Government also recognises that the best route out of unemployment for some young people will be starting up in business, but that it can be difficult to obtain the skills and capital required. Building on the support already availible, including the New Enterprise Allowance, later this year the Government will pilot the best way to introduce a programme of enterprise loans to help young people set up and grow their own business.

Great. A pilot scheme with an unspecified number of places (from which, read ‘it’s very small’) to enable young unemployed people to take on loans which, if their businesses fail, will leave them with additional debts to be repaid through their JSA. Meanwhile, more than one million young people continue to look for jobs, the total amount of support available via the Youth Contract remains 26 per cent less per year than was previously provided and companies get another £800 million off their tax bills.

we’ll be getting five times more money each and every year from the wealthiest in our society

Is this true?

The claim appears to be based on the premise that the 50p tax rate only has potential to raise up to £100 million a year. It is scheduled to be cut in 2013-14. In that year, new taxes on the best off include £65 million from a crackdown in stamp duty avoidance and £180 million from the 7 per cent stamp duty rate. That appears to be 2.5 times more.

But this isn’t the end of the story, as it’s far from clear that those affected by new measures are the same as those who are currently paying the 50p tax rate. Analysis as to the impacts for this group is summed up the Budget’s asssessment of the household impacts of the change [my emphasis]:

There are a number of measures announced at this Budget that will principally affect this group but cannot be modelled in Charts B.1 to B.4. Taken together, it is estimated that the reduction in the additional rate of income tax to 45 per cent, the 25 per cent cap on income tax reliefs above £50,000 and the increase in stamp duty rates for high value properties will result in an expected average contribution to the Exchequer from those with incomes of above £150,000 of an additional £1,300 a year

The basis of these estimates are unclear.

But, regardless of what you think of their quality, the entire argument rests on the 50p tax rate only providing a net return of £80 million in 2013-14. Divided by 300,000 people, that gives a net forecast cost of the 50p tax of around £267 each, five times less than the estimated £1,300.

However, this estimate also rests upon the assumptions made in HMRC’s report, most notably that the total revenue the tax has potential to raise is around £3 billion, and that £2.9 billion of this is inevitably lost to ‘behavioural impacts’ (which, HMRC acknowledge, include huge amounts of income shifting and also ‘avoidance and evasion’).

Without getting into the technicalities of the report (on which more on this blog tomorrow) imagine that even half of the assumed maximum revenue of £3 billion could be recouped. That would mean that the net average cost per taxpayer in the 50p rate bracket was £5,000. This is four times more than this group are estimated (by unpublished data) to end up paying under the new system.

It’s bold to claim the richest are now going to be paying five times more – but the claim seems to be built on very shaky ground. Whether it stacks up as the public debate continues remains to be seen.

Importantly, they also conclude that ‘the net effect on real household disposable income is likely to be small, and the effect on consumption will depend on the marginal propensities to consume of the winnder and losers’. Given the OBR already recognise the larger economic benefits of boosting the incomes of those are the worst off, and that the Treasury’s own distributional assessment shows that this group are (when the top decile is excluded) the biggest losers of the Budget, the OBR’s careful words could be seen to imply that today’s measures are not well targeted for growth.

How might this be achieved?

Firstly, the government needs to reconsider its approach to deficit reduction. With the economy facing an unprecedented programme of spending cuts, a large majority of which are yet to be implemented (IFS analysis has shown that by the end of 2011–12 only 6% of the planned cuts to public service spending will have taken place) reduced government spending is set to have an ongoing negative impact on growth. 270,000 public sector workers have already lost their jobs, millions more have had their pay frozen and job insecurity is rife. Across the economy, unemployment remains over one million higher than was the case before the recession. Tax credit and benefit cuts, combined with the VAT rise, have reduced household incomes and there has been no scope for the Government to provide the stimulus that could help offset weak demand (a result of international commodity prices driving up inflation, global uncertainties and also homegrown problems).  The impact: disappointing growth over 2011 which in turn has further depressed business and consumer confidence.

A growing economy, with bright prospects for future demand, is clearly far more conducive to boosting investment than a country facing years of economic stagnation – and it’s within the Government’s scope to review its approach to deficit reduction as a means to secure a stronger economy, increase confidence and make the investment surge more likely.

What else could make a difference?

Recognising the futility of corporation tax cuts would be a good start. These cuts are set to cost the Treasury over £1 billion a year by 2015-16, but with corporate cash piles already at unprecedented levels (as Richard shows in our Economic Report, corporate Britain is currently sitting on reserves equivalent to 50 per cent of GDP – worth over £700 billion) providing further tax breaks to companies who are flush with cash seems more likely to boost their profits than their investment intentions.

On the other hand increasing capital allowances looks like it could be a smart move – as our Budget Submission (and many others, including long-term advocates of such a policy at the EEF) recognises. Why give tax breaks to businesses that just want higher profits when they could be targeted at those that want to invest in our economic future.

Government investment is also facing steep reductions – with public investment set to fall by 46% by 2015.  With these reductions likely to be a further drag on growth, and with targeted Government investment having scope to significantly boost our longer-term economic prospects, they appear particularly misguided.

Measures to boost bank lending, particularly for small businesses, also look like a no-brainer. In his recent TUC report, Banking after Vickers, Duncan set out the evidence which strongly suggests that availability of finance is a key issue limiting UK investment levels, making the case for significant banking reform. Detailed work will be needed to consider how comprehensive changes to make the UK’s banking infrastructure increase its lending on non-financial sector firms can be achieved, but with last year’s Project Merlin targets not leading to any significant increase in net lending, an obvious place to start is a stronger lending agreement with the banks. Credit easing, particularly the Business Finance Partnership, could also have some impact – although it will be impossible to tell until more details are available.

In the medium-term the case for a state investment bank, which can channel private sector funds into areas of strategic investment, couldn’t be stronger. The international evidence shows that there is a role for such a public body in helping ensure that credit flows to where it is needed and in  ensuring that growth is better ‘balanced’. Such an organisation doesn’t have to take years to set up – the Government is already in the process of setting up a green investment bank. Providing it with borrowing powers from when it starts its operations, which is still scheduled to be later this year, would significantly increase its potential to help tackle the investment shortfall.

