tag:theconversation.com,2011:/fr/topics/uk-budget-2017-36594/articlesUK budget 2017 – The Conversation2017-11-24T11:40:41Ztag:theconversation.com,2011:article/880422017-11-24T11:40:41Z2017-11-24T11:40:41ZDebunking the UK’s productivity problem<figure><img src="https://images.theconversation.com/files/196194/original/file-20171123-18006-14ohrd8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Hyper-efficient.</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>Productivity – or the UK’s lack of it – is the cause of the country’s economic woes. We have been told this by countless politicians and commentators. And the focus on Britain’s “productivity puzzle” is back in the headlines thanks to the latest budget. The UK’s latest productivity and growth forecasts have been <a href="http://www.independent.co.uk/news/business/news/budget-2017-latest-uk-productivity-growth-economic-forecast-gdp-philip-hammond-statement-a8069321.html">slashed</a>, such that the leading IFS think tank now predicts two decades of <a href="https://www.theguardian.com/business/2017/nov/23/uk-no-earnings-growth-budget-brexit-productivity-ifs">no earnings growth</a>. </p>
<p>A similar story tends to be recycled every time growth forecasts change or data comparing the G7 countries or regions within the UK is released. Phrases <a href="https://www.gov.uk/government/speeches/autumn-statement-2016-philip-hammonds-speech">like</a>: “It takes a German worker four days to produce what a British one does in five.”</p>
<p>But how is productivity the cause of the UK’s problems and what does this statement actually mean? Unfortunately very little, because the term is used inconsistently. There are different measures of productivity and the nature of the UK’s problem depends on which one we are looking at and how it is being used.</p>
<h2>Different definitions</h2>
<p>At its base, productivity is a measure of output over input. The most commonly used measure of output is value-added. Literally the value added to goods and services produced in the UK, calculated as the monetary difference between what is sold and the intermediate goods used in its production. </p>
<p>The most commonly reported input is the number of workers or worker-hours. When combined this gives us a measure of labour productivity, calculated for each industry and aggregated for a region or the whole economy. So far, so good. However, there are some more crucial distinctions, depending upon how labour productivity is used.</p>
<p>If we compare the performance of the UK with other countries or that of London with other parts of the UK, this requires making the comparison at the same point in time. In this case national statistical offices use current price measures of value-added. They use prices in each country at the point of comparison, converted into a common currency (usually US dollars) and adjusted for what these can buy in each place. This is called purchasing power parity or PPP. </p>
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<p>Hence, what we are saying when we say that London is more productive than Carlisle in the north of England or that the UK is less productive than Germany, is that the value-added at current prices produced per hour worked in those places (what economists would call nominal productivity) is different. This is likely to depend largely upon the activities that are being performed in each place. </p>
<p>If some highly lucrative activities are concentrated in one part of the country – say financial and professional services in London – or within a country – think of complex manufacturing across Germany – then this will strongly influence the current price productivity data. The fact that the UK lags behind other countries on this measure reflects what goods and services it produces and the prices it can command for them versus what it has to pay for intermediate inputs. </p>
<p>So some of what the UK produces may be attributable to the skills of workers – but clearly the UK has wider historical issues regarding the types of industry it has and the geographical diversity of its economy. It is misleading to label this a productivity problem.</p>
<h2>Skills and efficiency</h2>
<p>A second way that labour productivity is used is to chart its change or growth over time. This calculation involves fixing prices at some point in time and calculating the change in the quantity of output produced to give a real measure of value-added. Hence if real labour productivity is increasing at 3% per year, a country is producing 3% more actual goods and services per hour worked than it was before, independent of price changes. </p>
<p>It is this calculation that is reflected in the growth of the economy and increases living standards. It is often interpreted as a measure of the increasing efficiency of workers but we must bear in mind that how work is organised, what equipment workers have, how skilled and well-trained they are and how close to capacity the economy is operating will all affect this measure. Also, certain industries have greater propensity for automation, which is <a href="https://hbr.org/2015/06/robots-seem-to-be-improving-productivity-not-costing-jobs">central to increasing productivity</a>.</p>
<p>Unfortunately, since the financial crisis productivity growth across the G7 has been much lower than it was prior to it – which has raised questions regarding how realistic prior measurement was, particularly in financial services, and whether the world has entered an era of slower technological progress. The UK’s productivity fall was steeper and its rebound weaker than in <a href="https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/internationalcomparisonsofproductivityfinalestimates/2015">comparison countries</a>. </p>
<p>This might be due to a number of reasons: low capital investment, poor skills, the high employment rate and low interest rates keeping inefficient companies afloat. No single explanation is currently winning the day. I would, however, urge readers to think about which measure of productivity is being used and what it means the next time we are told that the UK’s economic woes are due to poor productivity.</p><img src="https://counter.theconversation.com/content/88042/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Lewis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are different measures of productivity and the nature of the UK’s problem depends on which one we are looking at.Paul Lewis, Senior Lecturer in Political Economy, Birmingham Business School, University of BirminghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/879632017-11-22T16:20:34Z2017-11-22T16:20:34ZBudget 2017 fails to reset or rebalance anaemic UK economy<p>Given the May government’s weakness and instability, and the ongoing toxic, Brexit-laced personal and political divisions within the cabinet, not much was expected from Philip Hammond’s <a href="https://theconversation.com/budget-2017-experts-respond-87796">Autumn 2017 budget</a>. He did not disappoint. </p>
<p>During a rambling, <a href="https://www.gov.uk/government/speeches/autumn-budget-2017-philip-hammonds-speech">hour-long speech</a> of nearly 8,000 words, weak jokes torturously delivered were interspersed with a raft of policy announcements whose sum total fell far short of resetting UK economic policy away from austerity. This was not a budget to redress the “burning injustices” and interests of the “just about managing”, which the prime minister <a href="https://www.gov.uk/government/speeches/statement-from-the-new-prime-minister-theresa-may">once promised</a> would be the mission of her government. </p>
<p>Hammond’s announcements fell far short of the £4 billion in investment required to redress the impact of a lost decade of cuts in welfare, including the <a href="http://cpag.org.uk/content/austerity-generation-impact-decade-cuts-family-incomes-and-child-poverty">freeze on benefits</a>. Or the <a href="https://www.kingsfund.org.uk/publications/autumn-budget-2017">£4 billion required</a> to maintain services in the National Health Service in England in 2018-19. And little to redress the <a href="https://www.nao.org.uk/report/financial-sustainability-in-schools/">financial unsustainability of England’s schools</a> or <a href="https://www.nao.org.uk/report/financial-sustainability-of-local-authorities-capital-expenditure-and-resourcing/">its local government</a>.</p>
<p>Hammond’s statement announced token investment in driverless vehicles, but onlookers could be forgiven for thinking that this was the anaemic budget of a driverless government. Like his next-door-neighbour in 10 Downing Street, Hammond lacks the necessary gumption to lead the UK economy at this critical juncture.</p>
<p>The Autumn 2017 budget represented the opportunity to make good Hammond’s <a href="http://www.bbc.co.uk/news/business-36864099">July 2016 promise</a> “to reset fiscal policy if we deem it necessary to do so in the light of the data that will emerge over the coming months”. The data that has emerged subsequently should have convinced him that the time for a reset was long overdue. Austerity has clearly failed to revive the British economy and there is an urgent need to prepare businesses – and not just government departments – for Brexit.</p>
