George Osborne and David Cameron are given to policy stunts which they should know by now will come back to haunt them. I’ve written about it before on Lib Dem Voice.
And this time they really have messed up big time. Should they win the election they will undoubtedly live to regret their foolishness on National Insurance and, most especially, the public sector savings they have cavalierly claimed can easily pay for it.
The people who know about these things – not company bosses who are quite understandably interested in reducing their company tax bills – have come out against Osborne and Cameron’s electoral cynicism and imprudence.
First of all there is the Sunday Times Economics Editor, David Smith. David Smith isn’t known as a Liberal Democrat or Labour supporting economic pundit. That makes his undisguised contempt for the Osborne/Cameron NI proposal – instant cuts in support of accelerated deficit reduction AND tax cuts in a year’s time – particularly striking.
This is what David Smith told readers of his recent Sunday Times piece entitled ‘City allows Osborne to make a monkey of the voters’:
Something strange has been happening in recent days. The Tories, through George Osborne, made an announcement that to me represented an unmistakable softening of the party’s fiscal stance. By announcing that a Tory government would shelve most of Labour’s planned April 2011 National Insurance (NI) hike, paid for by efficiency savings, the shadow chancellor made a remarkable lurch … Business bodies, which a few days earlier had lambasted Darling for failing to set out a credible plan for cutting the budget deficit, queued up to praise the Tory plan …
So what can explain the lurch? David Smith offers three possible explanations but clearly favours the third:
… we have now entered the world of lies, half-truths, dodgy statistics and even dodgier claims known as a British election campaign …
Mr. Smith has impressive backing for his excoriating piece on Osborne and Cameron’s departure from fiscal rectitude. None other than Gerry Grimstone, chairman of insurer Standard Life and an adviser to the Treasury on efficiency. Grimstone put it very simply: finding immediate additional savings to fund Tory cut in NI is ‘just not credible’. Grimstone makes his case, one that damns the Tory duo, in an impressive piece in the Financial Times. A piece that ought to be compulsory reading for Liberal Democrat candidates in all the UK elections now taking place, because it is a piece that will help them to nail an extraordinary and extraordinarily irresponsible Conservative deceit.
Two observations stand out from Grimstone’s expert and well informed analysis:
[The] Treasury’s efficiency programme [is already set to] deliver an extra £15bn of savings in 2010-2011 … It is just not credible to think that [these] … savings can [suddenly] be almost doubled… The last thing the country needs is a rushed plan that will not produce results and will get in the way of serious reforms.
Osborne and Cameron’s electoral cynicism should see them pilloried. I pray that David Smith is wrong when he suggests that: ‘The Tories have pulled a fast one on NI and have probably got away with it.’
Ed Randall, a Liberal Democrat councillor in the London Borough of Greenwich from 1982 to 1998, edited the Dictionary of Liberal Thought jointly with Duncan Brack. Ed lectures on Politics and Risk at Goldsmiths University of London and is the author of Food, Risk and Politics, published by Manchester University Press in 2009.
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12 Comments
My experience of local government is that forced cuts on the grounds “there must be some inefficiency somewhere, you go and find it and cut it” lead to cuts which save money short-term and don’t make an immediate impact, but cost big-time long-term. It’s all those boring maintenance things. Wonder why the roads are full of potholes, for example? Because cuts in road maintenance were an easy “efficiency” saving, and anyway “we don’t have cold winters these days, so no need for costly maintenance to prepare for how a cold one damages badly patched roads”.
Our country is in a mess, so isn’t it obvious we should all pull together, which might require a bit of sacrifice from those lucky enough still to have jobs and businesses? If it’s so damaging to have this NI rise, why not pay for it by cutting the fat cat bosses pay and bonuses? If they really care for the future of our country and its people, why aren’t they volunteering to do that? Out ancestors made huge sacrifices for this country, sometimes their lives. But the fat cats won’t sacrifice a tiny bit of their unbelieveable luxury. Reality is they care nothing at all for us ordinary people or for this country, they care only for themselves. Why do we listen to these greedy pigs? Why are the likes of Cameron crawling to them? Why isn’t the Liberal Democrat national campaign loudly shouting them down for being traitors to Britain with their “my greed, first, second and third” attitude?
