lower employment further.

    A job guarantee scheme that targets structural unemployment is largely financed by replacing benefit payments including housing benefits with wage payments. Such a scheme can lower unemployment further when fiscal and monetary policy will no longer work.

    The job guarantee scheme can also act as an automatic stabiliser in a cyclical downturn by maintaining wage demand. I think it is a more focused means of injecting demand into the economy where it is most needed, than across the board tax cuts or exclusively relying on accelerated capital projects expenditure. In a recession, increased spending on the job guarantee scheme my be supported by borrowing to fund wages instead of borrowing to fund benefits, as is happening now. The deficit financing provides the necessary economic stimulus to accompany any other fiscal and monetary policy easing that might be considered appropriate during a slump.

    The number of workers participating in the job guarantee scheme during an economic downturn increases and this becomes the new measure of unemployment . As the economy recovers and people transfer from the job guarantee scheme to the private or public sectors, the government’s budget should return to a balanced or surplus position

  • @ Joe Bourke

    Thank you for your longer explanation. I can appreciate that the 5% target for unemployment is a guide and hopefully you can accept that it shouldn’t be fixed but should be studied to discover if the estimate is correct and if not policy adapted to the new estimate and target.

    I hadn’t realised that you wanted a balanced budget at 5% unemployment. I am not sure this is achievable even at the height of the economic cycle. And this is the first time I realised that you would accept a higher level of inflation.

    The automatic stabilisers I thought applied to increasing government revenue in an economic upturn. I am not sure that a government deficit always stimulus the economy. I thought there were some economists who had presented a case that the economy could still have insufficient demand to create economic growth and there still to be a government deficit. I am not an expert but didn’t this happen to Japan?

    Also I am not convinced that giving tax cuts is the best way to stimulate demand in the economy. I prefer spending the money on building something, but accept that this takes longer to work on the economy even if the effect is greater. I assume that increasing the money that those on benefits get by converting them from benefit to minimum wage is likely to stimulate the economy, but its effect will be lessened depending on the rate which housing benefit and council tax support is withdrawn at. Therefore this automatic stimulus might not be enough to produce enough economic growth to reduce unemployment.

  • Michael,

    I would agree with your view that estimated Nairu should be regularly reviewed and policy adapted accordingly .

    With respect to a balanced budget and tolerance for a greater range of inflation outcomes, I would advocate the following policy stance:

    1. A balanced budget for current spending under normal conditions of full employment i.e. (around a 5% unemployment rate as compared with the current rate of circa 6.6%).

    2. Stable and consistent funding of the national infrastructure plan and social housing investment year on year. The excess of spending on capital investments over and above replacement/renewal costs, net of sales of assets should be funded by borrowing. If capital spending is less than replacement/renewal costs net of sales proceeds , then the proceeds of assets sales should be used to pay down national debt.

    3. A monetary stabilisation fund to manage cyclical fluctuations in demand and the money-supply should be established. The government has the power via the Bank of England to increase or reduce the amount of money in the economy that is made available to purchase goods and services. During recessions the government can call on this stabilisation fund to meet the funding requirements of automatic stabilisers (i.e. temporary reduction in tax receipts and increased welfare support payments) and/or other fiscal stimulus As the economy begins to overheat and wage inflationary pressures rise, the government would withdraw money from the economy to dampen demand by using the net gains from increased tax receipts and lower welfare spending and/or fiscal tightening measures to repay the stabilisation fund.

    This fund is intra-goverment debt that carries no interest cost and is limited in scope to the extent that increases in the supply of money supply introduced into the economy cannot exceed spare output capacity as evidenced by changes in inflation or nomimal GDP expectations in the forecast horizon.

    A monetary stabilisation fund of this nature would eliminate the need or incentive for periodic or cancelling of capital spending during cyclical downturns, as has been happening on Japan for a couple of decades.

  • @ Joe Bourke

    If you have a capital investment programme funded by borrowing unless sales of assets equal that investment or is greater than this, then there is the possibility that it will be a fiscal stimulus and this could happen when the economy is at full capacity. Therefore any investment programme must take account of the need for a fiscal stimulus or the need for there not to be one.

    I have no faith that monetary policy solely can be used to manage cyclical fluctuations in demand because it hasn’t work in the UK. The setting up of a stabilisation fund just sounds like a wheeze to return control of the monetary supply back to government. However the idea that the government can fund the economic downturn destabilisers caused by a reduced tax receipts and increased welfare support payments and any fiscal stimulus needed does appeal.

    Perhaps it would be better to limit the fiscal stimulus to less than 3% of GDP as it is unlikely for economic growth to be higher than this.

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