Yesterday’s budget certainly had plenty of surprises. But it says something about the state of our politics that not allowing sensitive information leak ahead of the budget speech counts as a political success. Because surprises — rabbits out of hats — are not the same as radicalism, whatever much of the media, or Osborne himself, would have us believe this morning. The budget, when looked at more closely, was notable for its timidity, not its profundity.
In identifying the nonsense of those on low wages paying relatively large amounts of tax, only to receive it back with interest in tax credits, the chancellor identified a genuinely ridiculous (and illiberal) legacy of Gordon Brown’s time at the Treasury.
This take-with-one-hand-give-with-the-other approach to the low-paid should concern liberals, as I wrote a couple of years ago:
The latter [the tax credits system] is more controversial, and should pose much more of a problem for liberals. Statists, and therefore many in the Labour party, love the labyrinthine system of tax credits, child benefits and rent subsidies devised by Gordon Brown. But it is for precisely the reasons that they are loved by such people that they should be anathema to liberals: such schemes turn industrious, hard-working people into clients of the state, reliant on Whitehall bureaucrats to ‘keep life from day to day’.
And Osborne got half way to solving the problem, in recognising the need for both wage increases and reductions on the costs of employment to businesses. But he did not have the courage to follow his thoughts to their logical conclusions, which has left, unsurprisingly, a situation that is unsatisfactory from almost every angle.
The cuts to tax credits are too large, at least upfront. The process of reducing reliance on such handouts has to be a gradual process, and would largely follow automatically once wages rise and low earners pay less tax, through the means-testing process.
And progress on the wage front is nowhere near as bold as what is required. The higher increase in the minimum wage (for that is what it is) is a start. But in some ways it only further highlights the absurdity of the system: a person working full time on the new minimum wage starting next April will earn about £13,500. They will pay income tax on £2,500 of that, and national insurance contributions on about half of it. Then receive much of it back, and possibly more, in tax credits.
And the measures to minimise the impact on businesses of increased wages are tangential at best. The corporation tax cut is sensible for other reasons, but is irrelevant for many businesses. And the employment allowance is a complex recipe for tax avoidance.
All of this when there remains a massive, direct tax on employment: employers’ national insurance contributions — a tax that raised the costs of employment for businesses by over £60bn in 2013-2014.
Osborne’s earlier desire to sort out our complex, outdated national insurance system seems to have been abandoned, at exactly the point at which it is most needed.
Much of the critique of the budget from Lib Dems has been correct, as far as it goes. This is a budget which protects wealthy pensioners and middle-aged inheritors at the expense of the working poor.
But if we are to have any future as a party making this (obvious) point will not be sufficient. Where is our reforming zeal? Radicalism is not just a label that we can wear without any critical thought about how we want to change things. The tax and social security system Labour left behind was, in many respects, an illiberal mess. The Tories, driven by moralising nonsense and political tactics, recognise some of the problems but refuse to properly think about solutions.
It’s a time for radical, reforming thinking, and we can be the party that offers it.
* Nick Thornsby is a day editor at Lib Dem Voice.
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19 Comments
Some good points about the importance of cutting national insurance for the low paid, but I do not think radicalism should be a goal in itself. Radical situations require radical measures, but sometimes milder measures are more suitable.
I would like less “theatre” in the whole thing. The surprises element and the cheering takes the seriousness away from it all. They should be having a proper debate.
What’s illiberal about people both paying taxes and receiving benefits. All benefit recipients pay taxes. The tax credit system may militate against common sense but not any moral principles.
@Peter – becuase Labour has deliberely constructed a system whereby people become dependent on the state
The problem shared by the tax credit system and opponents of a living wage is basically the same; they allow businesses to free ride on the state, paying poverty wages in the knowledge others will make up the shortfall.
Osborne, by contrast, is all smoke and mirrors. His so-called “living wage” is nothing of the sort. It is a marginally enhanced National Minimum Wage that fails to meet established definitions of a Living Wage. Worse, it comes hand in hand with the removal of tax credits for millions of families, leaving them considerably worse off.
In fact, a proper Living Wage would as has been demonstrated by the Resolution Foundation and others, reduce pressure on the tax credits budget by the simple ruse of putting money in people’s pockets and removing the need for tax credits.
The hopelessly timid approach of existing Liberal Democrat policy – which I seem to remember the author of this article saying went too far – means there is no easy response beyond opposition. A proper solution would be to implement a proper Living Wage, but in a way that minimised any risk of job losses – and tax the wealthiest as we proposed in the manifesto. All quite simple really.