Cameron wants to halt the upgrading of ICT systems used by public bodies as an “efficiency saving”. Given that many public bodies have ICT systems that are not fit for purpose, it is difficult to see how it is a “saving” not to make them more “efficient”.
It is easy to complain about the high salaries paid to senior public service managers, and the hefty remunerations given to specialist contract staff, but the fact is that comparable people in the private sector are paid even more.
Matthew has clearly noticed the exhaust-bashing potholes that have shot up everywhere this Spring. I even found some in Tory Buckinghamshire the other day.
The feebleness of the Tory efficiency savings planned for 2010-11, to meet reductions in NI contributions in 2011-12, has been exposed by Peter Gershon’s own explanation of how the Osborne/Cameron public sector savings, on which he advised, were arrived at.
Sir Peter told the FT that “driving down the use of agency and contract staff” and leaving posts empty could “perhaps [save] £1bn to £2bn” in 2010-11. What, you might ask, is a billion between friends?
Apparently cuts to spending on IT could “potentially at least” – Sir Peter’s words not mine – produce savings of £2bn to £4bn. Sir Peter, widely thought to possess a razor sharp mind when it comes to figures, has acquired a new and disarming skill: imprecision.
Sir Peter’s figures are also reported to assume savings from the renegotiation of contracts with suppliers of goods and services to the public sector. In Sir Peter’s opinion achieving savings in this way is “not rocket science”. The companies and employees affected by sudden ‘renegotiation’ of their contracts with government are surely entitled to take a different view about rockets and science.
Sir Peter’s efficiency savings include estimates of reduced public expenditure on consultants and expenses; something he anticipates would yield £2.5bn in 2010-11. Peter Gershon’s claim that the £2.5bn saving relates to ‘discretionary’ spending still has to be substantiated.
The FT had no better luck in persuading Sir Peter to provide figures for the contribution of reductions in public sector property costs to the projected Tory public sector savings needed to offset the loss of government income from NI (which forms part of their savings, tax cuts and deficit reduction plan).
Those whose party colours are rather less obvious than Gershon’s, such as Professor Colin Talbot of the Manchester Business School, anticipate cuts in the public sector payroll that imply more than 20,000 job losses.
There is a curious disconnect between Gershon’s advice to the Tories and the views of those independent advisers who are now closest to the current government’s efficiency programmes. The man who headed the government’s review of property, Lord Carter of Coles, has been reported as saying that saving an extra £12bn in the current financial year “simply does not add up”.
Jerry Grimstone has been blunter. The FT reports him as saying that: “Incoherent attempts to deliver efficiencies will not deliver value for money and will damage the services people rely on at times like this.”
The insistence that canceling the NIC hike is economic folly is overdone.
Ceteris paribus, a rise in National Insurance contributions would indeed raise more tax and reduce the deficit. But tax is never a zero sum game, by increasing the cost of employment, the rise in contributions could also increase redundancies. If it does increase redundancies, the people made redundant cease to be taxpayers and are likely to become a net drain on the Treasury, increasing the deficit (at least until they find another job).
In order to know whether the policy would decrease or increase the deficit overall, you have to know how many redundancies would be created by an increase in the cost of employing people. The Government’s answer appears to be none at all because they don’t appear to have off-set the revenue from the hike against anything. This is likely to be wrong. We know, for example that output has fallen faster than employment. This must mean that many companies are keeping on larger workforces than they really need in order to avoid making redundancies and be ready for the recovery. If you increase the cost of retaining “spare” staff, you increase the likelihood that redundancies will be made. The NIC hike is equivalent to 1% of salary but most people pay 25-30% of their income in tax and would draw a significant chunk of their income in benefits if made redundant. Thus, every redundancy off-sets the additional revenue raised by perhaps 40 people’s increased contributions.