<h2>Rising debt</h2>
<p>Austerity – the notion of balancing the books by cutting spending – has singularly failed to rebalance the nation’s finances. Since Hammond’s appointment as chancellor, a further £176 billion has been added to the UK’s public sector net debt, which now stands at <a href="https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/october2017">more than £1,790 billion</a>. This has maintained the pattern since May 2010, which has seen the Cameron-Clegg coalition’s <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/83820/coalition_programme_for_government.pdf">“unavoidable deficit reduction plan”</a> add £772.5 billion <a href="https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/october2017">to public sector net debt</a>. </p>
<p>The budget <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/661480/autumn_budget_2017_web.pdf">now forecasts</a> that in 2022-23, public sector net debt will still be £1,909 billion or 79.1% of GDP, and the government will be borrowing £25.6 billion or 1.1% of GDP. </p>
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<p>This is contrary to what Hammond’s predecessor George Osborne <a href="http://www.parliament.uk/business/news/2010/06/emergency-budget-2010-statement/">promised</a> would have been achieved by 2015-16. When the Conservatives came into government in June 2010, Osborne <a href="https://publications.parliament.uk/pa/cm201011/cmhansrd/cm100622/debtext/100622-0004.htm#1006224500000">promised</a> “to raise from the ruins of an economy built on debt a new, balanced economy where we save, invest and export”.</p>
<p>That new, balanced economy has proven to be a fiction. In 2016, the UK ran a record current account deficit of £115.5 billion, equivalent to 5.9% of GDP, and a trade deficit of £43 billion, <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/balanceofpayments/apriltojune2017">equivalent to 2.2% of GDP</a>. </p>
<p>There was little in the latest budget to reverse these trends. Instead, the independent Office for Budget Responsibility (OBR) downgraded its forecasts for real GDP growth between 2017-18 and 2021-22 <a href="http://cdn.budgetresponsibility.org.uk/Nov2017EFOwebversion.pdf">from 7.5% to 5.7%</a>. The British economy is now forecast to grow by less than 2% in each year of the current parliament, and, as the OBR also noted, this contrasts with “a pick-up in other advanced economies”.</p>
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<h2>Storing problems for the future</h2>
<p>The budget concluded with a raft of announcements to address the housing crisis in England, including the abolition of Stamp Duty on properties up to £300,000. This was Hammond’s crowd-pleasing rabbit out of the hat. But the OBR <a href="http://cdn.budgetresponsibility.org.uk/Nov2017EFOwebversion.pdf">has observed</a> that “the main gainers from the policy are people who already own property” rather than first-time buyers, and will likely push up prices, thus making properties less affordable. </p>
<p>Official government statistics have revealed that over the past 20 years, land values have increased by 479% <a href="https://www.ons.gov.uk/economy/grossdomesticproductgdp/compendium/unitedkingdomnationalaccountsthebluebook/2017">and property values by 203%</a>. The latest budget has done nothing to reverse these trends towards investment in property and rent-seeking, rather than in the real economy of businesses.</p>
<p>David Willetts, who until May 2015 was complicit in the implementation of austerity, as a cabinet minister in the Cameron-Clegg coalition government, <a href="http://www.resolutionfoundation.org/media/blog/the-social-contract-between-generations-in-britain-is-being-broken/">recently warned</a>: </p>
<blockquote>
<p>We are reshaping the state and storing problems for the future by creating a country for older generations. The social contract is a contract between the generations and in Britain it is being broken.</p>
</blockquote>
<p>The truth is more stark than that. Philip Hammond’s failure to reset UK economic policy by perpetuating fundamentally flawed austerity policy means the May government is reshaping the state and storing problems for the future by creating a country for older, rentier and asset-rich interests. This risks breaking down the political contract between the governing elite at Westminster and the people of Britain.</p><img src="https://counter.theconversation.com/content/87963/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Simon Lee does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There was token investment in driverless cars, but this was a pitiful budget by a rudderless government.Simon Lee, Senior Lecturer in Politics, University of HullLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/875602017-11-21T11:51:48Z2017-11-21T11:51:48ZBrexit calls for free trade are a convenient smoke screen for more corporate tax privilege<p>Liam Fox’s <a href="http://www.telegraph.co.uk/business/2017/11/07/fox/">call</a> for Britain to champion the cause for free trade in the wake of Brexit and increasing trade barriers, needs to be examined against further revelations of the so-called <a href="https://theconversation.com/four-things-the-paradise-papers-tell-us-about-global-business-and-political-elites-86946">Paradise Papers scandal</a>, and other evidence of the growing power and influence of the British corporate elite.</p>
<p>The UK international trade secretary stated that non-tariff trade barriers operated by G20 countries have risen sharply since 2010. At a time of struggling economic growth in the poorer parts of the world, such trade barriers <a href="http://www.telegraph.co.uk/business/2017/11/07/fox/">have risen</a> from 300 to 1,200 between 2010 and 2015.</p>
<p>By contrast to this growing protectionism, the British government now champions the cause of open and free trade to lift the global poor. But this claim does not sit comfortably with further revelations in the recent Paradise Papers leak. The documents from offshore financial service providers (many of which are British overseas territories and crown dependencies) show widespread tax avoidance by companies and the ultra wealthy. </p>
<p>Meanwhile, the UK tax code – and its enforcement over the past 30 years – is largely based on the capture of British government legislative and economic policy by UK corporate interests. The complex structures that allow multinationals, and high-net-worth individuals, to protect their cash overseas is just one small part of a multi-billion pound corporate tax avoidance industry. Not only does this harm the UK economy, it <a href="http://blogs.lse.ac.uk/africaatlse/2014/03/07/tax-evasion-the-main-cause-of-global-poverty/">entrenches global poverty</a>.</p>
<h2>Two sides, same argument</h2>
<p>After many years of celebrating the economic benefits of the single market, the British government now argues for a decisive Brexit to remove all barriers and needless regulation from world trade. The efficiency gains from growing free trade, the argument goes, will ensure all nations benefit from a rising tide of prosperity, not just the UK. </p>
<p>This seems contrary to the government’s previous <a href="https://www.gov.uk/government/publications/why-the-government-believes-that-voting-to-remain-in-the-european-union-is-the-best-decision-for-the-uk/why-the-government-believes-that-voting-to-remain-in-the-european-union-is-the-best-decision-for-the-uk">Remain argument</a>, which asserted that the economic value of membership of a large trading block, such as the EU, and free trade only within the single market. </p>
<p>But further examination of this reveals that the difference is not so clear-cut between the two positions.</p>
<p>Many of those in favour of continued membership of the EU, on both sides of the Channel, do not just want protection from a “race to the bottom” and declining employment and environmental standards. European leaders, <a href="https://www.theguardian.com/commentisfree/2017/may/08/emmanuel-macron-france-economics-neoliberalism">such as French president, Emmanuel Macron</a>, also want to protect the fruits of open and unregulated markets, privatisation of national assets, and low corporate tax rates. </p>
<p>In the UK, the main Brexit and Remain sides merely champion different versions of <a href="https://www.theguardian.com/books/2016/apr/15/neoliberalism-ideology-problem-george-monbiot">neoliberal economics</a>, with all its theoretical proofs for efficiency, prosperity, stability and fairness. Both want to give a largely unregulated corporate sector further freedom to best allocate capital as they see fit, with the idea that it will better serve the UK consumer and producer.</p>
<h2>The real story</h2>
<p>The real economic story since 2010 in the UK is not growing European protectionism, now opposed by the government in the name of liberty and good conscience. It is that UK corporate tax rates have fallen in <a href="http://www.telegraph.co.uk/finance/budget/9944515/Corporation-tax-falls-to-20-per-cent-in-fourth-consecutive-Budget-cut.html">each of the four previous budgets</a> at a time when UK household living standards have shrunk <a href="http://www.independent.co.uk/news/business/news/brexit-latest-news-uk-household-living-standards-inflation-rise-fast-2011-ons-office-national-a7827171.html">at their fastest pace since 2011</a>. In the shadow of the next budget, the chancellor, Philip Hammond, would do well to remember that the country is <a href="https://www.ifs.org.uk/publications/9207">forecast</a> to not even raise 7% of its total tax receipts from corporation tax in 2017-18. </p>