Hi Gareth – which policy proposals are you referring to in your last para?
Simon – whatever one thinks of Labour the cynicism goes too far at times. They were concerned with making work pay and the tax credit idea came from that well known bastion of social democracy the United States. I’m not sure about the need to cut corporation tax when we already have one of the lowest rates around and whilst it would be good to take the basic threshold up to 13000 – rather than rely on TCs – the government will be seriously short of cash. The basic rate of income tax should be increased to fund it.
Peter Davies
“What’s illiberal about people both paying taxes and receiving benefits. All benefit recipients pay taxes. The tax credit system may militate against common sense but not any moral principles.”
On the principle, it is a matter of the state taking money from the poor so that they can’t afford to survive (or are even further from being able to survive) and then giving money (that belonged to the poor person in the first place) at the state’s discretion. This is not taking from people to fulfill the responsibility of the state to support the poor, it is taking from the poor to give the impression of patronage and “buy” certain groups for those in power.
On the practicality side it is taking from the poor (with all the errors, inefficiencies and skewing incentives) to give back to them in a more complicated form (with all the errors, inefficiencies and skewing incentives) with conditions attached. The errors will be a problem in any system, more so when you have a system that is more complex or dealing with a greater load. Errors in this system can be devastating when the affect the incomes of people on low incomes so it has to be the priority to have the system that is likely to have the lowest chance of error, in both design and execution.
The idea of a simple “top up” benefit doing the job of tax credits where employees with a low productivity are able to work and earn more than their productivity would normally suggest is a good one. However to make the system excessively complex and to have taxes kicking in at such a low level is designing in failure.
Politicians will always want to give the impression they are “giving you something” but it should be resisted when it results in two systems pushing in opposite directions.
Psi
We can argue about the means of delivery and whether tax credits (a Tory invention and used extensively in the US) are the best way to do it. There are pros and cons
I find though it rather sad at the number of apologists for this vicious and focused attack on the poor by a nasty and disgraceful political ideology from so called Liberal Democrats
The Economist sums it up in one sentence
“cutting benefits to the very poor while reducing inheritance tax for the wealthy is indefensible”
but some Liberal Democrats drunk on Tory neon-lib ideology (along with some of the NuLab stalwarts) seem have to defend this budget. The day of it there was almost elation on here from some people
Gareth Epps
“The problem shared by the tax credit system and opponents of a living wage is basically the same; they allow businesses to free ride on the state, paying poverty wages in the knowledge others will make up the shortfall.”
That sentence suggest that you assume employers are in the business of employing people out of some kind of social responsibility. They don’t.
They employ people because they enable them to fulfil their function (making profits, achieving a social outcome), if people have the ability to produce significant returns employers are willing to pay more (or offer better conditions) to have them work for them. The problem of employers paying poverty wages is that their marginal productivity isn’t high enough to justify higher wages (as they tend to get substituted with machines).
What does help improve wages is increasing skills, yet we see one of the best ways for this to happen (further education) taking a hammering in the latest BIS cuts (Something Vince was very concerned to minimise). As for “implement a proper Living Wage, but in a way that minimised any risk of job losses” I think you are trying to square a circle, there will always be people who have very low productivity (normally the young and unskilled) who need a first rung on the ladder, the concern should be the current absence of the next few rungs.
I’m not a particular fan of tax credits but I do wish critics didn’t present them as some kind of mad, wicked idea. Tax cuts and rises in the minimum wage are fairly blunt instruments. Raising the personal allowance gives no more benefit to a family with one breadwinner than it does to a single person. Tax credits are an instrument to target resources at low-income working families. They are more responsive to the particular circumstances of a household than tax cuts or wage rises can be. The policy goal was to try and ensure that children’s life chances weren’t irreparably damaged
by growing up in households in desperate poverty and it achieved a reasonable measure of success.
And the idea tax credits were some kind of plot to foster a ‘client state’ is a bit of nonsense isn’t it? Whatever policy mix you come up with in terms of tax, benefits, and wage controls someone on a low income is receiving more from the state than they are paying for directly. Whether the benefit you are receiving comes in the form of a tax credit or a public service makes no real difference.
The current tax and credit system has everything most low wage working households hate. Means testing, underpayment, overpayment ,administrative error, claw backs and considerable stress and anxiety for the household concerned .the political classes need to understand these credits are claimed out of necessity not out a wish to claim benefits .The more uncluttered and straight forward you can make the tax system even if that means additional bands or targeting working families who need the most help the better .
