Thoughts on the budget

The budget announced today came with some surprises, and I thought I would give my stream of consciousness response to the headline changes.

·         The big surprise is the major increase in the minimum wage announced under the heading of a national living wage. As the new ‘living wage’ is national it does not take account of the disparities in regional living costs that the living wage is designed to highlight.

The rebranding of the minimum wage is strange, perhaps designed to muddy the term to rob it of its power. Being cynical, this might be out of a desire to undermine the growing campaign that is highlighting the increasing disconnect between earnings and the cost of living in the UK.

The increase in the minimum wage (as this is what it is) is quite a move by Osborne. It takes a typically left-wing policy proposal and enables the chancellor to portray himself as a friend of the worker.

·         Only workers over 25 get the new living/minimum wage though, as far as I can make out. There are already age-bands designed to give inexperienced school-leavers a chance in the job-market so this isn’t a major departure.

·         What of the low-pay commission, the independent body charged with determining what minimum wage level will be sustainable? They will presumably still be in charge of the ‘real’ minimum wage while Osborne has created another band, over which he has control.

·         I have recently blogged about my preference for tax credits over high minimum wages and the policy here is going in the opposite direction. Cutting the eligibility threshold for tax credits is painful as it further undermines this support to workers and/or the employers who can make use of their labour.

·         Questions remains about what will happen as a result to prices and the job market. Perhaps this will be good at reducing the number of NEETs but at what cost? It might mean that a lot of over-25s end up unemployable as under-25s can be employed for less money than them.

Companies who have to pay their workers more are going to pass this on to their customers in the long run. These increased prices will cost those on frozen benefits and those who do not benefit from the policy as well as everyone else.

It is likely that most people will be losers from this policy and some of those losers will be among the economically worst off. The chancellor claims he represents ‘working people’ but certainly not the working class who might find themselves out of work but with fewer options and less support.

·         Positive proposals: To give credit where it is due, the Buy-to-let tax break cut and tightening up eligibility for "non doms" sounds like good things, though I haven’t had a chance to look in any real detail.

·         A terrible idea: The proposal to increase the inheritance tax threshold was heavily trailed and I was predictably apoplectic about this. Unearned income like gifts and bequests should be taxed more heavily than anything else, according to almost all economic and ethical theories of tax.

·         Punitive:  The punishment imposed on younger people for not having a wealthy and generous family continues. Under 25’s needing benefits and low-earning parents seem to be particular targets of this government, just as they are of tabloids. Today’s changes to maintenance grants, housing benefit, Child Tax Credits and the newly lowered Benefit cap seem to be targeted at these “feckless scroungers.”

As a recent guardian editorial pointed out, there isn’t any actual principle behind the benefit cap—it is benefit-scrounger-bashing-tabloid-fodder. A similar point can be made about the other punitive changes—punish the young and the poor (they don’t vote Tory anyway).

·         What magic happens when someone reaches 25? This budget seems to build on the premise that people become very different at this age. Perhaps this is the government reflecting on the extended adolescence that people are considered to have in this SO-CALLED (by me, right now) binge-drinking and computer-game age.

I’m sceptical that there is anything so considered—the young are not a popular constituency with most voters and so are ripe for cuts. These changes also entrench inequality – with one set of young people trapped in low-paid work which provides little time and money left over for further development, while others can get ahead. It all appeals to the Tory base.

·         Overall trend:  One thing that this budget continues is the removal of state support in many areas and passing this on to individuals (or the BBC). Education is an obvious case, where gradually grants have been replaced with fees and loans. Public transport (such as rail travel) is another area where more revenue comes from passengers and less from government as time goes on.

In-work benefits seem to be going the same way, and I have slightly more of a problem with that than education and public transport subsidy, but I think it is worth noting. My question is whether we really need to give up on a progressive tax system that could fund a fairer society which would encourage people into work, improve their chances of finding some and ensure that they get a reward for it.

This isn’t a universal trend – pensioners and the NHS continue to be funded at previous levels. But it is a noticeable direction of travel. It would be good to have a progressive tax system that enabled us to move in the opposite direction in some cases (tax-credits being my own preferred method).

·         Overall this budget (unsurprisingly) doesn’t get the seal of approval from me. 

The Living Wage vs. Earning Subsidies

Is the Living Wage campaign just counterproductive?