And far wider reforms of our corporate governance framework also have a role to play. The TUC has long been concerned that aspects of the UK’s corporate governance system, in particular the relationship between companies and investors, can drive economic short-termism, hampering long-term corporate development as well as long-term investor returns. Changes including amending directors duties to ensure they are charged with promoting the long-term success of the company, rather than prioritising shareholders’ interests as at present, and restricting corporate voting and engagement rights to those with a minimum period of share ownership could start to make a real difference in this area.

Of course investment alone isn’t going to drive the recovery. Consumer spending remains around 70% of GDP, and even small improvements here could have significant economic impacts. But household spending growth on par with past upturns looks unlikely – particularly as real wages continue to fall.  This makes our recovery more dependent than in the past on investment playing its part, and Government needs to recognise that such significant change won’t just happen unaided – simply cutting taxes for big business isn’t going to turn our investment culture around.

In contrast, the campaign in favour of retaining this tax rate rests on the belief that there is ample scope for the best off to make a greater contribution without their wealth creating activities being curtailed – and that a fairer and more progressive tax system would bring wider social and economic benefits.

Not surprisingly, I’m in the latter camp. And while of course I recognise that the 50p rate is very far from the only move necessary to achieve a fairer system, and that it may not even be the most important of the many changes we need, the decision that is taken on its retention will provide a significant indication as to where the Government’s views on this important debate lie.

It is not hard to build an evidence based case in favour of retaining the rate.

Firstly, it is not as high as those arguing against it claim. Those in the 50p tax rate already benefit from reliefs and allowances that benefit them to the tune of an average £15,000 a year (more than half of women working in the private sector earn in a year). And, although it shouldn’t need pointing out, the 50p rate is only payable on income above £150,000. So the actual effective tax rate of most of those who pay it is significantly below 50%. As Richard Murphy has shown in this comprehensive TUC report, a person with taxable earnings of, for example, £160,000 has an overall income tax rate of 36% whilst a person with taxable earnings of £1 million pays 47.8% of their income in tax.

Particularly given this, it’s hard to see how it can be significantly reducing the amount of effort people are putting in. As I have previously shown, millions of lower paid workers go to work for far less pay as well as losing a far higher proportion of their income as they move from benefits into work. And as Ian Mulherin of the SMF has pointed out, the net income per hour of work for the very top paid is far higher than these workers would have received ten years ago for equivalent hours and effort (over the 14 years to 2010 the incomes of those in the top 1 per cent rose by 56 per cent, more than twice the speed of those on median incomes and clearly far faster than inflation).

So if the 50p tax does fail to raise significant revenues, there is simply no evidence that this will be a result of rich people deciding they can’t be bothered to work hard.

It also won’t be because they have left the country. Again, as Richard expertly showed in our recent report, 59% of those likely to pay the 50p tax rate are employees. The only way they could move abroad would be if their employers all left the country too.  Another 21% of those in the 50% bracket are self-employed, mostly in professions where relocating a career is difficult: a knowledge of regulation (whether it be in law, accountancy or another field) or a license to practice (e.g. in medicine) is very often the basis on which these people can make such high levels of income – moving overseas while retaining their jobs isn’t an option. And even some of those supposedly living on investment income, making up almost 17% of the 50p rate taxpayers, may not be as mobile as the description suggests: many will be receiving that income in the form of dividends from their own companies that they manage in the UK and others will have family ties that make moving overseas unattractive.

The 50p rate may or may not be found to raise money – but if it doesn’t this will still leave us far from an endorsement for the view that we can never have a fairer tax system or that a 50p rate can never work. Leaving arguments about how the impact of the tax is measured aside (and the TUC will be looking carefully at HMRC’s report to understand the assumptions they may or may not have made with respect to the tax’s revenue raising potential) Government data shows that in theory there is scope for the rate to raise more than the initially estimated £3 billion a year. If this doesn’t happen, it will be because there are fewer taxpayers in the bracket than HMRC originally anticipated, or because income has been taken early, deferred (for top tips on how, helpful advice is provided by Freshfields), paid into personal service companies (until such time as the tax rate is reduced) or paid in shares and then instantly sold (therefore only incurring capital gains rather than income tax – as per the Mirror’s report on the activities of the rather unbelievably named ‘Rich Ricci’).  So whatever the reasons behind the tax’s estimated impact, lower than expected revenues won’t be because rich people stopped trying.

The very fact that it seems likely some high earners will manage to avoid the rate demonstrates the need for wider tax reform. While a clear indication of the tax’s permanence would likely go some way to increasing the income it raises, others wider measures including a comprehensive anti-avoidance principle and alignment of capital gains and income tax rates would also boost its scope to raise cash. So regardless of what happens with the 50p rate on Wednesday, far wider debates on tax reform will continue. Income inequalities in the UK are reaching levels not seen since the industrial revolution and it is our future economic success as well as our ability to build a fairer society that depends on closing them. A more progressive tax system will play a key part in enabling us to get there – and even the retention of the 50p tax rate would only be a small stop along the way to its achievement.

But it is not just our ability to forecast that is in doubt, it is also the polictical assumptions that such forecasts are often framed by. It is as wrong to conclude that the public of the future will chose privatised health care over a collectively funded service that is free at the point of the delivery as it is to conclude that employment rates (and in particular the labour market participation of women), population growth and productivity will only change in relation to current trends and that income tax revenues will therefore inevitably fall.

Attempting to cover the entirety of this debate was a bit of a stretch in a ten minute panel discussion at 10.30 in the evening, so I thought I’d try and set out something (slightly) more comprehensive here.

Firstly, employment rates can make a real difference. Forthcoming TUC research will show that, even based on the OBR’s demographic forecasts (which, as Paul Mason pointed out at the end of last night’s programme, also shift significantly if we achieve higher population growth through increased migration) the costs of changing demography could be significantly offset by increasing both the employment levels and hours worked by those who are currently under- or unemployed.  For example, if we were to achieve levels of female employment that were close to some of those currently seen by some of our competitors, including Canada and other European states, revenues would clearly rise as social security expenditure fell. So smart thinking about how this could be achieved should start sooner rather than later – as IPPR have recently been highlighting, a stronger childcare offer could more than pay for itself if it provided the scope to significantly boost labour market participation among those caring for children.

