This Budget may have been our part-time Chancellor’s last chance

David Blanchflower logo

After nearly two years in power, the coalition government has to take ownership of the economic mess it has created.

After nearly two years in power, the coalition government has to take ownership of the economic mess it has created. There has been virtually no growth over the past 15 months, which stands in direct contrast to the previous 15 months under Labour when, because of monetary and fiscal stimulus, growth was 31 times higher than under George Osborne (3.1 per cent against 0.1 per cent, respectively). The latest data release shows that from June 2010 to December 2011, public-sector employment fell by 30,000 more than private-sector employment increased. In contrast, between December 2009 and June 2010, over the last six months of the Labour government, the private sector created 300,000 additional jobs over and above the 60,000 public-sector job losses. No expansionary fiscal contraction. None.

The Chancellor apparently has two part-time jobs, neither of which he seems to be very good at. The first is as the chief strategist to the Tories who was unable to win an outright majority for his party in the most winnable general election in a century or so. And if the recent polls are anything to go by, his plans to win a Conservative majority at the next one in 2015 may have to be put on hold.

Mess of contradictions

Osborne's second job is as the first ever part-time Chancellor, who apparently defers to his young, inexperienced and underqualified chief economist (yet another Tory Old Etonian), Rupert Harrison. I find it astonishing that Osborne buzzed off to the United States to hold David Cameron's hand at a meeting with Barack Obama at the White House just a week before the Budget. And this Budget may well have been the Chancellor's last chance to do something about growth and jobs, to silence the rumblings not least from his own party's back benches but also from the increasingly testy Liberal Democrats.

The decision by the Chancellor, who appears to be intent on widening income and wealth inequality further, to reduce the top rate of income tax to 45p for those earning more than £150,000 looks like a huge political gamble. A Guardian poll found that two-thirds of voters opposed it. If the evidence is that the tax doesn't raise much money, then abolishing it will have little impact - but nobody believes that. And all of this at a time when child benefit and working tax credits are being cut. Paying the poor less so that they work harder and paying the rich more so that they work harder does seem something of a contradiction.

On 6 April, Osborne's policies are going to impact thousands of working couples earning around £18,000, who will lose as much as £4,000 a year in tax credits. This could affect roughly 470,000 children, whose family income will drop by about £74 a week. Previously, someone in the family had to work 16 hours in order to qualify for these benefits but now they will have to work 24 hours a week or lose tax credits, which looks impossible when large numbers of workers want more hours and 1.4 million are in part-time jobs because they can't find full-time jobs.

Microdata from the latest labour force survey that the Office for National Statistics uses to calculate its labour-market statistics for October to December 2011 has now been released to researchers under strict guidelines. Workers were asked whether they would like to work more hours; 10 per cent said that they would and, of these, the average additional hours they wanted was 16. The young, women and minorities - and especially black and Asian people - were the ones saying that they wanted more hours. So the burden is greatest on the most vulnerable.

Osborne's plan to cut the pay of public-sector workers in the poorest parts of the country with the highest unemployment rates will widen regional differences even further. This is unlikely to save money and will simply deepen inequality and worsen public-sector labour relations.

Given that the government is putting emphasis on a one-size-fits-all monetary policy, this means, in effect, that it has no regional policy and hence no plans to do anything about the growing north-south divide. The new credit-easing plan that is intended to make it more straightforward for banks to give loans to small businesses, for example, could be targeted on deprived regions with greater loan subsidies than in the more prosperous south-east.

The newly announced small firm loan scheme, to which only four of the five banks have signed up, has failed to address the problem of banks' stringent lending conditions. As John Longworth, director general of the British Chambers of Commerce, has noted: “It will not help smaller, younger and high-growth firms that have trouble getting credit in the first place." Cameron's proposal to "privatise" roads is another ill-considered plan that is going nowhere.

Building boost

The Chancellor should have left the 50p tax rate in place on grounds of fairness and instead incentivised firms to hire more staff through substantial National Insurance cuts.

To reduce the youth unemployment rate from 23 per cent, I would go further and give a two-year National Insurance holiday for every employed youngster under the age of 25. This idea could easily be extended to jobs created in deprived regions and to small firms and would likely gain broad support from employers' associations, the Trades Union Congress and voters.

Tax cuts targeted on job creators would pay for themselves by lowering unemployment and spending on benefits. In addition, I would give private-sector firms investment subsidies and announce plans to invest in our crumbling infrastructure, so as to give a fillip to the construction sector. The amount spent would depend on how the economy was performing but I would start with a bang. Such measures would boost output and lower unemployment and would also likely pay for themselves.

I always thought the Tories believed that tax cuts could be self-financing. Oh, that's right, only for the rich.

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