Is the changing workforce really costing the Exchequer £4 billion per year?

28 February 2017

The impact new forms of work are having on the tax base is coming under increasing scrutiny. In his Autumn Statement, the Chancellor of the Exchequer noted that “technological progress is changing the way people live and the way they work”, as well as the need to update the tax system to “keep pace”. The Office of Tax Simplification have published a focus paper raising some of the tax problems presented by the ‘gig’ economy and indicating their intention to conduct further research in this area. Earlier this month, the Trades Union Congress (TUC) published research claiming that growth in self-employment and zero-hours contracts is costing the Exchequer £4 billion per year.

These concerns are well placed. As outlined in a previous blog for the Reformer, the Exchequer accrues much less in tax receipts from self-employed people than from employees. This is because self-employed workers pay a lower rate of National Insurance Contributions (NICs) than employees; do not raise NICs from an employer; and typically earn less, denting income tax receipts and stretching the in-work benefit bill.

In calculating the loss to the Exchequer from the changing composition of the UK workforce, the TUC research compares the present situation with a counterfactual. Under this alternative, the gains in self-employment and zero-hours contracts between 2006 and 2016 are instead in better paid, permanent employee positions. The £4 billion headline is therefore calculated using the difference in NICs, income tax and in-work benefits paid and claimed between permanent employees and self-employed and zero-hours workers.

This counterfactual is unrealistic.

It estimates how much better off the Government would be if 1.25 million self-employed and zero-hours workers moved into higher-paid, permanent work, without considering the money bringing about such a drastic shift would cost. The £4 billion estimate should therefore take account of this.

It also assumes that all those who have moved into self-employment or zero-hours contracts would want and be able to take a permanent employee position. Research indicating the premium placed on flexibility amongst older people – for whom increases in self-employment have been especially pronounced – suggest this may not be true.

The impact such assumptions can have on headline estimates can be illustrated by considering a different, but equally reasonable, counterfactual. Self-employed workers, for example, now make up about 2 per cent more of the workforce than they did in 2006. Put another way, there are now around 700,000 more self-employed workers than if the proportion of self-employed and employed workers had stayed fixed since 2006.

Rather than assuming these additional 700,000 workers would all otherwise have found permanent employee roles, many might have instead been claiming out-of-work benefits. If, for example, all 700,000 would otherwise be claiming Jobseekers’ Allowance (JSA), the increase just in self-employment since 2006 could be saving the Government over £2.5 billion each year in out-of-work benefit payments alone. Clearly, it is unlikely that all gains in self-employment will have reduced the JSA caseload, but neither is it plausible that they could all have been converted into permanent employee positions.

The actual impact of the changing composition of the UK workforce is very difficult to accurately evaluate. Wider concerns about financial insecurity and exploitation of those working in such forms of work are also well placed. It is crucial, however, that in determining the right policy response to these issues, misleading analyses do not prevent us from embracing the potential such forms of work present.

Ben Dobson, Researcher, Reform

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