<p>What is particularly revealing in terms of corporate privilege is that UK corporate profits are currently at or near <a href="https://tradingeconomics.com/united-kingdom/corporate-profits">record highs as a percentage of GDP</a>. The growing wealth and power of this elite in the UK since 2010 <a href="https://www.theguardian.com/business/2017/sep/18/uk-debt-crisis-credit-cards-car-loans">has many implications</a> for declining UK living standards, social stability and the current household debt crisis. </p>
<p>In the last seven years, the City has rigged markets (<a href="https://theconversation.com/qanda-what-is-the-libor-scandal-and-why-does-it-matter-45662">Libor</a>), <a href="https://theconversation.com/hsbc-scandal-the-uks-strict-rules-on-bank-customers-were-abandoned-at-the-border-37431">laundered money</a> and <a href="https://www.thetimes.co.uk/edition/business/lloyds-to-pay-80m-in-new-sales-blunder-06r3gnq2d">mis-sold products</a>, but has diverted attention by implicitly threatening to take even more more of its profits out of the UK. Meanwhile, the benefits of privatising the once state-owned utilities – <a href="https://www.theguardian.com/politics/2017/nov/11/mcdonnell-37bn-paid-to-shareholders-should-have-been-invested">£37 billion in dividends since 2010</a> – have gone to a relatively few shareholders, not to the increasingly stretched British household. </p>
<p>The current UK tax system works not just in favour of corporate interests, but is fundamentally unsuited to the digital economy where capital can be moved around the world at the flick of an electronic switch. </p>
<p>By contrast, <a href="http://voxeu.org/article/financial-transaction-tax-feasible-and-desirable-if-done-right">research</a> led by a former City banker concluded that a more broad-based financial transactions tax would bring an <a href="https://www.robinhoodtax.org.uk/former-banker-lays-out-plan-uk-robin-hood-tax">additional £5 billion a year</a>. Another simple, unavoidable and efficient tax, a land value tax, is <a href="https://iea.org.uk/blog/the-case-for-a-land-value-tax-0">even championed by</a> the UK’s self-proclaimed “original free-market think tank”, the Institute of Economic Affairs. </p>
<p>Both taxes point to the current UK corporate tax arrangements as increasingly indefensible. </p>
<p>So the call for free trade – whether global or just in the EU – is a convenient smoke screen that obscures the vast corporate privilege and profits that is embedded in UK governmental and economic policy. And the budget is very unlikely to change <a href="https://www.ifs.org.uk/publications/9207">estimates</a> that money raised from corporation taxes will fall to just 2.3% of UK national income by 2021–22.</p><img src="https://counter.theconversation.com/content/87560/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Winship does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s unlikely the next budget will do much to address the UK’s failure to raise money from corporation taxes.Jonathan Winship, Lecturer in Accounting and Finance, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/763672017-04-18T14:22:15Z2017-04-18T14:22:15ZGloomy economic outlook is why Theresa May was forced to call a snap election<p>Many are asking why Britain’s prime minister, Theresa May, has called a general election despite <a href="https://www.theguardian.com/politics/2017/apr/18/the-many-times-theresa-may-ruled-out-an-early-election">repeatedly saying</a> that she would not do so. From the moment she first stood for the leadership of the Conservative Party in June 2016 she <a href="https://www.theguardian.com/politics/2016/jun/30/theresa-may-launches-tory-leadership-bid-with-pledge-to-unite-country">ruled out such a possibility</a>. In her Easter message on April 16 <a href="http://www.bbc.co.uk/news/uk-39607056">she suggested</a> that the country was uniting behind Brexit. Now she wants an election to resolve the issue after all.</p>
<p>But is that the real story behind this surprise announcement? Or has, as ever, economics got more to do with it? <a href="http://www.telegraph.co.uk/news/2017/04/18/theresa-mays-early-general-election-speech-full/">In her Downing Street address</a> announcing the election, May said:</p>
<blockquote>
<p>Despite predictions of immediate financial and economic danger, since the referendum we have seen consumer confidence remain high, record numbers of jobs, and economic growth that has exceeded all expectations.</p>
</blockquote>
<p>This, however, glosses over some quite significant economic facts. The reality is that Britain’s economy is not in a good state. </p>
<h2>Reading the economic runes</h2>
<p>The UK’s high street is expected to see the biggest drop in retail sales, excluding food, for nearly six years in the <a href="https://www.theguardian.com/business/2017/apr/11/uk-retail-sales-fall-living-costs">first quarter of 2017</a>. Rising inflation, now at a rate exceeding the Bank of England’s 2% target rate, and likely to stay there for some time to come because of deflation in the value of sterling and rising oil prices, was the <a href="https://www.ft.com/content/b423f32c-1dd4-11e7-b7d3-163f5a7f229c">suggested main cause</a> of the decline. Whatever the reason, it seems likely that consumers have realised that the post-Brexit honeymoon is over.</p>
<p>There is good reason for them to do so. The latest <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/apr2017">labour market figures</a> reveal that even though employment is technically at a record high, pay rises have been lagging. Regular pay in the UK in February was 1.9% higher than a year earlier, but is running below the 2.3% increase in prices. That means real living standards are falling. It is a trend that is likely to continue.</p>
<p>The usual recourse in this situation is for consumers to borrow. Consumer debt levels are already at such high levels, however, that the Financial Conduct Authority <a href="http://www.bbc.co.uk/news/business-39628039">has announced</a> it is to review the whole sector and its regulation because of the threat to financial stability that it represents. </p>
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<img alt="" src="https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=357&fit=crop&dpr=1 600w, https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=357&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=357&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=448&fit=crop&dpr=1 754w, https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=448&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=448&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Consumer credit is beginning to dry up.</span>
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</figure>
<p>The regulator may not need to worry though: as the Bank of England <a href="https://www.ft.com/content/9abf248a-202a-11e7-b7d3-163f5a7f229c?segmentId=080b04f5-af92-ae6f-0513-095d44fb3577">recently announced</a>, it seems that Britain’s banks have already reacted to the pressure on UK household incomes and the availability of consumer credit was tightened for the first time in six years during the first three months of 2017. The Bank of England also noted that credit availability was likely to get tighter as the year progressed. The option of borrowing to make ends meet and cover a shortfall in wages – that has so long been the British choice – may no longer be available for many.</p>
<p>And, as if to cap it all off, <a href="https://www.theguardian.com/money/2017/apr/15/average-uk-house-price-falls-1000-since-start-of-year">average UK house prices fell</a> during the first quarter of 2017. It can always be argued that this does not matter, and might even be good news (particularly for first-time buyers). That though is not the way the British take such news: rising house prices are their surest indicator of economic confidence. The reality is that this might just be draining away.</p>
<p>To add to these woes, as the government is loathe to admit, the UK still has a huge budget deficit. It’s hard to recall that the Conservative Party plan in 2010 was to fight an election in 2015 <a href="http://www.telegraph.co.uk/finance/budget/7505366/Budget-2010-live.html">with no deficit</a>. The 2017 election will be fought against the backdrop of the deficit for 2016-17 exceeding £50 billion and actually expected to rise next year, <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/597467/spring_budget_2017_web.pdf">with no prospect of this ceasing</a>.</p>
<p>The reality is then that, as ever with elections, there has been a mighty lot of spin from the prime minister’s announcement. The truth is May does not need an election to deliver Brexit and nothing that election will decide will stop parliament – whether it is opposition MPs or the House of Lords – interfering with the Brexit process, if it seeks to do so in the future. </p>