Of course we need more than an increase in labour supply if employment is to rise – achieving strong and stable growth will depend on a whole range of factors. Can we reverse our 30 year trend  of low investment? Can corporate Britain start to take a long-term growth perspective? Can our energy intensive industries become the greenest and the most efficient in the world, underpinning an innovative and productive manufacturing sector that fully takes advantage of new global markets? Can we achieve the rebalancing that will reduce our reliance on financial services and create more better jobs? Recent decades have taught us that if the answer is to be yes Government can’t just sit back. We need a state investment bank to channel private sector cash into new technologies and fast growing sectors, a procurement strategy that guarantees every penny of each Government contract is spent on supporting growth (whether that’s through regional targeting, boosting skills or supporting British industry), banks that invest in the real economy not just in financial services and a comprehensive industrial strategy that commits the whole of Government to maximising the strategic support it gives to growth.

Higher growth means more taxes, and rebalancing and higher employment could create a more stable tax base, so it’s pessimistic to assume that revenues will inevitably come under extreme pressure in the years ahead. And while the OBR forecast rightly points out that demographic change and falling oil revenues will put strains on our taxation income in the years ahead, it is clearly beyond the scope of possibility for them to determine both whether higher than expected growth could be achieved and how future Governments will choose to structure the taxation system.  We currently have, even according to HMRC’s arguably low estimate, at tax gap of at least £35 billion a year. Those on the highest incomes of over £150,000 recieve more in tax relief (£15,000) than more than half of women working in the private sector earn in a year, and millionaire bankers who get their bonuses in shares and sell them on pay half the rate of tax that they would do if capital gains and income tax rates were aligned. While very high tax rates would risk negative impacts on economic activity, there is simply no evidence that the UK is anywhere near these levels meaning there is both ample scope for making sure that existing rates are applied more fairly and consistently and for increasing taxes on wealth, which would raise important revenues and create a fairer and more equal society.

Political choices on taxation are being made all the time. This Government has decided to fund corporation tax cuts for big business, despite the fact that corporate cash piles are currently worth around 50% of GDP (over £700 billion) and that business investment fell in the last quarter of last year. Similarly, big decisions are going to have to be made about Andrew Dilnot’s recent report on social care. While a universal social care service free at the point of delivery remains an important long-term aspiration for the UK, the Dilnot proposals would require some people to pay for around the first £35,000 of their care and for any residential boarding costs they incur – who is to say that with the promise of high quality social care and a lower risk of losing all their assets in older age is a proposal that won’t be acceptable to the public as a means to deal with some of the costs of demographic change. There is widespread public recognition of the need to secure enough income to pay for the collective goods provided by the NHS – how can the right possibly claim that the British public of the future will not feel the same way?

Small state conservatives might want us to believe that austerity is the only answer, and that permenant cuts are necessary for our economic and social health. But they are wrong. The sorts of changes that were proposed by some of last night’s Newsnight participants lead us to a bleak and increasingly unequal future that we don’t have to accept. Take further increases in the state pension age (often misleadingly described as increasing the retirement age). To start with such a shift would be massively unfair. Life expectancy in Glasgow City lags Kensington and Chelsea by 10 years, so raising the age at which pensions are paid denies those who are likely to have lived their lives on lower incomes a far higher proportion of their state pension than it does for those from better off backgrounds who will live for longer. In addition, those who have spent their working lives in low paid employment are more likely to be disabled or unemployed by the time they reach their 60s. For this group extending the age at which they can claim their state pension will not change their retirement age, but it will mean that they’ll spend longer on out of work benefits before getting a pension. In contrast, retirement ages for wealthier groups will remain the same – those with private pensions and assets will still be able to choose when they retire.

Importantly, arguing against such a move doesn’t mean denying the impacts of demograhic change, but accepting that there are progressive solutions to dealing with it, that are as credible as those proposed by the right. Imagine a society in which a universal right to flexible working and high quality health and social care services allowed more people to choose to work for longer in jobs where they could make a productive contribution. Where a rebalanced economy meant that more better paid employment was being created, and real action to boost the quality of part-time work meant that it didn’t simply consign most people in these jobs to poverty wages. This could be a world where many people chose to delay their retirement, boosting economic capacity and tax revenues and reducing benefit spending in the process, while those who wanted or needed to could still recieve their state pension at the same point as many do today. Greater taxes on wealth could raise important revenues from the best off, and the economic and social benefits of maintaining universal services could be such that progressive taxation was accepted as a means to fund them. And in a more equal society with higher employment rates our tax base would be far more secure than at present. Utopian? It doesn’t have to be – we have decades to get there. But to do so the political choices that could shape a version of this economic future need to start now.

As Keynes observed in the 1930s (Hat Tip to Duncan Weldon), “we are suffering just now from a bad attack of economic pessimism”. We cannot simply base our analysis of our future prospects on a right-wing idyll of an ever contracting, low tax state full of privatised services where only the best off benefit. Forecasting 30 years into the future is at best an inexact science, and the position we end up in will be influenced by political choices as well as economic realities.  We need to argue for a better and more equal future society with confidence, not accept the proposition of the right that demographics will finally lead us to the end of history.

Why are high earners treated like they have committed a crime and should be punished?

And James Milne of Balmoral Group Holdings, asks:

Sometimes I feel ‘why bother?

Leaving aside the question of whether the lifestyle of someone earning over £150k is comparable with a prison inmate, can it really be claimed that a tax rate of 50 per cent on income earned over £150k is a disincentive to work? The Government certainly doesn’t seem to think so – their much lauded Universal Credit policy will mean that the lowest earners in the UK face keep 24p in the pound as they increase their hours (in technical terms a marginal deduction rate of 76 per cent) a move which will apparently have radical impacts on ‘making work pay’.

