Will this be the coalition’s poll tax moment?

The 10 per cent cut to Council Tax Benefit will force many to pay the tax for the first time. It could prove the most disastrous of the coalition's welfare reforms.

It is hard to predict which of the coalition’s welfare reforms will prove most politically toxic. The withdrawal of child benefit from those earning over £50,000 could outrage the Tories’ natural supporters, as those families that have not opted out of claiming the benefit discover, to their surprise, that they must now pay a “High Income Child Benefit charge”. Others in the government are more troubled by the introduction later this year of Universal Credit, a new single payment for welfare recipients, reliant on a fearsomely complex computer system that increasingly few in Whitehall believe will work.

But the most hazardous change could be the one that has received the least attention: the government’s reform of the council-tax system. Polls routinely show that the levy is Britain’s most unpopular tax but the coalition is about to ensure that millions of people pay it for the first time. At present, those households deemed too poor to meet the monthly charge receive Council Tax Benefit to cover all or part of their bill. With 5.9 million recipients, it is claimed by more families than any other means-tested benefit or tax credit. Now, in its quest to roll back the welfare state, the coalition has cut the fund for Council Tax Benefit by 10 per cent. At the same time, it has localised the system, transferring responsibility for the new regime from central government to local councils.

From this April, councils must either maintain current levels of support and impose greater cuts elsewhere, remove other exemptions (such as those for second homes and empty properties), or ask those who receive a full or partial rebate at present to make a minimum payment. Early signs suggest that most will opt for the latter. An analysis by the Resolution Foundation and the New Policy Institute found that, of the 86 councils that have published their plans, 57 intend to introduce a minimum payment of between 6 and 30 per cent of a full council-tax bill.

As the government has stipulated that current levels of support must be maintained for pensioners (who, partly owing to their greater propensity to vote, have once again been shielded from austerity), the burden will fall entirely on the working-age poor. On 8 January, Birmingham City Council announced it would impose a 20 per cent charge on the unemployed. That will mean a minimum payment of £200 a year for households affected.

Striking parallel

In the past year, everything from the government’s NHS reforms to its handling of the West Coast Main Line auction has been compared to the poll tax but in this instance the comparison is completely warranted. The parallels with the greatest policy misjudgement by any modern Conservative government are so striking that one is inclined to conclude that the coalition has a death wish. The Community Charge, as it was officially known, similarly required each household, irrespective of its income, to pay at least 20 per cent of the tax. Now, as then, this regressive levy is likely to be met with mass non-payment.

Patrick Jenkin, the architect of the poll tax, has even accused the government of repeating the Thatcher government’s mistake. The Conservative peer told the BBC last year: “The poll tax was introduced with the proposition that everyone should pay something . . .We got it wrong. The same factor will apply here, that there will be large numbers of fairly poor households who have hitherto been protected from Council Tax, who are going to be asked to pay small sums.”

When the poll tax was introduced in 1989, the poor were at least assured that their benefits would rise with prices. But under George Osborne’s plan to uprate working-age benefits by 1 per cent for each of the next three years, rather than in line with inflation, their incomes will be squeezed to an unprecedented degree. The government’s impact assessment showed that the poorest tenth will lose the most in real terms (2 per cent of net income a week), while the next poorest tenth will lose the most in cash terms (£5 a week).

Those faced with the unpalatable choice of either heating their home or feeding their family are unlikely to accept stoically the first council tax bill that lands on their doormat in April. Figures from the Institute for Fiscal Studies show that the average working family will lose £165 per year, while the average non-working family will lose £215.

Confronted by these losses, which household will willingly pay hundreds of pounds in additional tax? Yet, for the sake of saving just £500m a year, the coalition intends to force councils to chase the poorest through the courts to recoup a charge they cannot afford to pay.

Ever since the coalition’s austerity programme began, commentators have asked when its “10p tax moment” will come. In this “son of poll tax”, we may have found the answer.

This piece appears in this week's issue of the New Statesman. To subscribe to the magazine, click here.

A protest in Trafalgar Square in 1990 against the poll tax.

George Eaton is political editor of the New Statesman.

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The global shipping slowdown hints at a recession around the corner

Instability in China and tumbling commodity prices have devastated the world’s freight providers – a strong indicator of trouble to come.

This is beginning to have the feel of 2008 all over again. Policy makers around the world are in denial once again as global stock markets dive. In 2008, the slowing of the world's biggest economy – the US – sent the global economy into a tailspin. The concern now is that the slowing of the second-largest economy, China, may well have similar global effects. Chinese growth, which averaged 10 per cent for three decades through to 2010, has decelerated for five straight years and in 2015 slowed to 6.9 per cent, its lowest rate in a quarter of a century. The IMF is forecasting that Chinese growth will slow further to 6.3 per cent in 2016 and 6 per cent in 2017, which may well be overly optimistic. There is already speculation that China’s banking system may see losses even larger than those suffered by US banks during the last crisis.