<p>The reality behind her change of mind is something much more commonplace. She has read the economic runes and thinks, as I do, that they do not present a pretty picture for her prospects. Come 2020, if she lets this parliament run its prescribed course, she would face a difficult electorate, fractious at the cost of a Brexit that may well have delivered on little of its promises. Calling an election now then, when the going still looks good, is May’s best chance of ever becoming an elected prime minister. In that circumstance she has succumbed to vanity, as all politicians do. Britons might all, quite literally, pay the cost of that.</p><img src="https://counter.theconversation.com/content/76367/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Murphy receives funding from a Horizon 2020 grant from the EU paid to City, University of London. He is a member of Tax Research LLP. That organisation can make no financial gain from this article. Nor can the Fair Tax Mark Limited or Cambridge Econometrics Limited of both of which he is a director. Richard Murphy is not a member of any political party. </span></em></p>Theresa May has read the economic runes – and called an election while she still confidently can.Richard Murphy, Professor of Practice in International Political Economy, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/746732017-03-16T11:05:40Z2017-03-16T11:05:40ZForget national insurance – Britain needs an economic policy U-turn<p>Just one week after announcing that it would raise national insurance for self-employed people, the UK government has U-turned on the policy. Despite being politically contentious, the reversal is more symbolic than substantive, at least from a fiscal perspective. </p>
<p>The proposed tax rise was only ever going to raise a very modest amount and was actually <a href="http://www.resolutionfoundation.org/media/blog/reforming-tax-for-the-self-employed-should-be-welcomed-by-progressives-and-fiscal-hawks-alike/">progressive in its effects</a>. It was an attempt to reduce the large tax gap between the self-employed and employees and was justified on fairness grounds. In this sense, the fact that it broke a manifesto promise was no bad thing.</p>
<p>The U-turn, however, is more significant for what it says about the general course of the government’s economic policy-making. It reflects a lack of serious thinking around issues of tax reform. It also exposes flaws in current policy towards supporting a stronger and more inclusive economy.</p>
<h2>Deeper problems at play</h2>
<p>The fact is that the government faces problems with the tax base. Its ability to fund spending out of taxation has become constrained. The chancellor, Philip Hammond, admitted to this fact in <a href="https://uploads.guim.co.uk/2017/03/15/Letter_from_the_Chancellor_to_colleagues.PDF">his letter announcing the U-turn</a>. He referred to “a structural issue in the tax base, on which we will have to act” and linked the issue directly to <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/mar2017">rising self-employment</a> in the UK.</p>
<p>Yet there are deeper problems that go beyond the increase in the number of self-employed workers. These problems relate to changes in the UK labour market. The rise of low-paid and insecure work has <a href="https://www.ifs.org.uk/uploads/publications/bns/BN_182.pdf">held back tax receipts</a>. It is not a matter of people en masse avoiding tax; rather it is matter of them not earning enough to contribute in a significant way to the total tax take.</p>
<p>The point is that <a href="https://theconversation.com/jobs-figures-mask-bogus-self-employment-in-the-shadow-economy-58017">structural changes in the labour market</a> – such as the rise in zero hours contracts, temporary and agency employment, and involuntary self-employment – over the last few decades have eroded the tax base. They have helped to create a fiscal gap in the UK budget that the chancellor now needs to fill.</p>
<p>The drive to make the labour market <a href="https://theconversation.com/a-look-behind-uks-impressive-unemployment-figures-shows-theyre-not-so-dazzling-33053">more “flexible”</a> has been actively encouraged by successive governments as a way to combat unemployment and inflation. It has meant worse wages, inferior career prospects, and dire working conditions for many workers. It now seems to be affecting the tax base, in a way that is concerning to the government. But, notably, it took fiscal pressure rather than concern over the lives of workers to prompt a (now-scrapped) change in policy.</p>
<h2>Wholesale review</h2>
<p>Commitments to fund social care and the NHS more generally will require more than piecemeal changes to the tax system; they will require a wholesale review of tax policy. Specifically, these commitments cannot be met without the move to a more progressive tax system. Taxes on profit and high incomes are key here and should take precedence over tinkering with national insurance for the self-employed.</p>
<p>If the government was truly serious about its commitment to tackle the tax base problem, it would be looking to reverse its policy to <a href="https://theconversation.com/uk-budget-2017-experts-respond-73998">cut corporation tax</a>. It would also look to raise taxes for higher earners. Those with the broadest shoulders should take more of the burden of taxation. Lower corporation tax and inaction to raise taxes on high incomes implies a tax system that is skewed in favour of big business and the rich.</p>
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<img alt="" src="https://images.theconversation.com/files/161132/original/image-20170316-10932-fls66l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/161132/original/image-20170316-10932-fls66l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/161132/original/image-20170316-10932-fls66l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/161132/original/image-20170316-10932-fls66l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/161132/original/image-20170316-10932-fls66l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/161132/original/image-20170316-10932-fls66l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/161132/original/image-20170316-10932-fls66l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Self-employment is not paying enough for most people to bring in sufficient tax receipts.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
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<p>The U-turn on the national insurance plan masks the fact that the government’s welfare reforms are predicted <a href="http://www.resolutionfoundation.org/media/blog/reforming-tax-for-the-self-employed-should-be-welcomed-by-progressives-and-fiscal-hawks-alike/">to hit the poorest in society the most</a>. Proposed benefit cuts will leave the poor worse off. Instead of worrying about a minor change in national insurance, politicians – and the media – should be worrying about the real hardships caused by these cuts.</p>
<h2>Investment needed</h2>
<p>The truth is that the UK economy remains in a very precarious position. Growth, to the extent that it is occurring at all, is being <a href="https://www.ft.com/content/e194e464-6b65-11e6-ae5b-a7cc5dd5a28c">driven by higher consumption</a>. With wages stagnating, the growth in consumption is being supported by higher borrowing and higher debt levels. This situation is not sustainable and the budget did nothing to address the structural problems of the UK economy.</p>
<p>The best way for the government to support the economy <a href="https://theconversation.com/philip-hammond-plays-the-pragmatist-but-lacks-the-vision-to-deliver-as-chancellor-66448">is to invest</a>. Funding infrastructure and creating a strong <a href="https://theconversation.com/is-the-uk-finally-getting-serious-about-industrial-strategy-71692">(not token) industrial strategy</a> should be priorities. Ultimately, higher tax receipts require a government committed to supporting, through its investment policies, better paid work.</p>
<p>If the chancellor was really committed to reviving the tax base and with it the fortunes of the UK economy, he would be seeking to reverse his government’s policy of austerity.</p>
<p>Sadly, the chancellor appears entrapped by reactionary forces in the media <a href="https://www.theguardian.com/commentisfree/2017/mar/15/budget-u-turn-may-tory-right-national-insurance?CMP=soc_3156">and on the Conservative backbenches</a>. He is unwilling to take even modest steps to resolve pressing problems of taxation and remains ideologically opposed to anything other than a cuts agenda. The country will be poorer materially and socially for his cravenness and dogmatism.</p><img src="https://counter.theconversation.com/content/74673/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Spencer has received funding from ESRC, EPSRC, and FP7. </span></em></p>The UK government’s U-turn on a national insurance increase for self-employed people exposes the flaws in its approach to building a stronger and more inclusive economy.David Spencer, Professor of Economics and Political Economy, University of LeedsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/743872017-03-10T13:39:56Z2017-03-10T13:39:56ZWhat national insurance is – and where it goes<p>A tax called <a href="https://www.gov.uk/national-insurance">national insurance</a> has become the centre of a row within Britain’s ruling Conservative Party. The <a href="https://theconversation.com/uk-budget-2017-experts-respond-73998">recent budget</a> announced a rise in the tax for the self-employed (from 9% to 11% on profits above £8,060 – still less than the 12% paid by employees). But a number of Conservative MPs have strongly criticised the announcement, forcing the prime minister to delay any changes <a href="https://www.theguardian.com/politics/2017/mar/10/national-insurance-delay-appeases-conservative-rebels">until autumn</a>.</p>