This means that for someone on the adult rate of minimum wage, working a 35 hour week, the combined impact of income tax, national insurance and the withdrawal of Universal Credit as they increase their hours of work will mean that for even pound they earn they will lose 76 per cent, leaving them with net weekly additional income of around £51 more than if they weren’t employed (and with a minimum wage of £6.08 an hour and a benefits system that is far from generous their actual net in work income is unlikely to be much above £200 a week).  In contrast, for someone earning a salary of (for example) £160,000 a year for the same number of hours would find themselves losing a net total of 36 per cent of their income in tax (the combined impacts of the different tax rates they pay on their total earned income, and of national insurance), leaving them with weekly earnings of around £1,969.

As James Milne asks, why bother? But the problem with his argument is that despite poverty pay millions of people seem to – including many who presumably work in the businesses owned by the signatories of today’s letter (and I do wonder if they extend their own analysis of work incentives to the pay scales of their own staff).

Note: for more on why the campaign against the 50p tax is overstated my previous blog post is here.

But we are not only concerned with the immediate problems facing young people. Considering youth unemployment over recent decades, our analysis demonstrates both that there was a small rise in youth unemployment before the recession and that this increase was worse for young people who were not in education. And it is not just current policy interventions that the pamplet questions: for years politicians have focused their efforts solely upon the population of the claimant unemployed, but with one in five of all young people not in education or employment we believe that this group are arguably more vulnerable than those who are just in reciept of JSA, a concern that often fragmented policy solutions need to take account of. 

A long period of unemployment can have scarring affects throughout young people’s careers – a lesson we’ve learnt from previous recessions. But put simply the Government is not currently doing enough to support those young people who leave school, college or university without a job. Prioritising effective support to give young people the best possible chance of successfully applying for an existing vacancy, or to enable them to undertake productive and useful activity until the jobs market recovers, is a priority which (as ACEVO (pdf) recently showed) makes both economic and social sense.

But the Youth Contract is worth 26 per cent less per year than the previous Youth Guarantee (which included the Future Jobs Fund), and is largely based upon interventions for which there is no real evidence of effectivness. In the short term our analysis argues that the programme therefore needs to be reshaped, to focus on the introduction of a Job Guarantee (a subsidised minimum wage job, which provides experience of real paid work and a proper reference), improved apprenticeships and funding for a wider volume of support. And of course a Government boost to aggregate demand (and therefore jobs) would do far more for youth unemployment than any micro measures can ever hope to.

But whatever decisions are taken over the next few years, in the medium term a wider range of problems need to be addressed if youth unemployment is to be properly tackled. These include raising levels of educational participation (despite the improvements of the last decade, learning participation rates among 15- to 24-yearolds in the UK are low by European and developed country standards), paying policy concern to young people in low-paid work as well as those who are unemployed (it transpires that 9 per cent of young people not in education and working part-time are doing so because they can’t find full-time work) and reconfiguring services that aim to support  young people so that as they move between work, unemployment and education they don’t fall between service gaps and encounter counterproductive benefit rules. To deal with these issues, our proposals include:

• Recognising our poor levels (when compared to our European neighbours) of educational participation among young people and establishing a government goal that by 2020 the UK’s young people should be as well qualified for jobs as those in any developed country.
• Introducing a new youth credit, which would integrate all financial support available for young people into one payment, building on the strongest elements of both JSA and the educational maintenance allowance (EMA).
• Developing a new youth employment and skills service that would bring together the job-related support provided through Jobcentre Plus with the careers service for those aged under 25. The role of the new service would not be to get people to take any job at all, but to encourage and support all young people to undertake and progress in either/or both learning and work.
• Supporting employers to play a more proactive role by structuring employment patterns to enable young people to combine learning and work and so firms can become better at offering opportunities which combine employment with education.

There is no magic bullet to tackling youth unemployment. But a serious attempt needs to rest both on evidence of what works, and on a proper analysis of those young people who are at greatest risk are. We hope this pamphlet provides some ideas as to how this might become a reality.

How has this happened? ‘Work Experience’ started out with a limited number of places, and was launched as part of the ‘Get Britain Working ‘ programme in early 2011. At that point DWP stated that the aim of the programme was to ‘help maximise the number of young people moving into employment and provide young people with quality work experience’. Initially, placements were only available in 14 areas across the country and were limited to young people aged 18-21. Placements are not technically compulsory, but once a young person has indicated that they want to undertake a work experience placement if they pull out their benefits will be docked.

Reports on the substance of these placements suggest that they are far from the ‘quality work experience’ that the Department purportedly aspires for them to be. No qualitative evaluation of the scheme is currently available, although ACEVO focus groups (pdf) with young participants suggest that several feel ‘exploited’. Employers participating in the scheme face no requirements to provide training, no limits on the number of placements provided per site, do not have to provide a guaranteed job interview at the end of the placement and are not actively monitored to ensure that existing workers are not being denied overtime (or in the worst case scenario being made redundant) as a result of the unpaid work being undertaken.  In addition, reports suggest that the vast majority of placements are in the retail sector – hardly providing a range of experience for young people who are likely to have far more varied employment aspirations.

Early outcome data from this initiative was published in November 2011. It found that after 13 weeks on the programme, 49% of participants were still claiming benefits. But over the same period, the normal rate of departure from JSA for young people was higher, with an average of 47% of young people across the JSA caseload still claiming at this point. If anything this early data suggests the scheme is making it slightly harder for young people to find work, as spending eight hours a day undertaking unpaid work may be making it more difficult for them to focus on applying for jobs in the open labour market. This wouldn’t be surprising, the DWP’s own evaluations of workfare schemes in other countries have found the same effect, also concluding that:

There is little evidence that workfare increases the likelihood of finding work.

But despite these indications that the scheme is not operating as planned, the introduction of the ‘Youth Contract’ saw the number of places available on work experience significantly increase, with the Department now committed to sourcing at least 100,000 placements a year. Whether this will be possible given the increased PR risk for participating employers remains to be seen. Sainsbury’s, TKMaxx and Waterstones have reportedly already pulled out, and as the bad publicity continues is seems inevitable that more will follow.