People don’t mind paying their fair share towards services as long as they can see it is fair ,and what is George Osbourne doing trying to socially engineer the size of families by fiscal benefit manipulation if you have more than 2 children. Does he not realise that European family sizes are declining and that if we are not careful we wont have a working age population to support our NHS or the elderly if our population does not have enough people of working age in the future. We need to ask some very awkward and uncomfortable questions to the chancellor.
Nick,
In optimal tax theory, the principle of equity can be subdivided into two aspects- horizontal and vertical. Horizontal equity considers people who have equal ability-to-pay actually should pay an equal amount in taxes. Vertical equity is the premise that those who have a higher capacity-to-pay should pay more than those who are less able to pay.
A LVT on existing land only residential rental values is expected to raise circa £200 billion.,This could replace the approximate £50 billion of existing taxes on residential property including council tax, stamp duty, inheritance tax, capital gains tax, Vat on the refurbishment of domestic buildings, as well as employer and employee National insurance contributions on earned income of circa £113 billion combined.
Both employee and employers national insurance are remitted by employers. The tax incidence of national insurance falls on the employee, reducing net pay, whether it is notionally accounted for as an employer expense or a deduction from employees pay. Removal of National Insurance would automatically increase pay levels and the deadweight costs associated with this payroll tax. that is now greater then income tax deductions in many cases.
Whether tax relief for low and median income households is given by way of a personal allowance or a tax credit is a matter of efficiency and welfare economics.
Like Lloyd George, I tend to the view that all citizens should contribute some level of taxes on their earnings/income, no matter how small The most efficient method of distributing in-work welfare benefits is via an integrated tax and benefit system that applies tax relief (including personal allowances) via tax credits administered through PAYE codes.
With real time information (RTI) now in place and universal credit being rolled out, full integration is the logical next step.
Radical welfare reform requires a non-means tested citizens income unrelated to earnings that would largely replace all existing welfare benefits and personal tax allowances/reliefs..
This is by no means a new idea. . In 1797, Tom Paine proposed that “every proprietor [of cultivated land] owes the community a ground rent” and that this justifies an estate tax to fund retirement and disability pensions, as well as an amount to be paid to all citizens to start them out in life on reaching maturity.
stuart moran
“We can argue about the means of delivery and whether tax credits (a Tory invention and used extensively in the US) are the best way to do it. There are pros and cons”
Agreed there is a debate to be had about the best way to do this, personally I have defended IDS’s concept (execution is a different matter) of universal credit of having a simpler single system where it is much more easily understood.by everyone. Also I would the the view that the PAC expressed early in Tax Credits expansion under Gordon Brown that “top up payments” are better handled as a benefit than a Tax Credit for transparency and simplicity.
“I find though it rather sad at the number of apologists for this vicious and focused attack on the poor by a nasty and disgraceful political ideology from so called Liberal Democrats”
I’m slightly unclear about which LibDems are apologising for “vicious and focused attack on the poor” Are you saying that those arguing netting off the stopping of tax and the giving of benefits are doing this, as that position has (as netting would suggest) would have no net effect on the poor. Or are you suggesting that LibDems are excusing the going beyond this and removing more in benefits (tax credits) than they are now able to keep via tax (estimate of £1000) is a good policy? If it is the latter, I don’t see anyone one on here saying that this is the original piece says: “The cuts to tax credits are too large.”
One of the sad things about the way the LibDems in coalition implemented their tax threshold policy was that on some occasions the Higher rate threshold was not lowered to stop the benefit accruing to the higher rate payers rather then moving the threshold for NI and making the NI an annual tax to take the pressure off those with erratic earning patterns.
If you think this budget is welcomed by many people I would just say this, Ryan Bourne of the IEA is giving it a pounding on many levels (marginal loss rate going up to 80%, “remember the good old days when the conservatives knew it was marginal incentives that mattered, not just benefit levels?”), if you are concerned that this budget is somehow loved it is taking a beating from across the spectrum. Where there is the odd positive concept (even if badly implemented) it is reasonable for people to pick out what they can salvage, to discuss positives to go with the general disappointment.
Joe Bourke
I’ed agree with the need for an LVT but I think there is a need to be cautious about estimates of what it will raise as current rental values is not likely to be accurate (an LVT will move the market therefore the valuation, plus it will probably over react at first), added that it will need to be phased in. It needs to be explained in as what will be achieved on fairly unambitious terms first as it is better to under promise to allow it to have credibility as it is introduced (and while building support for it before that). Though I think this is going off topic.