<p>So what is the tax at the centre of this debate and how significant is the rise? National insurance is a tax on pay, paid by employees, their employers and the self-employed. But it’s not just a tax – by paying some types of national insurance, you build up an entitlement to claim certain state benefits, including the state retirement pension and various benefits payable on death to your spouse or partner, or to you when you are unable to work. </p>
<p>This principle of benefits that you contribute to was first introduced in the UK in 1911 and became enshrined in the <a href="http://www.bbc.co.uk/history/historic_figures/beveridge_william.shtml">Beveridge reforms</a> of the 1940s that still underpin today’s welfare state.</p>
<p>There are different types of national insurance contribution, called “classes”. They are paid by different people and carry different benefit entitlements. The main classes are summarised here:</p>
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<h2>What it pays for</h2>
<p>Part of national insurance contributions help to fund the National Health Service and the rest are paid into a ring-fenced fund used to pay benefits. In <a href="https://www.gov.uk/government/publications/report-to-parliament-on-the-2017-re-rating-and-up-rating-orders">2016-17</a>, Class 1 contributions paid by employees and employers brought £94.3 billion into the fund and Class 2 and 4 contributions paid by the self-employed brought in £2.2 billion. Class 3 voluntary contributions brought in less than £0.1 billion.</p>
<p>Through their Class 1 national insurance contributions, employees build up entitlements to claim state pension, bereavement benefits for their spouse or civil partner if they die, and benefits if they are unemployed or off work sick. In addition to these national insurance benefits, employees must by law be provided with “statutory payments”, such as sick pay and maternity pay. </p>
<p>These statutory payments are not paid out of national insurance, but directly by the employer – although small employers can claim back some or all of the cost from the state. Employers often choose to run their own sick pay and maternity schemes that are more generous than just the statutory payments.</p>
<p>Self-employed people, with their lower contributions, build up entitlements to state pension, bereavement benefits, maternity allowance and benefits if ill. However, their maternity and sickness benefits tend to be less than the equivalent sums that employees can get and, until April 2016, this was also the case with the state pension. The following table reflects how the self-employed have been paying lower national insurance than people who are employed on the same earnings.</p>
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<h2>The big one: pensions</h2>
<p>The state retirement pension is by far and away the largest benefit covered by the national insurance fund. In <a href="https://www.gov.uk/government/publications/report-to-parliament-on-the-2017-re-rating-and-up-rating-orders">2016-17</a>, the fund paid out £98 billion in benefits, of which £92 billion (94%) was for state pensions.</p>
<p>For people reaching their <a href="https://www.gov.uk/state-pension-age">state pension age</a> before April 6, 2016, their state pension is made up of two parts: a basic state pension which is <a href="http://www.legislation.gov.uk/uksi/2016/230/contents/made">£119.30 a week in 2016-17</a>; and an additional pension, which on average adds <a href="https://www.ons.gov.uk/economy/investmentspensionsandtrusts/compendium/pensiontrends/2014-11-28/chapter5statepensions2013edition">another £30 a week</a>. Employees could get the additional pension, but not the self-employed – and this is the key reason why the self-employed have been paying lower National Insurance contributions.</p>
<p>But, as of April 6, 2016, the government introduced a <a href="https://www.gov.uk/new-state-pension">new “flat-rate” pension</a>. Everyone reaching state pension age on or after April 6, 2016 qualifies for this. This essentially rolls up the average additional pension with the basic pension to produce a new combined pension for the self-employed, as well as employees. In 2016-17, the flat-rate pension is £155.65 a week. </p>
<p>So the <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/597485/NICs_fact_sheet_final_web.pdf">argument</a> put forward by the government in its latest spring budget is that, now the self-employed are building up this higher pension in the same way as employees, the justification for lower National Insurance contributions is largely gone.</p>
<p>Of course, there are many other differences between being an employee and being self-employed. As a self-employed person, you don’t get holiday pay, employer contributions to a private pension scheme or redundancy pay if work dries up. You also have to bear the costs of your own workplace, equipment, insurance, and so on. On the other hand, you have greater freedom over your time and control of your working environment, as well as more expenses you can claim against income tax. These are all valid areas of difference, but are outside the scope of the national insurance scheme.</p><img src="https://counter.theconversation.com/content/74387/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonquil Lowe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Changes to the national insurance tax for self-employed people was one of the most controversial parts of the 2017 spring budget.Jonquil Lowe, Senior Lecturer in Economics and Personal Finance, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/739982017-03-08T14:48:36Z2017-03-08T14:48:36ZUK budget 2017: experts respond<p><em>Philip Hammond has delivered his first budget as Britain’s chancellor of the exchequer. Here our panellists give their take on what it means for the UK economy. Stay tuned for further updates and follow @ConversationUK on Twitter.</em></p>
<h2>Economy</h2>
<p><em>Michael Kitson, University Senior Lecturer in International Macroeconomics, Cambridge Judge Business School</em></p>
<p>The chancellor delivered an upbeat assessment of the economy – upbeat but rose-tinted. The economy is currently being sustained by debt-driven consumption and a low exchange rate, and Hammond has done little to address the long-term challenges. </p>
<p>We were given another glimpse of the chancellor’s actuarial tendencies as he <a href="https://www.gov.uk/government/speeches/spring-budget-%202017-philip-hammonds-speech">repeated the favoured mantra</a> of his predecessor that he will “not saddle our children with ever-increasing debts”. However, what the country needs is an entrepreneurial chancellor who will invest to ensure our children inherit a prosperous economy.</p>
<p>On the plus side, Hammond has announced some modest investment in technical and vocational training with the introduction of <a href="https://schoolsweek.co.uk/what-are-t-levels/">T levels</a>, combined with a hotchpotch of piecemeal initiatives to conceal the lack of a strategy. But there are important areas that were largely ignored. First, how is the economy going to develop robust trade links outside of the single market? Things may look rosy at the moment because of low exchange rate, but this is not sustainable. </p>
<p>Second, the British economy’s long-term record on investment has been poor and is likely to deteriorate if overseas companies decide that the UK is a less attractive option outside the EU. Offering subsidies and other sweeteners is not a coherent industrial policy. Innovation is one of the key mainsprings for long-term growth, but this requires companies to invest in the UK and for the economy to be open to talent from all countries. </p>
<p>The rhetoric was strong and the jokes were feeble. What was required – and what was lacking – was a long-term plan on how to deal with the challenges ahead.</p>
<p><em>Simon Wren-Lewis, Professor of Economic Policy at the Blavatnik School of Government, Oxford University</em></p>
<p>What any macroeconomist should ask of this budget is: has the chancellor done enough to get UK interest rates off near-zero (known as the zero lower bound); to get us out of what economists call a liquidity trap? When interest rates have gone as low as the Bank of England feels able to take them, then it has lost control of the economy. That is the situation right now. </p>
<p>The only duty of the chancellor in that situation is to give the Bank of England back control through a fiscal stimulus – something he has not done. If he did do this, however, the short-term deficit and borrowing numbers that go with the stimulus would be completely irrelevant. Seeing as he hasn’t done this, his budget has failed.</p>