‘Work Experience’ is not the only source of unpaid work that is now integrated into our welfare to work system. Mandatory Work Activity, a compulsory four week work experience scheme for jobseekers who are meeting the terms of their Jobseekers Agreement (the requirement placed upon JSA claimants to actively look for work and to demonstrate to Jobcentre Advisers that they are undertaking jobsearch and applying for vacancies) but are perceived by advisers ‘not to be doing enough to look for work’, is now also operational. Placements are purportedly of ‘community benefit’.

When this scheme was introduced, the Social Security Advisory Committee (SSAC) (declared interest – I am a member) formally referred the regulations for consultation, and published this report on their likely impacts – which recommended that the programme should not proceed. The Government rejected the Committee’s main conclusions, and noted the Committee’s concerns, including the lack of available information on what type of work the placements would involve, the intensive nature of the placements which was likely to leave those with, for example, childcare responsibilities struggling to participate (and therefore at higher risk of having their benefits stopped), the risk of employers using rolling placements to cover what would otherwise be real (paid)  job vacancies and the lack of checks to prevent this risk. In response to the report the Government agreed to ‘robust monitoring of placements’ covering issues including access to training and placement quality. The Government also stated that the intention of the scheme was that only a ‘small number’ of jobseekers would be referred to it.

The most recent data on this scheme suggests that all is not well. So far just over 24,000 people have been referred, hardly a ‘small’ number. No ‘robust monitoring data’ appears to be available on scheme quality or on placement type, other than a Guardian report that ‘community benefit’ placements are now taking place in the retail sector. No data are available on the outcomes the scheme has led to, including on the number of participants who have found work.  In particular the recent data release didn’t trace the source of these statistics, presumably released directly from a Ministerial office to the press, which suggest that significant numbers of those referred stop claiming. If this is true it’s extremely concerning – it likely means that SSAC’s concern that those facing additional travel expenses or barriers to participation, such as childcare, may drop out of the benefits system as a result of the scheme (either as a result of being sanctioned as they are unable to participate or because they decide they simply can’t meet the terms of the unpaid work requirement) may be being realised.

These are the two most significant sources of unpaid work currently in the system, but there are more. The Work Programme, which most unemployed people are referred to after a year (nine months for young people) allows providers to refer jobseekers to any form of provision they think appropriate, which could in theory involve unlimited unpaid work experience. And for those who are still out of work after the Work Programme has attempted to support them the Community Action Programme for the very long-term unemployed (those out of work for over two years) is currently being piloted and involves unpaid work of up to 26 weeks. In addition, today’s papers suggest that the Work Related Activity that those claiming Employment and Support Allowance (ESA) are required to undertake could shortly be extended to require unlimited unpaid work.

This increasing prevalence of unpaid work is a significant worry, because put simply there is no evidence at all that it will work as a means to increase job outcomes. That’s not to say that proper work experience isn’t beneficial, just that the particular brand currently on offer if falling well short of the mark for many participants. The consensus of expert opinion and academic research is that unpaid work achieves at best very little and at worst makes paid employment for claimants less likely while simultaneously reducing the hours of existing staff and limiting the number of paid vacancies in the jobs market. Requiring unemployed people to work for their benefits may be publicly popular, but as a means to reduce worklessness it’s unlikely to be successful – which will have far wider economic costs in the longer term.

With 6.3 million people across the economy without any or enough work this is a vital debate to start. Our jobs market will not be on the mend until both levels of under-employment and unemployment are on their way back to pre-recession levels, a significant challenge given there are over one million more people out of work than on the eve of the downturn and close to the same number more again (around 800,000) in involuntary part-time employment.  While some work is undoubtedly better than no job at all, moving from full-time to part-time hours (on a most likely lower hourly rate) will prove a significant shock to family budgets. And when people can only find a very few hours of work a week their household incomes will differ very little from those of people who have no work at all.

So when Ministers claim there are plenty of jobs to go around they are simply wrong. With the ratio of jobs to unemployed jobseekers 1:5.8, with only 439,000 vacancies available at any one time (down around 240,000 from the start of the downturn) the level of competition in the labour market, particularly when the larger group of economically inactive and under-employed workers is considered, is clearly fierce. That’s why stories of hundreds of people applying for handfuls of jobs are now common place.

There have been a few minor queries around our analysis. Our approximation of the American U6 measure, as Full Fact have pointed out, included both discouraged and economically inactive workers who would like a job as seperate groups. Technically a few of those in the former group (around 68,000) will also show up in the latter – not all discouraged workers will have given up all hope of finding employment.  On the other hand, we don’t have a measure for under employment of part-time workers who don’t want full-time work (ONS doesn’t regularly produce such a series). But it is likely that among the 6.4 million part-time workers who tell the surveys that they don’t want a full-time job a substantial number will be seeking to increase their hours (not least the 200,000 couple households who are set to be hit by the Government’s requirement that they find more paid hours to qualify for Working Tax Credit) although not by as much as a full-time position would require.

So there is no perfect means to assess under employment using the ONS’s existing labour market measures, which is perhaps why the ING/Sky assessment of 6.9 million, or over one in five working people, is several hundred thousand higher than our analysis. But what our study does show is that a true assessment of the state of the UK’s jobs market requires far wider measures of labour market weakeness to be taken into account than simply the headline unemployment rate, and that the jobs challenge we face is even more significant than many may have previously realised.

We hope the debate on the scale of under-employment in the UK continues – and over the weeks ahead will be hosting a number of posts from authors with an interest in the subject.  We’re glad we’ve been able to make a contribution to boosting public awareness of the state of the labour market, and to highlighting the vital importance of politicians across the spectrum treating job creation as a policy priority.

The answer is that the package is in fact meaner than it first appears, apparently comprising a weekly payment that is slightly less than JSA for 13  weeks (£65) and which falls to £33 a week for the remaining 13 weeks, leaving someone on the scheme who isn’t successfully making any cash with less than they would have had on benefits. But even more worrying is the option that all participants will have the opportunity to take out a loan of up to £1,000 repayable at a 10 per cent interest rate to support their businesses.