The bad news from China appears to have already spread to the US, which has seen GDP growth slowing sharply in the last quarter of 2015. US industrial production and core retail sales are both falling, and there have been marked contractions in core capital goods shipments and private non-residential construction. Business fixed investment declined nearly 2 per cent last quarter. Despite the bad news, last week Federal Reserve chair Janet Yellen astonishingly claimed that “the US economy is in many ways close to normal”. By contrast, Ruslan Bikbov from Bank of America Merrill Lynch calculates that there is a 64 per cent probability the US is already in recession. My expectation is the next move by the Fed will be to cut rates.

Company profits are tumbling as commodity and oil prices decline. BP reported a $3.3bn fourth-quarter loss last year while Exxon Mobil reported a 58 per cent fall in its quarterly profit. It isn’t just oil companies. Last week, Rio Tinto – the world's second biggest mining company – reported profits down 51 per cent after commodity prices collapsed amid slowing growth from China. Company profits are also suffering due to a big decline in the amount of freight being moved, especially to and from China. Moeller-Maersk, the Danish conglomerate and the world’s biggest container-ship operator by capacity, last week reported a fourth-quarter net loss of $2.51bn.  

DP World, one of the world’s biggest port operators, also says that global volume has slowed sharply. It reported that volumes at its ports rose by 2.4 per cent last year, compared with 8 per cent growth in 2014. Data provider Container Trades Statistics said this week that Asia-to-Europe trade fell nearly 4 per cent last year. Freight rates in 2015 averaged $620 per container on the Asia-to-Europe trade route. Typically, ship operators need more than $1,000 to break even. In February, the cost of moving a container from Shanghai to Rotterdam fell to $431, barely covering fuel costs. Figures released by the Shanghai Shipping Exchange show that the country’s 20 largest container ports grew by 3.7 per cent over 2014, compared to 5.5 per cent the previous year. The Hong Kong Port Development Council reported that throughput at the port of Hong Kong fell by 9.5 per cent in 2015.  

The Baltic Dry Index (BDIY) – an index of the price for shipping dry goods such as iron ore and coal (oil is wet) as shown in the chart below – is at a record low of 290. It is down 75 per cent since its recent peak in 2015 and down 98 per cent from its peak of 11,793 points in May 2008. The collapse to 772 by 5 September 2008 (a week before Lehman Brothers failed) presaged the global recession and it is falling again. Capesize vessels, which are too big to get through the Suez or Panama canals, had an average daily hire last week of $1,484, compared with a peak of $233,988 in June 2008. Even though there is an oversupply of ships, global demand is collapsing.

The International Air Transport Association (IATA) released figures for global air freight, showing cargo volumes expanded 2.2 per cent in 2015 compared to 2014. This was a slower pace of growth than the 5 per cent recorded in 2014. This weakness apparently reflects sluggish trade growth in Europe and Asia-Pacific. “2015 was another very difficult year for air cargo,” said Tony Tyler, IATA’s Director General and CEO. “Growth has slowed and revenue is falling. In 2011 air cargo revenue peaked at $67bn. In 2016 we are not expecting revenue to exceed $51bn.”

The current contraction in rail freight is apparently reminiscent of the drop that started at the end of 2008 and carried on into 2009. China's rail freight volumes fell by a significant amount last year. According to the National Development and Reform Commission (NDRC), volumes fell by 11.9 per cent, a further increase on the 2014 slowdown, when traffic declined by 3.9 per cent.

In the western US farm belt, grain trains are so abundant you can’t give one away. Since the middle of last March, carloads of agricultural products, chemicals, coal, metals, autos and other goods have declined every week. Shipments of US coal, the biggest commodity moved by rail, declined 12 per cent in 2015, according to the Association of American Railroads. The cost of carrying spring wheat from North Dakota to the Pacific coast has dropped by a third in the past two years. In early 2014, grain companies with a train to spare could command $6,000 per car above the official railway tariff, traders say. Today, to avoid hefty contract cancellation fees, they are paying others to use their unwanted trains.

Manufacturing output in the UK fell for each of the last three months and is down 1.7 per cent over the year. The overly optimistic Monetary Policy Committee is forecasting GDP growth of 2.2 per cent (2.4 per cent) in 2016; 2.4 per cent (2.5 per cent) in 2017 and 2.5 per cent (2.4 per cent) in 2018 (the latest, broadly similar, OBR forecasts in parentheses).

So all is well then? Probably not. Mark Carney has run out of ammunition with the Bank Rate at 0.5 per cent, compared with 5.5 per cent in 2008, and has little room to manoeuvre. Negative rates and more quantitative easing, here we come. George Osborne has never explained what he would have done differently in 2008 – his plans for a budget surplus are already in disarray as the economy slows. I am not saying a recession is going to happen any time soon, but it well might.

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