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Quack cures won’t stop the angry young taking to the streets

Our youngsters deserve better than the warm words of Osborne’s ideologues, intent on austerity.

Youth unemployment around the world is growing apace and young people are starting to be heard, with hundreds of thousands pouring on to the streets to protest about the seeming unfairness of it all and the lack of jobs. Free markets deliver the most efficient allocation of resources but their distribution may still be unjust.

The activism of the young has provoked an explosion of anger from the American right, including the likes of Rush Limbaugh, who so effusively supported the Tea Party. "These protesters, who are actually few in number, have contributed nothing," he said on his radio show. "They're parasites. They're pure, genuine parasites. Many . . . are bored trust fund kids, obsessed with being something, being somebody. Meaningless lives, they want to matter."

No reverse gear?

Scary stuff, but Limbaugh does have a point. I think the young are protesting because they do want to matter. It isn't their fault that there are no jobs. Youngsters need hope and too many have none, and that may come to haunt us all. As long as the protests remain peaceful, they are likely to have a big impact: governments worldwide are likely to get into trouble with their austerity agendas if the protests are joined by mothers with children and retired people.

Occupy Wall Street, the protest that started all of this, is apparently supported by most New Yorkers, according to a poll this month by Quinnipiac University. Sixty-seven per cent of New York City voters say they agree with the protesters' views; only 23 per cent do not.

In Britain, there is growing opposition to Chancellor George Osborne's refusal to accept the obvious - that his policies are directly responsible for the pain that young people are experiencing. A powerful editorial in the New York Times of 14 October, entitled "Britain's self-inflicted misery", stated that the coalition government's "quack cure" had failed:

Austerity was a deliberate ideological choice . . . It has failed and can be expected to keep failing . . . slashing government spending in an already stalled economy weakens anaemic demand, leading to lost output and lost tax revenues. As revenues fall, deficit reduction requires longer, deeper spending cuts.

Cut too far, too fast, and the result is not a balanced budget but a lost decade of no growth. That could now happen in Britain . . . Austerity is a political ideology masquerading as an economic policy. It rests on a myth, impervious to facts, that portrays all government spending as wasteful and harmful, and unnecessary to the recovery. The real world is a lot more complicated.

It is all so unnecessary. But I have a sense that change is in the air. People are waking up to the reality that growth has stalled and consumers have stopped spending. Bond yields are low because the economy is tanking.

The small growth of private-sector employment has not compensated for the collapse in public-sector employment as predicted by the government. Over the 12 months to June 2011, private-sector employment grew by 264,000, while public-sector employment fell by 240,000. It is worth noting that the Office for National Statistics (ONS) also produces estimates of what has happened to employment since then. Over the three-month period between June and August this year, employment fell by a further 178,000. It will be interesting to see the mix between public- and private-sector job losses in due course.

Data from the National Institute of Economic and Social Research published on 11 October does make it look as if the coalition may well be driving us into the second Great Depression. I have presented earlier versions of the chart (below), which now includes the most recent ONS data revisions. This version is alarming. It shows the decline in output from the starting point and how long it takes to reverse each setback. The present slump looks worse than any other in the past 100 years; it is comparable in depth to that of the 1930s, having fallen by over 7 per cent, but is of longer duration and still is far from over.

blanchflower graph

We are 44 months in and less than half of the output drop has been restored. It is clear what Osborne's policies have done. Recovery was proceeding merrily under the previous chancellor, Alistair Darling, but has shown little growth over the past nine months.

Add insult to injury

Youth unemployment hit 991,000 in August, with the unemployment rate in the 16-24 age group hitting a record high of 21.3 per cent. So what did the government have to say about this? Chris Grayling, the spin merchant and employment minister, who has responsibility for overseeing the new Work Programme, was sent out to blame anything but the government's failed policies. The line is that the increase occurred because of what was happening in the eurozone, and wasn't that bad, as nearly a quarter of a million were in full-time education. That was an insult to the young.

Let's look at this nonsense. First, there is no evidence that the recent rise in youth unemployment has anything to do with the eurozone. Rather, it has everything to do with a freeze in public-sector hiring, the squeeze on public spending and the removal of help for the young that the Labour government introduced, such as the Education Maintenance Allowance.

Second, unemployment among the young has always been calculated as the sum of those not in full-time education plus those in full-time education looking for work. That is how the EU calculates youth unemployment in all countries. Since May 2010, unemployment among 16-to-24-year-olds has risen by 67,000, from 924,000 to 991,000. Unemployment among those in full-time education has fallen by 24,000, from 293,000 to 269,000, while those not in education has risen by 91,000, up from 630,000 to 721,000. The unemployment rate of youngsters not in full-time education now stands at 20.2 per cent, its highest level since such data first became available in 1992.

Grayling speaks with forked tongue.

David Blanchflower is the NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 24 October 2011 issue of the New Statesman, The art of lying

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.