Many loans providers appear to be private businesses, who seem likely to seek to recover payments from recipients should their businesses fail. Given that rates of small business start up failure are high (this BBC report suggests that 4 out of 5 new businesses fail), and are likely to be higher in more deprived areas and when they are headed by people without previous experience of self-employment, this suggests that a significant number of recipients may find their enterprises do not succeed and that they return to unemployment. The impact? A loan of £1,000 gaining 10 per cent interest annually that will have to be repaid out of JSA of £67.50 a week.

Given this scheme will apparently be made available to 40,000 people nationally, of which it is anticipated 30,000 will take out a loan,  this could mean that around a minimum of 15,000 unemployed people (assuming a 50 per cent rate of business failure before significant profits are generated) find themselves with a £1,000 debt to repay, courtesy of the DWP. No statistics on take up rates provide any details on the number of claimants who have taken out loans, or on rates of business success – I wonder when they will become available.

This view is an insult to the 2.68 million people who are unemployed and looking for work. There are 463,000 jobs available in the economy (down 18,000 on last year and down 34% on pre-recession levels).* There are over one million more unemployed people looking for employment than there were four years ago. The ratio of unemployed people to jobs currently 5.8. Factor in the far from perfect match between the geographical locations (see Anjum’s regular round up of the areas of the UK where there are as many as 32 claimants for every available post) and skills profiles of jobs and claimants, and that family committments mean the hours of work offered won’t fit with the caring responsibilities of every unemployed worker, and the picture becomes even bleaker.  It is simply not feasible for everyone who is out of work to find employment.

Those who are unemployed are not ‘failing to do the right thing’. They are, in the main, desperately seeking employment (and any who are not will quickly be denied benefits under current, extremely strict, JSA rules). The benefit cap (which, incidentally, will also hit those who aren’t even required under current benefit rules to be actively seeking employment) will do nothing to help them, and where people have to move from jobs rich to more deprived areas it is likely to make their efforts even harder. To moralise about unemployment when the labour market is in the weakest position is has been for 17 years is simply offensive.

*Of course the vacancy level is net, but so is the unemployment total, so while there will, of course, be more vacancies over the course of every month than the net figure suggests, this is also true of the number of unemployed people.

The main reason for this outburst of optimism turns out to be that ‘everyone feels the pain, rather than just certain sections of the community as in the Eighties and Nineties’. Apparently the ‘democratic nature’ of the recent downturn, combined with various pieces of recent ‘good news’, mean that it’s time to stop worrying. Unfortunately, this assessment doesn’t stack up.

Firstly, it simply isn’t the case that the downturn is affecting all of us equally. Those in the lowest paid work are always more likely than everyone else to lose their jobs, and during an economic slowdown their risk increases more quickly than is the case for middle and higher paid workers.  And those in the lowest paid work do not only have the highest risk of unemployment, they also face the highest risk of spending more than six months out of work and ending up in long-term unemployment.

Different areas of the UK are also feeling differential amounts of pain. The downturn has hit economically weaker areas of the country far more than those which were already better off – hence current unemployment rates of 12 per cent in the North East (with a 2.3 point annual increase) compared 6.4 per cent in the South East (a far lower increase of 0.7 points). With public sector job losses set to hit those areas which already have higher rates of unemployment, regional inequalities look set to become worse not better.

There’s also the question of who is hardest hit by the current living standards squeeze. It’s absolutely right that real wages are falling for the many rather than the few, and have been for over two years. But with the poorest fifth of households having far higher inflation rates than those in higher income deciles, and those who are underemployed in temporary or shift work more likely to be lower paid (and facing both the impacts of falling wages and not enough work), again those on lower incomes are worst affected. And of course, rising inflation costs will inevitably form a higher proportion of the income of those with lower incomes (a £20 rise in basic weekly food costs will by definition form 20 per cent of the weekly budget of someone living on £100 a week, but only 4 per cent of the weekly costs of someone with £500 a week to spend).

In addition, ongoing falls in household incomes are accompanied and exacerbated by the steepest programme of public spending reductions since WW2 – something Laws neglected to include in his article. Extensive IFS analysis has regularly shown that the distributional impacts of government’s programme of spending reductions are anything but fair.  As the TUC showed at the time of the Comprehensive Spending Review, the poorest are being affected by cuts 15 times more than higher household incomes.

The second part of the Laws case for optimism rests on various pieces of supposed good economic news. But again the analysis is suspect.

Laws is right that falling inflation will help squeezed household budgets, but if earnings growth continues to fall then real wages will remain negative, ndeed the OBR say that they are set to fall throughout 2012. And when benefit and tax credit cuts are built in, the prospects for household incomes over the next year aren’t looking great. The rise in the tax tax-free personal allowance will provide an additional £120 a year for anyone on basic rate tax, but this is an amount that pales into insignificance compared to the cuts in household incomes many will be facing (for example, a duel earner household on an annual income of £26,000 paying for part-time childcare is set to lose over £1,500 in tax credit cuts alone by April 2012).

We also hear that ‘the Government has now delivered most of its bad news’, with the continued impact of that news, and the additional, steeper and as yet unspecified spending cuts that the Chancellor has factored in for after the next election easily glossed over – and that the low pound is a cause for celebration. Of course it’s better to have lower rates, which has had some benefit for exports as well as homeowners (at least those not in negative equity and on variable rates), but with domestic consumption (which makes a far greater economic contribution) continuing to fall through the floor and growth projections worsening, it’s hard to see how it can bring much cheer.

The Daily Mail often produces factually inaccurate analysis. So perhaps it’s no surprise that an ex-Cabinet Minister would choose to use the paper to promote a misleading picture of the state of the economy. But however warm his words, for many they simply won’t ring true.

On the basis of today’s performance it appears that the Prime Minister believes the excesses of corporate Britain can be solved by less regulation, and a Cooperatives bill.  Apart from that we had some dubious sounding statistics, lots of bland assertions and an attempt to argue simultaneously for unconstrained free markets and measures to keep the unacceptable extravagances of turbo-charged capitalism in check.

But this is an impossible position, leading to clear contradictions in Cameron’s analysis.