<p>The performance of the economy since 2010 <a href="https://mainlymacro.blogspot.co.uk/2017/03/could-we-still-be-at-bottom-of-self.html">has been terrible</a>. There has been no recovery, using the <a href="https://mainlymacro.blogspot.co.uk/2016/12/when-is-economic-recovery-not-recovery.html">proper meaning of the word</a>, from the Great Recession. All this time the Bank of England has been forced to keep interest rates at or near their floor, and use incredibly inefficient instruments like quantitative easing, because the government has kept on cutting spending. This is not normal and austerity is no longer even the international consensus. </p>
<h2>Business</h2>
<p><em>Kevin Farnsworth, Reader in International Social Policy, University of York</em></p>
<p>The biggest surprise of this budget is that the most significant factor that affected it wasn’t mentioned at all. Not only did the chancellor not mention Brexit, it is not immediately obvious how any of his announcements connect directly to it either. </p>
<p>I would have expected a boost to regional development or support for new businesses along the lines being <a href="http://www.hl.co.uk/news/2017/3/1/nissan-says-the-uk-car-industry-needs-100m-of-government-support-to-survive-brexit">called for by the car industry</a>. Usually, an unexpected boost to the finances – borrowing is set to be £26 billion lower than previously predicted by the end of this parliament as a result of stronger than expected growth – would provide some scope for new policies. But it gave the chancellor little wriggle room today. This is in part because he wants to reduce borrowing in future. But it is probably more to do with the fact that he wants to give himself more flexibility as the government prepares for Brexit. </p>
<p>Help is provided for larger businesses – perhaps those most able to leave the UK if they don’t get a good Brexit deal – by way of the further reduction in corporation tax (down to 17% by 2020). In ordinary times, this would be headline-grabbing – the UK already has <a href="https://stats.oecd.org/index.aspx?DataSetCode=Table_II1">one of the lowest rates of its competitors</a>. But larger businesses may be disappointed that Hammond didn’t go further. His predecessor, George Osborne, <a href="https://www.ft.com/content/d5aedda0-412e-11e6-9b66-0712b3873ae1">promised</a> to bring corporation tax down to 15% in his budget following the Brexit vote. </p>
<p>So it’s surprising that Brexit didn’t really feature. We might have expected much more in the way of help, support and compensation for businesses considering their own futures once article 50 is triggered. My guess is that the chancellor is playing a waiting game, with one eye on the potential for greater borrowing to ease Brexit going forward. And such is the <a href="https://theconversation.com/uk-budget-2017-why-upcoming-brexit-uncertainty-will-put-bright-economic-outlook-to-the-test-74220">level of uncertainty</a> in the future that what he did today amounts to the calm before the storm.</p>
<h2>Productivity</h2>
<p><em>Geraint Johnes, Professor of Economics, Lancaster University</em></p>
<p>Productivity is very much at the heart of the budget, with specific projects being allocated funding from the £23 billion fund previously <a href="https://www.gov.uk/government/topical-events/autumn-statement-2016">announced in the 2016 Autumn Statement</a>. These include investment in STEM research, support for disruptive technologies, help with the high-speed broadband roll out and further transport projects to relieve local congestion. </p>
<p>But the main announcements made today concern the country’s education and skills infrastructure. New funding will be made available to support the creation of 110 free schools. These will, <a href="https://theconversation.com/why-do-grammar-schools-remain-so-popular-49248">controversially</a>, include new selective schools and specialist maths schools. While it is widely recognised that students attending selective schools can benefit from the experience, average performance across all students in areas served by such schools <a href="https://theconversation.com/grammar-schools-why-academic-selection-only-benefits-the-very-affluent-74189">is not enhanced</a>. </p>
<p>The chancellor also announced a long overdue and welcome tidying up of vocational and technical qualifications, replacing more than 13,000 qualifications by some 15 new T levels. Here the devil will be in the detail – we know that the job market has been polarising and that routine jobs will face challenge from continued advances in automation. To prevent a situation where we train people to do jobs that robots will soon do, technical education will need to emphasise adaptability, a high level of creativity, and the ability to learn how to learn. Finally, a relatively small investment – but an important one – addresses the issue of lifelong learning. Hammond has announced £40m to be spent on pilot projects in this area.</p>
<h2>Industrial strategy</h2>
<p><em>Ian Greenwood, Associate Professor in Industrial Relations and Human Resource Management, University of Leeds</em></p>
<p>The government’s <a href="https://www.gov.uk/government/consultations/building-our-industrial-strategy">plan for a “modern industrial strategy”</a> requires clarity of vision, strong leadership and of course substantial investment. In his budget speech today, Hammond offered additional investment in intermediate skills, but – worryingly for UK industry – the extent that the government is ideologically committed to management of the economy is unclear. </p>
<p>Hammond adopted a schizophrenic attitude to state intervention – a corollary of any industry strategy. He attacked the Labour Party for its past intervention in the economy while seeming to accept that the market does not always work as a remedy to all ills.</p>
<p>The immediate and critical needs of the UK aerospace and automotive sectors, and the downstream foundation industries – <a href="https://theconversation.com/britains-needless-kick-in-the-teeth-for-its-struggling-steel-mills-67983">such as steel</a> – that support these sectors are manifest. They will drive innovation, R&D and good jobs, especially in the context of Brexit. It would not have been difficult to develop a narrative in today’s announcement that the government understands this. </p>
<p>Is it significant that this was absent? The <a href="https://www.ft.com/content/f5f83122-01c9-11e7-ace0-1ce02ef0def9">acquisition of Vauxhall by France’s PSA Group</a> has raised again the prospect of the auto industry exiting the UK. The <a href="http://smallbusiness.chron.com/definitions-upstream-downstream-production-process-30971.html">upstream</a> devastation that this would cause to the wider economy surely warranted a mention?</p>
<h2>Pensions and savings</h2>
<p><em>Jonquil Lowe, Senior Lecturer in Economics and Personal Finance, The Open University</em></p>
<p>The budget confirmed that reform of national insurance for the self-employed will go ahead from 2018. Class 4 national insurance contributions will be increased in stages over two years, taking the standard rate to 11% from its current level of 9% (compared with the 12% paid by employees). The original rationale for the lower rate for the self-employed was mainly that they were not entitled to the old additional state pension. With the introduction of the flat-rate state pension since April 2016, the self-employed now build up the state pension at the same rate as employees. The remaining 1% point gap compared with employees reflects the self-employed’s lack of sick pay and contributory unemployment benefits, although the government has said it will consult on parental benefits for the self-employed.</p>
<p>There will also be measures to reduce the tax advantage for working through an owner-managed company, starting with a reduction in the <a href="https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet">Dividend Tax Allowance</a> (only introduced in April 2016) from £5,000 to £2,000 from April 2018. This will also affect investors with large shareholdings (around £50,000 or more).</p>
<p>A new National Savings & Investments 3-year bond will be introduced from April. Offering 2.2% a year (taxable); it is among the best rates currently available. But, with inflation forecast to rise to 2.4% this year, competing returns may prove better.</p>
<h2>Dividend tax</h2>
<p><em>Michael Devereux, Professor of Business Taxation, University of Oxford</em></p>
<p>The “<a href="https://www.gov.uk/tax-on-dividends/how-dividends-are-taxed">dividend tax exemption</a>” of £5,000 was introduced only in the summer budget of 2015 and came into effect in April 2016. Now it has been reduced by to £2,000. It is hard to see much consistency there.</p>
<p>It seems that Hammond is concerned about the tax incentives for individuals and partnerships to incorporate – when they would be liable to corporation tax and income taxes on dividends – instead of income tax on the whole income.</p>
