Select Committee on Social Security First Report


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" tasks.

  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 anyway.

  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 Wage—which together will increase unemployment probably by around <fr3,4> million—one can only say that this government's policies are a case of "curing" a non-existent disease through a damaging series of redundant interventions.

June 1998

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