Interesting that a couple of people mentioned children. There has been a lot of argument recently about immigration, and the predicted rise in the Uk population. The Uk does not need more children! Economic models about needing more children so as to increase the work force implicitly mean a growing population which is completely unsustainable. policy ought to be dircted towards reducing the number of births.
The only valid argument against this is the question of child welfare. Living in poverty unquestionbaly gets you off to a bad start in life, but a few thousand a year extra in household income probably will make hardly any difference to this. Poverty is about way more than income. Its about the quality of your education. The neighbourhood you live in. The assets accumulated by your family. Your friends, what influence they have on your attitude to life and -bluntly- how much nepotism they can exercise to improve your position.
There has to be an incentive to work. derisory wage levels are not an incentive to work. So many of these low paid jobs are service industry, which are amongst the least likely to be ‘exported’ to low wage economies elsewhere. I vividly recall a letter in the local newspaper from a care home proprietor, complaining about the new minimum wage which would make their struggling business uncompetitve. Failure to pay a market rate for care for elderly was the problem. Forcing young, fit and poverty struck people to provide free care to the old was not the solution.
No one should be attacking the government for increasing the minimum wage quite significantly, even if still not enough. Its trending the right way, and doing it instantly would likely have bad results. Means tested benefits are an evil in themselves, because they prevent people from saving money and accumulating capital. Capital might help you escape poverty by starting a business, but what it really does is give you a stake in society. House ownership is a great idea from that perspective, but only if it is realistic. If there is a national housing shortage as we have, then housing becomes part of the poverty trap instead. Dont give them money, give them homes. Easy to say. needs a truly massive redesign of the system that we have, starting with creating those homes. This aspect of helping the poor went out of fashion a very long time ago.
Danny policy directed to reducing the number of births.
We need to think that one through .This will mean either a heavily automated economy like Japan with what work there is restricted to the financial, service and tourism sectors or an economy like the USA heavily dominated by migrant labour from the poorer parts of Latin America. Both are uncomfortable choices for a country like ours with a low productivity rate, and a commitment to supporting the NHS and our growing elderly population.
I think it is fascinating that it used to be an argument of the left that low wage jobs are being subsidised by the state – and that this argument has been adopted by the Conservatives to justify slashing tax credits, while modestly boosting the minimum wage.
I remain unconvinced. I don’t believe the availability of in-work benefits factors much in employers’ decisions on wage rages – rather they are driven by market forces, that is by the need to recruit and retain staff able and willing to do to job to the standard required. This would still be the case under the much-touted panaceas of Basic Income or Negative Income Tax.
Low wage jobs are clearly not as good as high wage jobs, but are better than no jobs at all. The question is whether low wage jobs are crowding out high wage jobs, and I don’t see how they could. People would generally move to higher-paying jobs given the chance. So even if there is a “subsidy” effect it is subsiding people into work, not subsidising downward pressure on wages.
Of course when you have £12bn to find from welfare that you didn’t expect, tax credits do have to be raided, and any way to sound like you’re making a virtue of it must be grasped. The raid on housing revenue accounts by reducing social rents is also a headline saving to welfare without actually saving any money.
Not all businesses can reduce their staff numbers to become more competitive and if you provide services which cannot be exported then you are only competing with other UK firms so an increase in the minimum wage if rigorously enforced would not harm those businesses. This might not be the case for those businesses competing with foreign firms in the export market.
My recollection when I was working was that those who were eligible for wage subsidies, tax credits etc were unwilling to work more than the minimum number of hours as they would lose benefits so only those who were not eligible for tax credits would work on Saturdays or do overtime. This caused quite a lot of resentment as although no one was forced to work if they did not want to do so, many felt obliged to do so in order to help the firm. A lot of management time was spent trying to bring in part time workers, not always successfully, and talking the full time employees into helping out.
I take the view that taxing people in order to pay them subsidies of various kinds to replace the money paid in taxes is absurd and as another person has said , is done to make people feel dependent on the state. There seems to be a vested interest in maintaining an expensive bureaucracy to deal with all these subsidies which are over complicated and cause inefficiency which damages the economy, not to mention all the problems caused to those who have to claim the subsidies in order to get enough money.
Joe Otten,
most of the academic evidence I have seen supports your argument that the availability of in-work benefits factors much in employers’ decisions on wage rages. It does however, as nvelope2003 notes, impact individual employee decisions on to take on extra work/overtime etc., for fear of losing benefits, particularly housing benefit.
Where an unconditional a basic income has been used in place of workfare schemes , as in the case of the Alaska dividend, these disincentives to taking on extra work are eliminated.