All taxes are a necessary evil but some are more evil than others. There is nothing inconsistent about saying that the overall level of taxation must increase whilst saying that specific taxes – taxes upon things we wish to encourage – should be restrained.
Not that I’ll be voting for the Tories of course, I just think that this proposal is within the bounds of reasonable discourse and shouldn’t be dismissed with childish complaints of “inconsistency”.
Why the lurch indeed! Could it to be a manifestation of a ‘buy now, pay later’ mentality – which, by all accounts, the Tories so much disapprove of??
Penn48
GeorgeV says “The insistence that cancel[l]ing the NIC hike is economic folly is overdone.”
I’m not aware that economic commentators [or others] have criticised the cancellation of the NIC hike as economic folly IN ISOLATION. The point that most knowledgeable and serious commentators have made is that cancelling the hike needs to be counterbalanced by some other measure(s), either revenue raising and/or expenditure constraining.
GeorgeV says “Ceteris paribus, a rise in National Insurance contributions would indeed raise more tax and reduce the deficit.”
But – much honoured monarch – all other things are not equal.
As James Caan explained [to the uncomprehending Jeremy Paxman]: those who have been complaining most vociferously about the job destroying impact of the NIC hike appear to lack a basic grasp of business costs – especially in retailing. Caan did more than hint that his criticism was aimed at Chairman [Sir Stuart] Rose, who has been at the head of the Tory posse damning the Labour NI, job destroying, hike and commending Tory plans to cancel it and usher in an employment led economic revival.
Of course you are correct – it is possible that an increase in the costs of employing people, due to an NI hike, may result in a net decrease in employment in the economy. It all depends what is done with the NI revenues and the strength of demand for goods and services when taxes rise. The latter is related to a vital question – the big question about the timing of tax changes and spending changes during a recession.
It would be comforting to think that establishing whether the game is a positive, zero or negative sum one is best considered as a purely empirical matter. Because the NI hike forms part of a complex and interdependent package of tax and spending policies the empirical study required goes well beyond the direct impact of NI on employment at businesses such as Marks and Spencer. For example, Colin Talbot (the closest we have to an authority on many of the key issues) estimates that the Tory game of balancing the cancellation of the NI Hike in 2011-12 with an increase in public sector savings in 2010-11 translates into “roughly 20,000 to 40,000 job losses” [in the public sector]. I dare say that if he is correct the 20 to 40 thousand would add considerably to the drain ‘on the Treasury, increasing the deficit (at least until they find another job)’.
The choices for Darling and Brown, Cameron and Osborne, as well as Clegg and Cable, are hard to make. The quality of the information available to them about ‘how many redundancies would [result from] an increase in the cost of employing people [following an NI hike]’ is pretty poor. As you point out ‘output has fallen faster than employment’ and, I could add, employment has held up much better than economic modellers/forecasters anticipated at an early stage in the recession.
However – following a political and economic reality check – it is clear that the choices made by Darling and Brown cannot be explained by any crystal ball gazing they may have done; economic forecasting being pretty much equivalent to crystal ball gazing. The judgements that have been made by the trio of economic policy makers (each party’s duo) seem to me to owe more to their ideological predilections about how to share the pain of deficit reduction fairly and how to manage the timing of spending and tax changes. In other words they have been concerned with how much use to make of different revenue raising devices, NI hike versus VAT increase, and expenditure cutting strategies, bigger or smaller cuts, made sooner or later.
Glad to hear you will not be voting Tory. Cannot help wondering WHERE you think messers Cable, Clegg, Brown, Darling, Osborne and Cameron should go for the very best guidance on the most likely employment and fiscal consequences of their different deficit reduction strategies. Also interested in whether (and how) you think social equity considerations should feature in making the policy choices about managing the deficit.
And, in closing, I think (despite what you have to say) that David Smith has a point. So far as I am aware he hasn’t called George Osborne childish… but he has seriously questioned Osborne’s commitment to fiscal rectitude and the coherence of his NI cancellation announcement.
