The return of the big state – incomes policy and the trimmings?

14 July 2015

Before the Budget, the Government’s aspiration was to reduce regulation and to promote growth through greater competition. The Budget is profoundly shocking in that it marks a return to extensive government intervention which shows up in five different ways.

First, Ministers are now at the top of a very slippery slope towards detailed intervention in the labour market. Such phrases as “government action on wages” bring back memories of far off days in the Macmillan / Heath era. A five year plan in which government plans for a 40 per cent increase in a compulsory wage level is surely something that deserves more than passing attention. It involves a big increase in regulation with government inspection of pay records for several million more workers. It is profoundly anti- competitive as new entrants have much less ability to pay than established firms. It slows down rebalancing since there are lower pay levels in the regions. It is also dependent on the growth forecasts. The drive to localism makes sense but this policy on the living wage undermines it.

Second, the living wage raises the pay of some workers in real terms by 30 per cent as another government action is reducing the pay of qualified staff by at least 5 per cent. The 1 per cent pay cap on doctors, nurses, teachers and other staff in the public sector shows disregard of key facts about the labour market. Higher pay is partly the result of long training periods and it also reflects the fact that qualified workers often have to work 50-60 hours a week. Now nurses’ pay is going to be reduced in real terms over the next five years while the pay of some of their patients is going to be raised by 30 per cent. The Treasury bemoans shortages of skilled workers but the government treatment of its own skilled workers is hardly a good message to other employers. Neither does it show much gratitude for the very real dedication of nurses ,doctors, social workers and teachers.

Third, over-optimistic projections of government spending have a been key reason for government interventions in the past. The spending projections are for a 14 per cent rise in total spending from now to 2020-21 with a rise of £102.2 billion (from £742.3 billion to £844.5 billion). This will only allow for deficit reduction if the most optimistic growth projections for 70 years are met, with steady state growth of 2.4 per cent. The Government has adopted a high risk strategy.  Its spending plans are based on the outer edge of optimistic forecasts for tax revenues and GDP forecasts. Any reduction in the growth rate to 1.5 per cent for 18 months will reverse the deficit plan.

Fourth, the new administration shows an addiction to government action to solve problems. It is important to say that some public action can produce results. There should be a picture in every Treasury Office of the homesteading couple in Stoke on Trent who bought a derelict home for a £1 and renovated it with a £30,000 loan on commercial terms. In many areas however more government compulsion is not the answer. One astounding change is the levy on companies to pay for apprenticeships. This was tried in the 1960s after a research study by Professor Lady Williams. “Apprenticeships in Europe” showed that the UK was lagging behind Europe. The then Conservative Government (led by John Hare and Robert Carr) set up Industrial Training Boards on a levy grant basis. Later evaluations which have clearly been lost in the Treasury filing system showed this did not work.

There is also a dangerous move to special funds. This now includes a new Roads Fund (harking back to the fund set up in the 1920s), a Coastal Fund, Enterprise Zones and a New Station fund. The evidence from such transient spending is that it leads to waste because of the lack of local sense of ownership and revenue support. In addition there are ad hoc interventions from VAT discounts for small cider makers to a possible discounts on Mersey bridge Tolls for residents of Chester and Warrington.

Fifth, there are arbitrary actions over a range of topics .One small one is the extension of MoT testing for cars from three years to four years. This is said to save the motorist £100 but since the MoT covers basic safety checks, the saving will be a false economy. In fact the system seems to work well with little cost to the Treasury—why interference? Even more serious is the new sudden introduction of an 8 per cent tax on bank profits which is a hit on new entrants rather than on the large established banks. The various interventions in the housing market mean that supply incentives are now being introduced to offset the demand stimulus from earlier government measures.

The Budget statement is based on a basic misunderstanding of the causes of the recovery. Government stability has helped but the main reason for recovery is not the government “plan”. Employers and workers have shown much greater flexibility and economic drive.  The reaction of firms to downturns in a competitive market is to fight harder for business. That is very different from the oligopolies of old where downturns triggered mass redundancies.  We have a more competitive economy. Now we need higher productivity but this will come about through increased competition not through a new age of government intervention.

Chancellor Osborne is an admirer of Gladstone but Gladstone’s aims were to encourage enterprise and private saving while also minimizing arbitrary changes in taxation. He made some far reaching initiatives such as the abolition of paper duties and the introduction of National Savings. The Chancellor needs a refresher course on Gladstone – and Walpole.

Professor Nick Bosanquet, Emeritus Professor of Health Policy, Imperial College London



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