Memorandum submitted by Professor Patrick
Minford and Mr Paul Ashton (TAB 70)
1. I gave evidence to the Committee in an earlier
session over the tax-benefit system. At that time I argued that
the then-existing system could not be much improved by further
alteration in rates ("tinkering"), there having been
extensive even continuous examination of it in the past dozen
or so years. The difficulty was that improving incentives for
some would imply worsening for others and the present balance
of disincentives seem the least damaging taking the level of income
support to the unemployed as given. I went on to argue that to
achieve a serious reduction in disincentives for the poor and
unemployed we ought to be looking at a privatised system of insurance
whereby the family and individual provided for lifetime contingencies;
this could be backed up by a loan system with intensive monitoring
of those who persistently defaulted.
2. Turning to the Chancellor's budget measures,
I refer back to that paper and note that he has pressed on regardless
with his ideas for the WFTC. In effect it is an extended and more
generous Family Credit, but with administration by the Revenue
yet on a household basis with the option to pay the credit to
the woman even if she is not the taxpayer. I suspect the administration
will prove an expensive and time-consuming affair for the Revenue
at a time when they are under pressure from self-assessment and
the ongoing problems of computerisation. There may be a confusion
here between administrative efficiency and "streamlining"
3. The proposal to make the lower rate of National
Insurance a constant marginal rate instead of the previous taper
is in itself a useful consolidation of the philosophy of subsidising
low-paid jobs. But it has a cost in higher marginal tax rates
for all other workers; whether it is worthwhile has to be seen
in the context of whether yet more incentives to take low-paid
work is necessary. I return to this below.
4. I am glad that the Taylor task force did
not suggest amalgamating NI and taxes since the NI system is not
(yet) fully a tax given the contracting-out of SERPS and the ongoing
debate about the basic pension also.
5. On the WFTC itself my Liverpool Research
Group is in the process of looking carefully at the new system;
at this stage I am reliant on the DSS and other official estimates.
These suggest that while the unemployed face greater incentives
to take a job and many of those in employment have slightly reduced
marginal tax rates some <fr3,4>million more families have
been brought into the Credit and so into the poverty trap, with
marginal tax rates of 50-60 per cent or more (HMT Press Release
17 March 1998 says 1.4 million families will receive WFTC, against
0.76 million now getting Family Credit). The WFTC extends much
further up the income scale with higher initial amounts and lower
withdrawal rates; the WFTC can be claimed for example by a couple
with two children on £329 per week, approximately average
earnings. These figures appear to be based on 1997-98 take-up
rates but the increased generosity of the new system may encourage
greater take-up than the present 70 per cent or so, bringing yet
more people into the poverty trap. There are therefore worse incentives
to upgrade job quality, for example by acquiring better skills,
if one takes the 50 per cent marginal rate or above as implying
a substantial disincentive.
6. In addition the changes have a substantial
cost to the general taxpayer (albeit currently concealed by the
movement of the public finances into surplus). The WFTC will cost
by 2001 some £3 billion per annum more than Family Credit
(Dawn Primarolo answer 26 March gives £5.6 billion in 2001-02
against £2.35 billion for Family Credit in 1997-98). The
NI employee changes cost £1.4 billion. And the employer NI
changes have raised the marginal contribution rate by 2.2 per
cent to 12.2 per cent. Thus overall these changes cost the employed
taxpayer a rise in the marginal rate, compared with what would
otherwise have been possible, of about 5 per cent.
7. Thus in broad terms the "unemployment
trap" has been alleviated but at the expense of a general
worsening and extending of the "poverty trap" and a
large cost in rising marginal tax rates for the general taxpayer.
8. I do think this is a seriously damaging trade-off.
It is relatively easy to monitor the unemployed; they are visible
and under the new regulations must report regularly to benefit
offices. Hence regardless of their monetary incentives pressure
can be put on them to honour their responsibility to take a job.
The same is not true of those in jobs who could become more skilled.
For them monetary incentives are all since there is no way they
can be checked out in this dimension. At the present time when
there are large pressures on the unskilled due to globalisation
and technology change, this worsening of reskilling incentives
could be very damaging.
9. There is the final point to which I promised
to return: the necessity of all this extra incentive to the unemployed
which in turn has contributed to the worsening of skilling incentives.
On our Liverpool Group calculations the "natural" rate
of unemployment (i.e. that which the economy would reach in a
normal way, and without reviving inflationary pressure, once recovery
had worked itself out) is 2.5 per cent on the benefit count, probably
equivalent to 3.5 per cent or so on the Labour Force Survey basis.
In the later stages of recovery service jobs grow strongly- as
we are now seeing and as we saw before in 1986-90. These jobs
are capable of providing opportunities for people (such as in
double-jobless households) who are not easy to place; there are
many varieties of service jobs covering a wide range of qualifications
and when they are plentiful those who are held back from work
because their partner cannot find it can in effect go to work
at the same time, in which case the unemployment trap is basically
sprung. Clearly at this stage of the cycle there has to be caution
that growth is not excessive because of bottlenecks developing
with scarcer labour and fully employed areas; however the level
of real interest rates and the strength of the pound should be
sufficient to prevent the overheating we experienced in 1988-90.
10. On this assumption I have to question the
need for the latest set of packages on the unemployment front,
with its effects on the skilling incentive and the total taxpayer
cost. This is an expensive bolting on of extra stable doors when
the horse is already well enclosed by the existing ones. With
measures already in place the unemployed would have found jobs
11. When one adds that in addition more measures
are now proposed raising the cost of workers to employers through
Fairness At Work and the Minimum Wagewhich together will
increase unemployment probably by around <fr3,4> millionone
can only say that this government's policies are a case of "curing"
a non-existent disease through a damaging series of redundant