For the average person (and I’m exceedingly average, if that’s possible) unpacking the government’s fiscal policy is a Herculean task: changes to tax credits; increases in the minimum wage; cuts to government departments; caps on public sector pay; changes to inheritance tax; decreases in corporation tax; pension tax relief restrictions; age limits on housing benefit; alignment of job-seeker and employment support allowance; savings assumed through clamping down on tax evasion; changes to the personal income allowance and tax taper rates; the climate change levy; the benefits cap; and a whole bevy of other reforms and tweaks I have neither the time nor patience to list. We cannot accuse either the Coalition or, latterly, the Conservatives of taking a laissez-faire approach to this topic.
Alongside that, newspapers, politicians, think tanks and bloggers provide a myriad of alternate viewpoints supported by baffling and seemingly contradictory statistics. Technological improvement has brought many things but at this point I feel exhausted by information overload.
Unfortunately, I realised that I’m yet to rant about the summer budget and that with the spending review due in just over a month, I needed to do so now. I’m going to try and keep this short and simple (again, a little like myself) but I apologise in advance if I get lost somewhere along the way.
Plenty has been written about how the changes to tax credits and the ‘living wage’ will affect individual households with the general conclusion seeming to be that no one’s quite sure but that the government may be dodging the impact analysis bullet.
While I broadly agree with the proposal to reduce working tax credits (basically, a subsidy which allows corporations to pay absurdly low wages) while increasing the minimum wage it’s a very delicate process and I’m not sure we’ve suitably protected household incomes. There is also understandable concern that the ‘living wage’ may have a serious impact on smaller businesses and the public sector.
When it comes to wage increases, the real pressure does not fall on central government but on local councils and the private companies that fulfill contracts on their behalf. The Local Government Association recently reported that local councils face an increase in wage bills of around £1BN a year by 2020[i]. At the same time they face a cap on annual public sector wage increases of around 1%. That leaves them with two options:
- Balance the books by giving lower wage increases to staff on higher salaries. i.e. many public sector workers face several years of wage rises of less than 1%. This is worth contrasting with the increase in Minimum Income Standards of somewhere between 22% and 28% over the last 7 years[ii].
- Cut staffing levels, hopefully without any direct effect on the vital services they offer.
If that doesn’t fill you with enough dread take a moment to consider the impact on a specific sector. While a lot of our homecare is provided by private companies they do so by winning contracts, 70% of which are paid for by local councils. The UK Homecare Association recently estimated that care firms face a shortfall of £750M in the first year after the implementation of the ‘living wage'[iii].
These are the organisations that care for our families and friends ensuring that they stay healthy and active and, importantly from a national view, help to reduce the burden on the hospitals and residential care homes. If homecare is not adequate then recovering patients have to stay in hospital. This is bad for them and bad for the country. NHS England statistics show that in the past 12 months there have been 1,042,434 days lost due to patients being unable to be discharged[iv]. Given the increasing financial difficulties that face our hospitals we are surely on the verge of a crisis in health provision. And I haven’t even mentioned cuts to mental health services, GPs taking early retirement or junior doctors’ interminable war of words with Jeremy Hunt. Thus far the government has offered little in the way of support. We can only hope that will change in the upcoming spending review.
Finally, it’s worth noting that the planned cuts in corporation tax and new inheritance tax rules will cost us somewhere around £3BN a year by the end of this parliament[v]. They may be excellent ways of improving our economic growth or helping to making our society fairer, they may not. I just don’t know enough to be sure.
My point here is simple: Increasing the wages of low-earners is vitally important. It’s not sustainable for the taxpayers to keep subsidising their incomes at the current level. Frankly, it’s no way to run a country. However, it seems to come with unpalatable consequences that we can’t continue to ignore. The role of a government is to ensure that while it balances spending and borrowing it does so neither at the expense of its people nor the key services they require. Right now, I don’t think that’s what is happening. It’s time the economic debate in this country evolved from who will cut the most to balance the books, to how can we find the money to keep this society fair, open and safe for everyone.
[ii] Joseph Rowntree Foundation – Minimum Income Standards 2015 https://www.jrf.org.uk/file/47124/download?token=7wlhr6kz
In case you’re wondering where all the music is, I recently released the second part of this month’s Skewed Quiff here.