<p>The corporation tax rate is falling to 19% in 2017/8, which is much lower than income tax rates. Plus there is no national insurance on corporate profit. Taxes on dividends do generally remove the tax advantage to incorporation – and more so now. But that is only when profits are distributed; if you keep the profit in the company then you pay only corporation tax.</p>
<p>So why was the dividend tax exemption ever introduced? And why not just get rid of it entirely? Maybe that is for next year.</p>
<h2>Social care</h2>
<p><em>Catherine Needham, Reader in Public Policy and Public Management, University of Birmingham</em> </p>
<p>Social care needs a big idea – long-term, carefully developed, cross-party – and today’s budget was never going to deliver on that. What it did deliver was £2 billion for the care sector – with half of this coming in 2017-18. That will come as a great relief to local authorities who manage desperately strained care budgets and to health leaders who can’t discharge people from their hospitals because care services are not in place to help them in the community.</p>
<p>Care providers – the vast majority of whom are in the for-profit or not-for-profit sectors rather than public sector – are <a href="https://amp.theguardian.com/society/2017/mar/07/government-social-care-england-chief-chancellor-budget">nervous</a> that the money will get stuck in local authorities and they won’t see the cash they need to keep services viable. But at least we don’t have the outrage and disappointment that <a href="https://www.kingsfund.org.uk/blog/2016/12/what-now-social-care">followed</a> the 2016 Autumn Statement, when high hopes for a response to the care crisis were dashed. </p>
<p>Hammond talked of the need to be strategic about the long-term challenges facing the care sector – he <a href="https://www.gov.uk/government/speeches/spring-budget-2017-philip-hammonds-speech">announced</a> that a green paper would be published on funding challenges later this year. A “big idea” for care has eluded recent governments, none of whom have quite worked out how to get enough money into a care system designed for the problems of 1948 at the beginning of the welfare state. The Cabinet Office is <a href="https://www.theguardian.com/society/2017/mar/07/budget-extra-money-social-care-long-term-reform-vital">working</a> on a paper about long-term options for care reform – let’s hope it’s a good one. </p>
<h2>Education</h2>
<p><em>Andrew Gunn, Visiting Fellow at the School of Education, University of Leeds</em></p>
<p>Several of Theresa May’s <a href="http://www.telegraph.co.uk/news/2017/03/07/giving-education-huge-boost/">ambitions</a> to improve education through increased choice are funded in the budget, most prominently £320m to create an additional 110 new <a href="https://www.gov.uk/types-of-school/free-schools">free schools</a>. Some of these schools will be sponsored by <a href="https://theconversation.com/what-business-do-universities-have-in-academy-schools-50805">universities</a> and, more controversially, many will be allowed to select pupils based on attainment. </p>
<p>Disadvantaged pupils will be offered free transport to these newly selective free schools. But <a href="http://www.telegraph.co.uk/business/2016/08/30/why-grammar-schools-are-not-the-answer-to-our-economic-and-socia/">critics</a> will still claim grammar schools are <a href="https://www.theguardian.com/commentisfree/2016/sep/09/grammar-schools-education-selection-divisive-ineffective">socially divisive</a> and are contrary to the prime minister’s goal of making “<a href="https://www.gov.uk/government/speeches/britain-the-great-meritocracy-prime-ministers-speech">Britain the world’s great meritocracy</a>”. </p>
<p>To deliver the biggest reform of further education in 70 years, £500m a year from 2019 has been committed to improve technical education. The current complex and vast range of technical qualifications will be streamlined into <a href="https://www.gov.uk/government/news/technical-education-overhaul-unveiled-by-skills-minister">15 routes</a>, offering students T level vocational qualifications of equal value to A-Levels. The chancellor sees these investments as a way to address the “<a href="https://www.ft.com/content/ac05863e-e304-11e6-9645-c9357a75844a">productivity gap</a>” caused by the UK’s enduring weakness in technical skills.</p>
<p>In higher education, the government will fund 1,000 new PhDs in science, technology, engineering and mathematics. The budget also <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/597467/spring_budget_2017_web.pdf">confirmed</a> the terms of doctoral loans of up to £25,000 each for doctoral study, and maintenance loans for part-time undergraduates.</p>
<h2>Welfare</h2>
<p><em>Donald Hirsch, Director, Centre for Research in Social Policy, Loughborough University</em></p>
<p>Cuts in welfare were at the heart of George Osborne’s agenda coming into the present parliament in 2015. Two years later, not a single new measure affecting benefits was announced in this budget. Any new welfare savings have been formally ruled out in this parliament, with the <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/597467/spring_budget_2017_web.pdf">proviso</a> that if spending breaks a new cap, further cuts will be made after 2021.</p>
<p>Yet if you think this represents a pause in welfare cuts, think again. Those <a href="https://www.gov.uk/government/news/summer-budget-2015-key-announcements">announced by Osborne</a> continue to feed through. From April, every new family on low earnings or out of work will see the introduction of cuts in tax credits or Universal Credit of £10.45 per week. In larger families with more than two children, there will also be a cut in child tax credit of £53.30 per week for each child after the second one. And for all working-age people getting benefits or credits, Osborne’s freeze in their level of support continues, allowing the real value of what they receive to be eroded by inflation, forecast to be a cumulative 9% over the next four years. </p>
<p>For low-income households, all this represents a now familiar trend in living standards. The <a href="http://budgetresponsibility.org.uk/efo/economic-fiscal-outlook-march-2017/">Office for Budget Responsibility’s new forecasts</a> are significantly gloomier than in 2015. The graph below is the result: steady improvement in the value of pensions, stagnant real earnings and falling real benefits – affecting millions of families both in and out of work who rely on declining state help.</p>
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<p class="fine-print"><em><span>Michael Kitson has received funding from BIS, HEFCE, EPSRC, ESRC, AHRC, NERC and the MRC.</span></em></p><p class="fine-print"><em><span>Andrew Gunn receives funding from Worldwide Universities Network, the British Council (administering the Newton Fund), the UK Higher Education Academy, the United Kingdom Political Studies Association, the New Zealand Political Studies Association and the UK Quality Assurance Agency. Andrew Gunn concurrently holds visiting academic positions internationally.</span></em></p><p class="fine-print"><em><span>Catherine Needham receives funding from the Department of Health Policy Research Programme for research into social care markets. She is a member of the Labour Party. </span></em></p><p class="fine-print"><em><span>Donald Hirsch works for the Centre for Research in Social Policy which receives funding from the Joseph Rowntree Foundation, Child Poverty Action Group and Trust for London to carry out analysis on low income, including the effects of tax and benefits policies. Donald Hirsch is a member of the Labour Party. </span></em></p><p class="fine-print"><em><span>Geraint Johnes is Research Director of the Work Foundation.</span></em></p><p class="fine-print"><em><span>Kevin Farnsworth is on the executive board of the Social Policy Association.</span></em></p><p class="fine-print"><em><span>The Oxford University Centre for Business Taxation receives donations from several large UK businesses listed on its website. It also receives research grants for specific projects, including from the Economic and Social Research Council, the Leverhulme Trust and the Nuffield Foundation. The Centre provides analysis independent of government, political party or any other vested interest. Further details are given on its website. Michael Devereux is also Research Director of the European Tax Policy Forum (ETPF), which commissions independent academic research on issues in business taxation.</span></em></p><p class="fine-print"><em><span>Ian Greenwood, Jonquil Lowe, and Simon Wren-Lewis do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Philip Hammond delivers his last Spring Budget on the state of the UK economy. Our panel of experts dissect what it says.Michael Kitson, University Senior Lecturer in International Macroeconomics, Cambridge Judge Business SchoolAndrew Gunn, Researcher in Higher Education Policy, University of LeedsCatherine Needham, Reader in Public Policy and Public Management, University of BirminghamDonald Hirsch, Professor of Social Policy, Loughborough UniversityGeraint Johnes, Professor of Economics, Lancaster UniversityIan Greenwood, Associate Professor in Industrial Relations and Human Resource Management, University of LeedsJonquil Lowe, Senior Lecturer in Economics and Personal Finance, The Open UniversityKevin Farnsworth, Reader in International Social Policy, University of YorkMichael Devereux, Professor of Business Taxation, University of OxfordSimon Wren-Lewis, Professor of Economics, and Fellow of Merton College, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/742202017-03-08T14:02:09Z2017-03-08T14:02:09ZUK budget 2017: why upcoming Brexit uncertainty will put bright economic outlook to the test<p>Philip Hammond has <a href="https://www.gov.uk/government/publications/spring-budget-2017-documents/spring-budget-2017">delivered his first budget</a> since taking over the role of chancellor of the exchequer after the UK’s Brexit vote <a href="https://theconversation.com/the-challenges-ahead-for-britains-new-chancellor-philip-hammond-62516">put paid to his predecessor</a>, George Osborne. He has unveiled a brighter outlook for economic growth, with an upgraded forecast for growth in 2017 <a href="http://cdn.budgetresponsibility.org.uk/March2017EFO-231.pdf">from the Office for Budget Responsibility</a>. He spoke of job creation and wage growth. And, with public finances in better shape than expected, he was also able to report lower borrowing forecasts than in his Autumn Statement.</p>
