From the TUC

Would a tax holiday for employers cut unemployment?

02 Feb 2010, by in Economics

One of the Opposition’s key job creation policies is a National Insurance ‘holiday’ for new businesses; they claim that it would create tens of thousands of jobs. But we’ve been here before, last time there was a Conservative government, and it only managed to create just over 2,000 jobs.

At last year’s Conservative conference George Osborne announced that any new business started in the first two years of a Conservative Government would not have to pay employer’s National Insurance Contributions on the first ten employees it hired during its first year. Predicting that it would create 60,000 jobs over two years, he boasted, “This is just another example of the Conservatives being the party of jobs at a time when Labour are the party of mass unemployment.”

One of the avenues and alleyways of the Major government’s record on employment was a very similar policy, which exempted businesses from employers’ National Insurance Contributions if they recruited someone who had been unemployed for more than 2 years. Known as the “National Insurance Holiday”, Ken Clarke announced it in Budget 1994 and it ran from 1996 to 1999.

Now unlike some policies (such as the pledge to abolish the Future Jobs Fund) the National Insurance Contributions holiday isn’t actually evil, it’s just that it is too small for it to make much difference – and it certainly wouldn’t create 60,000 jobs in two years.

According to DWP evaluations, only a quarter of employers had heard of the 1990s National Insurance Contributions holiday and, of them, only a fifth could remember anything about the scope or benefits of the scheme. Of 1,011 employers interviewed, 65 had recruited someone eligible for the scheme and, of these, only 5 had applied to the scheme.

These reports noted that the scheme was too small to make much difference to large employers, and didn’t offer enough to overcome small employers’ worries that these might be unreliable recruits. It looks as though those employers who did claim weren’t motivated by the scheme, they were simply taking advantage of free money. Admittedly, the employers in the 1998 study were very positive about the scheme – except for the fact that they had to take on long-term unemployed people to qualify!

The policy only cost about £2 million a year even though the initial expectation was that it would cost £50m. Low take-up meant this figure had to be revised downwards repeatedly – originally planned to get 130,000 long-term unemployed people off the dole it had only been paid out in respect of 2,312 people by January 1997.

A NIC holiday is a weak substitute for demand-side policies like the Future Jobs Fund because it does nothing to address the major weakness during a recession: the absence of effective demand. It is, however, a useful reminder of a harsher recession when, for year after year, the government’s policy response was merely cosmetic. As a minor element of a barrage of positive policies, there might be a case for this holiday; as one of the major features of the response, it just won’t do.