From the TUC

National Insurance holiday fails – just as predicted

31 Jul 2011, by in Economics

Figures released today by the Labour Party show that the government’s National Insurance Contributions ‘holiday‘ has been a damp squib. The scheme was supposed to help 400,000 new businesses and create 800,000 new jobs in worse-off regions; the results so far: 5,137 firms have been helped to create just over 10,000 jobs. Of the £940 million set aside for the scheme, the government has so far needed to spend … £10.3 million.

Now, it’s not good form to shout “told you so”, but ……this comes as no surprise. Before the general election, when it became clear that this was going to be an important element of Conservative economic policy, we argued that it “isn’t actually evil, it’s just that it is too small for it to make much difference.” It’s a position we’ve argued again, after it was announced in the June 2010 Budget, when it began operating and when the first statistics were published.

The holiday lets new small businesses in regions outside the South East off the first year’s employer National Insurance Contributions for their first ten employees. The idea behind it is that one reason we face high unemployment is that employers are put off hiring by costs like NICs.

The most important problem with the thinking behind this policy is that we are in a classic Keynesian recession, where the most important problem is the lack of demand, not structural reasons. But there’s specific reasons to doubt the effectiveness of this policy. As we’ve pointed out before, the last Tory government introduced a very similar policy – it too was a flop and research later found that it had the same problems as the current incarnation of not being noticed by employers.

The important point about this policy – and the reason why Ed Balls has been right to sneer at it – isn’t so much that it’s doing any harm. It has done some good. It’s just that, measured against the scale of the damage being inflicted by the cuts, it’s nowhere near enough to bring down the ratio of more than five unemployed people for every job vacancy.