I think that does amount to a charge of inconsistency from an economic pundit who has been reasonably sympathetic to the Tory cause. If I can leave the very last words to David Smith:
“The Tories say their commitment to cutting spending by an extra £6 billion in the first year is non-negotiable, whether or not it is done through reducing waste. They say this is consistent with the ‘unwavering commitment to fiscal responsibility’ Osborne [gave] at the Tory conference in October. Is it? A real cut of more than 5% in non-ring-fenced spending in 2010-11 will be hard to achieve, with or without cutting waste. Relying on it to meet an election promise is hardly fiscally responsible. If the cut is achieved, the Institute for Fiscal Studies says it will hit the economy when the recovery is most fragile.”
Ed, I agree with almost all you say.
My principal point was that the response to a decision to halve the increase in NICs was overdone. It was being treated at the time as though it was the major fiscal difference between the Tories and Labour.
What I was trying to say was that it was silly to look at the effect of the hike – or the decision not to hike – in isolation. I have pointed out one reason why it is not as simple as that, you have pointed out others. Not introducing the hike may save jobs but paying for the non-introduction of the hike though efficiency savings may cost jobs. However, the public sector is also an employer and would therefore also be hit by the hike and so on and so on.
Neither you nor I know which effect will predominate here and neither does anyone else (to any real degree of certainty). If we don’t know for certain what the outcome will be then we must look at the intentions behind it.
The Tories are saying that they would like to keep the taxes on employment to a minimum and would also like to have efficient public services. Under most circumstances I think everyone would agree that both high employment taxes and inefficient public services are bad things.
To oppose the Tories’ decision is to argue that reducing the deficit and saving public sector jobs are so important that high employment taxes and inefficient public services are a price worth paying. It is visceral judgements of that sort – rather than economic forecasting – that make up the viscera of politics.
I believe that services in a society should be
prioritised using basic common sense.
It does not take a genius to discern the difference
between essentials and non essentials.
Why such drastic cuts? when huge amounts of lottery
money is being used on entertainment, leisure, and
culture and the like.
Why not realistically switch more of the lottery money
and use it for essential public services like health,
education,the police force, fire brigade etc.
making drastic cuts could be
counterproductive in that it could not only affect the
needy but affect peoples motivation to a point where
the countries moral might end up being on a low.
Low moral is non productive and breeds discontent
which is not healthy for a country that wants
to get back on it’s feet!
I have always been astounded that any Government have
not homed in using more lottery cash for our countries
essential services. Instead of having lottery money
splashed all over the place in the name of “fun” It is
more sensible, prudent and noble to use the money to
help someone who is dying just because there are
insufficient funds to pay for that persons life saving
treatment? What is more important that person’s life
or entertainment? Moreover there is sufficient lottery
money generated to use for both public services and our
other’s countries requirements and fun.
Huge volumes of money are consistently generated
through lottery, so please, take more of these profits
to help our needy country!
Yes, let us still have our lottery and our fun, it’s
good for us, but more importantly let people’s needs
and public services come first!
More lottery cash to help the country and it’s
Deficit,and more lottery cash for public services.
There’s enough of it to go round thrice over.
Please let us redress the balance.
On that note, The Government may not have to look that
far ahead in an attempt to save our economy. The answer, surely
is right in front of the nose.
With hindsight all pre-May Lib Dem Voice articles are hilarious.
In a “black comedy” sort of way, of course.
Mike, I wish I found it as funny, even in “a black comedy sort of way”, as you do.
Hindsight is a wonderful thing!
Just for the record I hold the view that the timing and composition of coalition spending cuts will prove injurious to the UK economy, in both the short and the longer term. And, for the avoidance of doubt, I remain convinced that UK economic policy (under Labour and now Conservative and Liberal Democrat ministers) has been/continues to be on the wrong track.
@ Ed Randall: “George Osborne and David Cameron are given to policy stunts which they should know by now will come back to haunt them”.
Publicity stunts? Would that be like signing a NUS pledge to vote against a rise in tuition fees in opposition and then abolishing it when you get into power?