He wants to be for job creation and growth, while cutting spending on the very programmes that help those facing unemployment and presiding over an economic policy which implicitly accepts that unemployment is a price worth paying.  He argues for ‘corporate social responsibility and environmental responsibility’ while his Government’s policies have led to job losses in green industries and a growing green lobby backlash. And he criticises the previous Government’s ‘turbo-capitalism [which turned] a blind eye to corporate excess’ while refusing to support effective policies on limiting executive pay, and failing to advocate for industrial policies which have any chance of rebalancing the economy.

The Prime Minister sidestepped defining what an era of truly ‘responsible capitalism’ would look like. But the reality is that with his policy prescriptions it’s likely to be a more unequal and less successful version of what we have at the moment.  A world of  ‘less but better regulation’ facilitating markets which are ‘fair as well as free’ where ‘the real solution is more enterprise, competition and innovation’ will simply not solve the problems that most people refer to when they discuss growing discontent with British capitalism.

Simultaneously being for both the free market approach of the last 30 years and a ‘responsible capitalism’ does not add up. Small shifts of rhetoric and policy won’t  solve the problems of falling wages, excessive rewards at the top, poor quality jobs, growing labour force insecurity and employment polarisation that the public care about.

A major ratings agency has now joined the side of those who say fiscal austerity, as the central plank of the response to the eurozone crisis, is doing more harm than good

She concludes that not one recent downgrade has been due to the ratings agency thinking the government in question was not sufficiently committed to deficit reduction, with fears of external contagion and poor future economic growth forming the basis for their decisions. 

This analysis leads Standard and Poors to conclude that:

a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues

The austerity debate will continue – but the number calling for a priority to be placed on jobs and growth is growing.

But the challenge is finding meaningful policy solutions which will improve this situation – both in the short and longer terms.   Halting the stagnation in living standards is no easy feat. And at a time when upwards of 700,000 more public sector jobs are to be lost (jobs where the only occupational groups who are paid more than in the private sector are those where workers earn the lowest incomes) with conditions reduced for those who remain, where moderately paid manufacturing jobs have been falling consistently since the 1980s (and despite the improved performance of exports in the middle of last year the jobs fall has continued, with employment levels down 25,000 annually to September 2011), where the recession sped up the increasing polarisation (pdf) of well and poorly paid work and where unemployment is currently pushing 8.3 per cent, it will be particularly difficult.

A strategy that successfully aims to create better jobs will need (to name a few) to change the sectoral balance of our economy, offset the tendency towards job polarisation (a result at least in part of globalisation and technological change) that the economy may now contain, lower the differentials between top and lower pay across the private sector and incentivise businesses to boost investment in their workforces, most likely at the expense of dividend payments to shareholders. And that’s at the same time as the arguably even more pressing problem of creating enough jobs to bring unemployment down.

Don’t get me wrong – this is exactly the direction I think we need to be taking. Evidence from abroad shows that low-paid sectors need not always be so and that better jobs and wages are possible. But they are not easy to achieve. It takes a combination of a real industrial strategy (backed up by new means of providing finance to growing businesses in strategic sectors and regions), more widespread collective bargaining, a stronger out of work social security settlement, better employment protection at work, far stronger corporate governance, better funded public services (particularly those which enable labour market participation, such as childcare and social care), massive investment in workplace skills and smart incentives for employers to invest (often all funded by a far more progressive taxation regime) to achieve real change.

The reality is that these solutions are politically challenging, inevitably medium to long-term in nature and in large part rest on a significant change in the UK’s social and political culture as well as new policy solutions. A move, for example, to bring the UK towards anything near European levels of employment protection (or indeed taxation) would meet with strong resistance from the employer lobby. Even the seemingly straightforward ask of a state investment bank would take several years to set up, and all of these solutions are mutually reinforced by each other and rest upon a healthy economy that is creating rather than losing jobs. There is simply not a free short-term quick fix that will provide significant immediate relief to large- number of middle and low incomes families.

Of course there is a clear direction of travel for the future which can and should be set out. Long-term solutions all start with short-term changes, and improved workplace rights, a commitment to setting up and funding new systems of state support for industry and moves to reinvigorate contributory social security and to temper of corporate power are all actions that could be taken now. But it would be misleading to pretend that these solutions will provide any immediate living standards boosts.

This matters, particularly in the context of recent ‘black labour’ debate, which could be read to imply that fiscal austerity is compatible with rising living standards if we can achieve wider economic change. It seems absolutely right that we need to reconfigure the way our economy is run if we are to achieve better long-term outcomes for working people, but we also need to be honest about the short-term reality, which is that with deficit reduction based on spending cuts of the speed and scale that the Government have currently set out, short-term falls in living standards are inevitable as tax credit and benefit expenditure to households is cut and little money is available for investing in boosting growth.

So what is the short-term solution? Stronger growth is needed to enable wages to rise more quickly (which a significant immediate stimulus could help to achieve) and a longer-term timescale for deficit reduction would limit the need for cuts to key family benefits (such as Tax Credits) which are adding to the incomes squeeze. Even then,  the outcome would likely be no more than a slow return of middle incomes to relative levels somewhat below the pre-crisis status quo – meaning further spending reconfigurations, changes to taxation and social security boosts may be what are needed for families to see any real change as well as, of course, significant change in the way our economy is managed along the lines set out above. While it may not be ideal that increased tax credit type expenditure is what’s required to immediately raise incomes and reduce inequality, all countries with a fairer distribution of income have more of it than we do and, as Richard has shown, decades of social democracy has failed to disprove the idea that transfer payments play a key role in achieving improved social outcomes.

Whatever decisions political parties make about their spending commitments (which will inevitably be far more constrained than in the past) over the years ahead, it does seem important to be clear about the facts. Dealing with the problem of falling living standards needs, as with most areas of economic policy, short and long-term solutions. There is absolutely a significant agenda of policy change we need to start now if we are to rebuild a fairer economy – and it is important that the policy commitments to achieve this aim match the rhetoric. But it is also vital that the promise of longer-term change is not presented as the solution to today’s living standards falls – an approach which would risk both misleading the public as to the reality of what can be achieved, as well as failing to provide any real and immediate respite to the UK’s increasingly hard pressed households. Whatever your views on Coalition style fiscal austerity, the facts are that it is simply not compatible with short-term increases in living standards – regardless of your longer-term economic plans.