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<p>But recent history shows us why we should not be so confident about all these healthy forecasts. A look at the recent history of economic forecasting makes the upgraded expectations of 2% growth in 2017 questionable. Then there’s the fact that Brexit hasn’t happened yet. With Article 50 soon to be triggered, the uncertainty that harms economies the most will only get worse in the months to come. </p>
<h2>The problem with forecasts</h2>
<p>Deriving forecasts about the state of the UK economy and public finances is a huge challenge – in general – but especially now that we do not know how the UK’s relationship with Europe will shape up following Brexit. Indeed, the ancient Greek scientist <a href="http://www.philosophers.co.uk/thales-of-miletus.html">Thales of Miletus</a> was one of the first experts to (implicitly) recognise the challenges of forecasting by noting that “the past is certain, the future obscure”. </p>
<p>Reflecting the state of economic forecasting, the Bank of England’s interest rate setter Jan Vlieghe <a href="https://www.theguardian.com/business/2017/feb/21/we-will-miss-the-next-financial-crisis-predicts-bank-of-england">recently informed MPs</a>: “We are probably not going to forecast the next financial crisis, nor the next recession. Models are just not that good.” </p>
<p>As astonishing as this statement might sound, Vlieghe knows exactly what he is talking about. Figure 1 shows the inability of policymakers (the Bank of England’s in this case) to forecast GDP growth two years into the future. </p>
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<p>As the graph shows, policymakers’ ability to predict UK GDP growth has been rather poor. This can be seen in the way the forecast moves in the opposite direction to the actual outcome.</p>
<p>Figure 1 makes two further worrying readings. First, UK policymakers have been overconfident in their predictions. The Bank of England has, on average, over-predicted annual GDP growth by a massive 1.52% over the past nine years. Second – and perhaps much more worryingly – the Bank’s officials (and many other economists) completely missed the 2008-09 recession.</p>
<p>So what this tells us is that models are not good – at all – when they are needed the most. If this is indeed the case, what is the purpose of going through the somewhat futile exercise of presenting budget forecasts three to five (or even more) years into the future? Was this train of thought going through Phillip Hammond’s mind <a href="https://www.gov.uk/government/news/spring-budget-2017-date-confirmed">when he announced</a> that there will only be one, rather than two major budget statements a year?</p>
<h2>Revising the estimates</h2>
<p>Irrespective of what Hammond’s thinking might have been, the health of the UK public finances critically depends on the country’s economic performance. This is hard to pin down. Indeed, provisional (or real-time) published GDP data are often revised quite dramatically down the line. This is more the case in periods of increasing uncertainty – such as the recent financial crisis and (arguably) the present volatile economic climate following the recent Brexit vote. </p>
<p>Figure 2 plots together provisional and revised estimates of annual GDP growth in the UK. The revised estimates reflect the latest belief of how the economy has performed based on the most recent information. </p>
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<p>Although the correlation between provisional and revised GDP growth is quite high, a closer look at the data reveals the following:</p>
<p>1) During the 2008-2009 financial crisis, GDP fell earlier and more sharply than policymakers thought at the time. </p>
<p>2) Since 2015, provisional GDP growth data seems to be sending the rather misleading signal that the economy is doing better than it actually is.</p>
<p>This all has important implications for the UK’s public finances. Policymakers use data available in real time to produce forecasts about GDP growth and public finances. These forecasts should always be taken with a pinch of salt because real-time data (which are subject to potentially large revisions) are used as inputs in any forecasting model. To make things worse, forecasts critically depend on the underlying forecasting model, which is unlikely to adequately capture all the time-varying, evolving features of what we want to forecast. </p>
<h2>The challenge of uncertainty</h2>
<p>Even if we were to naively assume that provisional data remain unrevised and that we have an accurate forecasting model, economic uncertainty itself will challenge the economy. As Figure 3 shows, economic uncertainty takes its toll on annual investment growth, which in turn limits economic growth.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/159960/original/image-20170308-24192-g9xm5t.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/159960/original/image-20170308-24192-g9xm5t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/159960/original/image-20170308-24192-g9xm5t.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=339&fit=crop&dpr=1 600w, https://images.theconversation.com/files/159960/original/image-20170308-24192-g9xm5t.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=339&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/159960/original/image-20170308-24192-g9xm5t.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=339&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/159960/original/image-20170308-24192-g9xm5t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=426&fit=crop&dpr=1 754w, https://images.theconversation.com/files/159960/original/image-20170308-24192-g9xm5t.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=426&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/159960/original/image-20170308-24192-g9xm5t.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=426&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The inverse relationship between UK economic uncertainty and investment growth, 1950-2016.</span>
<span class="attribution"><span class="source">Estimates of the authors using ONS data. Economic uncertainty is measured by the 10-year rolling volatility of UK's long-term interest rate</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>To keep buying UK debt, international investors will require a higher yield on UK bonds. This yield will also experience further ups and some downs as the UK goes through a potentially messy Brexit divorce. With economic uncertainty on the rise, UK investment will slow down. This will bring with it job losses and a reduction in public finances because of lower tax receipts and rising unemployment benefits.</p>
<p>The chancellor will no doubt be hoping that his plans to lower the UK’s corporate tax rate to 19% in 2017 and 17% in 2020 will keep businesses happy. But the UK’s existing corporate tax rate of 20% was already much lower than the <a href="https://stats.oecd.org/index.aspx?DataSetCode=Table_II1">24% average for 34 OECD countries</a>. It might be helpful for existing businesses and may even attract additional ones. But it will not be enough to counteract Brexit uncertainty. Business would definitely prefer assurances about a smooth divorce today rather than lower taxes in the future.</p><img src="https://counter.theconversation.com/content/74220/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>In 2012, Costas Milas was the principal recipient of a Bank of England Research Donations Committee Grant (bid for £5,604). Title of the project: “Liquidity and output growth in the UK”. Duration of the project: 5 months.</span></em></p><p class="fine-print"><em><span>From October 2013 to October 2016, I received an Economic and Social Research Council (ESRC) doctoral scholarship award.</span></em></p>Recent history shows us why we should take the latest healthy forecasts with a pinch of salt.Costas Milas, Professor of Finance, University of LiverpoolMike Ellington, Research Associate in Finance, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.