There has been much discussion recently about the Living wage, or the lack thereof in many cases. The living wage represents the idea that the current UK minimum wage does not always provide enough to give people an adequate living. Living wage campaigners have two routes open to them – to argue that the minimum wage should be raised to living wage levels or to shame companies into paying their staff a living wage.

I am doubtful that either will succeed, but also that success with either would make a huge difference to the people at the bottom of the wage scale. The campaign to shame (and presumably boycott) companies would have to be pretty universal in order to overcome the competitive disadvantage such firms would face if they start paying their workers more than their competitors. This is a point Engels pointed out 150 years ago. Customers would have to voluntarily shop in the more expensive shops which pay the living wage instead of their cheaper rivals.

This explains the problem with imposing a higher minimum wage as well—that this will be passed on to consumers, many of whom are the low-paid people we wanted to help in the first place.

One recent line of attack is to highlight how much some major companies have been benefitting from the tax credit system. This is calculated by working out how much tax credit money is paid to assist the staff of the company in question.

The comparison is between the current situation (where companies with low-paid employees receive tax credits) and an alternative in which they would be forced to pay more and therefore the state would not have to pay as much.

This is a simple equation but it isn't a meaningful one. The question we face is about policy: Should we use tax credits to raise the living standards of low-paid workers or use minimum wage regulations?

If you change from one policy to the other it wouldn't simply mean that a cheque for the difference would be due. The important question for such an exercise is what represents the relevant counterfactual. If there were no tax credits this would not mean that firms would pay their staff more to get them to this income level. Their workers would just have less money in their pockets.

What about the alternative counterfactual that firms would be forced to pay the living wage? If companies were forced to pay their workers more then they would make all kinds of different decisions. Some would go out of business as they could not compete with foreign competition while some others would cut their workforce and replace them with machines.

But what about those businesses, like Tesco, which would survive and would not be able to employ robots or other technology to do the work? Firms would not respond by just paying their workers more and their shareholders and managers less. Firms might invest in labour saving equipment to reduce the number of staff they need, putting people out of work.

This would cut the tax credit bill, but it would not indicate any ‘subsidy’ to the corporations. The costs would pass mostly onto their customers, but also onto the unemployment bill where workers have lost their jobs.

Whichever way you look at it, tax credits don’t represent a simple subsidy to corporations (except in the cases I mention in my next blog). Some corporations will benefit from them of course, but at most a small fraction of the total cost of the tax credit scheme.

Some of the cost will go in administrative costs, lost incentives and economic inefficiencies. If any unintended group is likely to benefit it will be consumers (which means everyone) who get cheaper stuff, but mostly the scheme will help low-paid workers.

One reason some people are distrustful of the left is that they deem them incoherent or incompetent when it comes to economics and policy and I fear that campaigns like this do not do the egalitarian cause much good.

Minimum wage and its cost to workers

I have argued in a previous blog that my hourly subsidy proposals should be much more effective at supporting the least economically fortunate than a generous minimum wage.

There are several reasons to prefer targeted earnings subsidies to the minimum wage as a means to increase the living standards of low earners, such as that high minimum wages will price some people out of the job market, make some products and services untenable, benefit low-wage workers from already wealthy families and that it will damage exports from the area and shift the economy to more service work instead.

I wanted to emphasise another important reason that minimum wages can take from the poor while giving to them. According to economic theory (though backed up by a lot of evidence), minimum wage increases will generally be passed on to consumers.

The important question is who will pay the cost of these price increases. If only the goods and services purchased by the economically fortunate increase in price then it is a highly redistributive policy.

On the other hand, if low earners will have to pay a lot more for the goods they buy then the policy simply takes with one hand while giving with another. This is particularly problematic where the minimum wage is having a lot of other impacts on the economy such as increasing involuntary unemployment for the worst off.

The literature on the subject seems to indicate that the latter is true, and that the minimum wage will increase prices substantially for the low workers. Examples are from the USA MaCurdy, 2015 as summarised in the WSJ; Hungary Harasztosi and Lindner, 2015; and the UK Wadsworth, 2010 (also cited in Aitken Dolton and Wadsworth, 2014).

Are there reasons to be sceptical of this argument that earning subsidies might be more effective than the minimum wage at improving the position of the least well off? Perhaps some will worry that the evidence comes from right-wing or mainstream economists. But is there any evidence to the contrary? I would be interested if anyone has any contrary evidence that they can share.