So recently published You Gov polling (commissioned by the Fabian Society and the TUC, and covered in today’s Independent) has sought to look in some more detail at public views on the direction that recent economic policy approaches are taking us in.

The results are interesting. Firstly, perhaps unsurprisingly, a majority are worried about the future. But this isn’t just the next few years. When asked to think about their own financial situation 51 per cent agreed with the statement that ‘I am worried about the future – in ten years time I fear that people like me will be worse off than I am now’. Women were slightly more concerned than men (with 54 per cent and 48 per cent agreeing respectively), older people more than those who are younger and those on lower incomes more than those who are better off. But still, 44 per cent of those in You Gov’s ‘ABC1′ classification did not anticipate that people like themselves would be better off in a decade’s time.

We also asked people about living standards in general, and again 53 per cent agreed that ‘things are getting worse – I fear that future generations will have worse jobs and living standards than mine’. While more of those in lower income brackets agreed than whose who are better off, the difference was smaller than might have been expected (49 per cent of ABC1s agreeing compared to 57 per cent of C2DEs).

These responses indicate public anxiety, no doubt partly attributable to the ongoing economic situation, about life chances of younger people as well as a sense that whatever the future holds it will struggle to lead to improvements in living standards of the sort we have seen in the past. When we consider that over recent decades many on middle incomes did not benefit as much as the growth figures could have led us to expect, concern that things are likely to further worsen is significant. We have no way to tell how much change there has been in the level of worry about the future over the last few years, or how much change a more rosy short-term economic picture could bring to these figures, but such high levels of public worry about the future direction of their own and their families lives should be a major matter for policy concern.

The polling also reveals concerns about the scale of inequality in the UK, with 70 per cent agreeing that ‘the gap between those at the top and everyone else is now too wide and is bad for ordinary people’. This percentage rises to 81 per cent and 82 per cent respectively among Labour and Lib Dem voters, and remains above 50 per cent (53 per cent) for Conservatives. A large number of people, not just those at the very bottom, also think that inequality is affecting them. 44 per cent (41 per cent among those classified as ‘ABC1′ and 47 per cent of those classified as ‘C2DE’) say that the gap between rich and poor is affecting their living standards and that it is not just a problem for the poorest. British Social Attitudes data has shown public concern about inequality for years. But it is interesting in our poll to see how many people believe that inequality is now impacting upon their own lives. 

There are also some signs that, while the public accept that deficit reduction is important (although as other recent polling shows, there is also significant support for a slower timetable that would better support growth) a majority are not in full agreement with the wider decisions the Government are making on economic management. Only 26 per cent believe that businesses have too much red tape to deal with and that companies should have more freedom to hire and fire, while 64 per cent agree that workplace rights are essential and don’t mean fewer jobs. 80 per cent would like to see businesses taking a longer-term approach, even if this means less money is paid out to shareholders, and 70 per cent believe that the government should actively seek to help manufacturing companies.

But the case for progressive policy solutions to the problems of jobs and living standards does not yet seem to have been fully made. Support for state intervention in the economy is relatively low (only 31 per cent agree that the government should play a more active role in supporting the best businesses, while 41 per cent agree that ‘in the past, government intervention has usually ended in tears’) and the sectoral balance of the economy is not a huge matter of public concern: 58 per cent say that it doesn’t matter what we do as long as successful companies make profits. Of particular interest given the recent ‘black labour’ debate, only 48 per cent agree that the government should ‘spend more on transport and infrastructure, even if it means raising taxes or spending less on other services’. Overall, 37 per cent think that before the recession we were heading in the right direction, 31 per cent disagree and 32 per cent don’t know.

Perhaps this is no surprise, as the BSA data shows – with persistent lack of support for progressive taxation and redistribution despite ongoing worries about wealth inequalities – it would be naive to assume majority public support for evidence based solutions to widely held economic concerns. But the high level of ‘don’t know’ responses may also indicate an opportunity for those who want to make the case for a new approach to managing the UK’s economy as the means to address public anxieties and persistently poor economic data.

But it also provides a warning: with public concern about living standards so high, and understanding about the impact that direct government intervention can have for the economy low, this polling would seem to suggest that an appealing electoral strategy will have to find ways to provide short-term boosts to jobs and living standards (rather than, for example, choosing to prioritise medium term growth by funding greater state investment in industry on the back of tax credit cuts) as well as setting a strategy in place for longer-term economic change. As I have recently argued in an article in Fabian Review, key to achieving public support for a new growth agenda is showing that such a policy will make a real difference to people’s lives. Perhaps I should also have added that the medium term nature of many of the changes that progressives believe could lead to economic renewal means that we also need more creative thinking about how shorter-term improvements to jobs and living standards could possibly be achieved in a constrained fiscal environment, as well as focusing on how we can move to both higher and better growth in the longer-term.

2012 will start with economic growth slowing to a near standstill, unemployment rising and inflation still high. The Government are hoping that they can continue to present the alternative as even worse – but with high public anxiety about jobs, living standards and rising inequality this is an increasingly risky approach. Of course we have to recognise the importance of rebalancing the public finances. But economic management is about more than the balance sheet . Even when spending is constrained there are real choices to be made about how available resources are prioritised, and how the proceeds of what growth we have are distributed, as well as how current policy can shape the long-term economic direction of the country. And on this agenda, our polling suggests that there may be public appetite for a more ambitious agenda than the Government is proposing.

Today’s data reveals that over the first year of its operation 3,345 employers have taken advantage of the scheme (1% of the total anticipated number) and that the NICS holiday has been claimed for 12,411 employees (2% of the anticipated number of jobs).

What’s more in the region that currently has the highest unemployment rate (the North East where unemployment is 11.7%) only 587 employers have used the scheme, supporting 571 jobs.  To put this in some context over the same period of time the unemployment level in the NE has risen by 24,000 and the employment level has fallen by 23,000.

Far from “ensuring all parts of our country contribute to a more balanced and sustainable economic future” this scheme has created barely no jobs – as we predicted at the time. But with unemployment now at 2.63 million there is no pleasure in saying we told you so.