We’ve spent plenty time on Coffee House challenging George Osborne’s more dubious claims (‘deficit halved!’, etc) as has much of the media. But happily, there now seems to be a truce. Grant Shapps, Tory chairman, has confirmed that from now on he’ll use clear and honest language when talking about the deficit – a promise made good by the Tory political broadcast on Wednesday. In my Telegraph column today, I express a hope that the party has turned the corner and instead of telling porkies it will restrict itself to the large number of genuinely true boasts.
The above chart shows Osborne’s greatest boast: he has overseen more job creation than any other Chancellor in recent history. It may strike him as being a bit dull, lacking in the topspin that he is fond of applying. But if I were him, I’d take it. So much economics can seem abstract (inflation, deficit, primary surplus etc) but the word ‘jobs’ is fairly clear. And his policies have played a major role in this. His tax cuts make work more attractive, his company tax cuts make employers better-able to hire and welfare reform has ushered this system along.
But the other factor is wage subsidies (ie, tax credits). As a note by CitiGroup pointed out recently, the reason that Osborne is missing his deficit targets is because he is spending so much supporting the employment. His tax cuts have combined with Labour’s tax credit system to subsidie low-wage work. This fact is central to the British jobs recovery, and the Citi note (by Michael Saunders, Coffee House’s favourite economist) is worth quoting at length:-
The key reason for the revenue shortfall and deficit slippage is the interplay between the UK’s tax and benefit system and the rapid expansion of employment in low-pay sectors. With the increased levels of in-work tax credits since the early 2000s, plus the sharp rise in the personal tax allowance since 2010, the UK has greatly cut the overall tax burden on people in low-paid employment over the last 10-15 years.
Indeed, for people with children, the tax wedge is negative for people on pay levels below about 60% of average earnings — in other words, the government subsidises people in low-paid work. Very few advanced economies have such a structure.
In other words, Britain helps out low-paid workers more than almost any other major country. Except no one can be bothered to make this point.
These measures have been very successful in encouraging people to seek work and limiting the long-term hysteresis costs that usually occur post-recession. For example, the workforce participation rate is up from 76.4% in mid-2010 to 77.8% in June-August this year, near the all-time record high of 78.3% in 1990. The share of the working age population in work (73.0%) also is near its record high (73.2% in early 2005). In turn, almost all of the growth in employment over the last year is in industry sectors where the level of pay is at least 20% below the national average.
However, these tax and benefit changes have also greatly reduced the extent to which economic recovery automatically generates a major fiscal dividend, especially if (as recently) the growth in employment is concentrated in low pay sectors. In these circumstances, the flow of people from unemployment to employment no longer yields much income tax revenue and nor does it save much in benefits.
In conclusion, Citi exposes Osborne’s secret: instead of borrowing not to splash out on building bridges, etc, he has been borrowing to help people back to work.
Rather than use low gilt yields to finance extra public investment, as some have suggested, in effect the government has chosen to borrow to support employment. Given the abundant evidence that a long spell out of work reduces people’s future employability and earning power, such an investment in human capital has clear long-term economic and social merit in our view.
As ever, Saunders is quite right. Osborne shouldn’t try to hide it: he embarked on a slower deficit reduction plan because he has supported so many people returning to work.
Is this so embarrassing? Isn’t this the kind of thing that a modern, compassionate Conservative Party should be boasting about? The jobs miracle grew and grew; it swallowed up the immigration target (as Spaniards and Italians came here to find work) and swallowed up the deficit reduction plan (due to wage subsidies). But up and down the country, unemployment is falling: by a quarter in Cardiff, by half in Liverpool. In my home constituency, Inverness & Nairn, unemployment is down by three quarters. Look at what’s happening on the continent, and tell me that this is not amazing.
Yes, it’s expensive. But the modern Conservative Party has decided that this is price worth paying – and that helping people back to work is more important than the deficit target on which it once placed such great store. The facts changed, so Osborne changed his mind – and adopted what is, right now, the most successful job-creation policy in the world. Not a bad basis on which to fight the next election.
PS Commentators below are quite right to say that the next problem is low wages – and that the surprise drop in real wages fuelled the surprise rise in employment level. But a low wage problem is better than a Eurozone-style unemployment problem. As Allister Heath once put it, a low-productivity high-employment recovery is better than the reverse.
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