Easing the squeeze

FAIRER OPTIONS

Tax changes must reduce inequality, not exacerbate it—Shreya Nanda

Has the pandemic opened up space for more progressive taxation? Many were initially heartened to see polling last year that showed public support for an increase in national insurance contributions to fund higher spending on the NHS or social care. This appeared to indicate a shift in public attitudes, breaking with the post-financial crisis ethos of tax and spending cuts. But that support has since melted away.

Boris Johnson went on to announce such a change in September last year with the introduction of the new health and social care levy. Polling in the weeks following the announcement found that more now feel the changes are unfair than fair; public disapproval of the government’s handling of the tax system has shot up; and the Conservatives have overtaken Labour as the party judged most likely to raise taxes in a future government.

Johnson’s levy is distributionally unjust. National insurance is in some respects unfair by design – the effective tax rate peaks at £50,000 and then reduces for the highest earners. And national insurance contributions only tax earnings from work, not earnings from ownership or investment.

The tax rises are also intergenerationally unjust – while the new levy will apply to working pensioners, which national insurance currently does not, only a minority of pensioners fall into the affected group. Most of the increase in tax will be paid by those of working age, while the benefits will accrue mostly to the retired, who are on average wealthier. And most of the income derived by the retired will not be affected by the changes.

This rise in national insurance contribution rates was partially offset by the rise in national insurance contribution thresholds announced at the recent spring statement. Meanwhile, the income tax cut announced at the same time will impact not just income from work, but also some forms of income from wealth, such as pension and rental income. Overall, this package of measures further reduces the taxation of income from wealth relative to income from work.

The government was not wrong to propose increased investment in healthcare, and to achieve this through tax rises. But tax changes should target the wealthiest.

At IPPR, we have previously recommended bringing capital gains and dividend tax in line with income tax; replacing inheritance tax with a lifetime gifts tax; and replacing council tax with a proportional property tax. This would help to redistribute some of the asset price gains that have built up over the pandemic, reducing wealth gaps instead of exacerbating them. It would be good for growth. And who knows, it might even be more popular.

Shreya Nanda is an economist at the Centre for Economic Justice at the IPPR

SHORT AND SWEET?

Cutting the working week would be bold, but it would need to be done fairly—Aveek Bhattacharya and Jake Shepherd

The notion of a four-day week is gaining momentum. Across the world, workers, businesses, and politicians have been exploring the idea – not least the Labour party, which pledged in its 2019 manifesto to reduce the average work week to 32 hours.

The excitement is understandable. The four-day week  has the potential to radically transform the lives of workers, improving health and wellbeing, increasing productivity, and supporting social equality. This goes beyond theory: a growing number of trials suggest that it  can have real world success, making it even more compelling – and worthy of political attention.

However, every policy has challenges and drawbacks, and the hype around a four-day week should not blind us to the potential issues it raises. In our research looking at people’s working time preferences, we found some evidence that strengthens the case for a four-day week – 11  per cent of workers would be willing to take a pay cut for shorter hours. But there is also some cause for caution.

Not everyone is likely to reap the benefits of a four-day week. For all its egalitarian ambitions, we found signs that it may actually exacerbate certain inequalities. Better-paid workers tend to be keener on the idea of shortening their work week, whereas lower earners are more likely to say that they want (or need) to work more hours. Proponents of the four-day week also intend it to create a more level playing field between men and women in terms of caring responsibilities, career progression and pay, but that requires us to displace deep-seated gender norms. The risk is that women end up more marginalised from work: our analysis showed that they would prefer a significantly shorter work week than men on average.

Another major concern is that it is unclear how to pay for a four-day week. Advocates insist that workers should not lose any income, but it remains to be seen whether shorter hours can boost productivity by enough to pay for its introduction.

The four-day week has plenty of promise, but it is not a silver bullet for ensuring fairer working practices. It cannot eliminate pre-existing inequalities and prejudices, nor can it simply make poor quality work good. To benefit all working people, not just a privileged few, it needs to be a component of a much wider policy agenda.

For many workers, flexibility is as important as hours, which implies the government should explore measures to give people greater freedom to choose when and where they work, as well as improving parental leave. At a time of increasing in-work poverty where millions of workers are unable to escape hardship even when employed, policies that ensure higher pay, pathways to progression, and employee benefits can help to lift people from poverty and bad work. They can also lay the foundations for a fair, more equitable four-day week programme in the future.

The four-day week is a big, bold and potentially revolutionary policy idea. But it needs to be implemented carefully, based on continued experimentation, to ensure it is fair and affordable. As part of Labour’s new deal for working people, a considered approach to the four-day week could do a lot of good – as long as the party remembers the other important elements of good work beyond shorter hours.

Aveek Bhattacharya is chief economist and Jake Shepherd is a researcher at the Social Market Foundation

CRUCIAL CHOICES

Government must support businesses to power the economic recovery—Claire Walker

Accredited chambers of commerce sit at the juncture where communities and businesses intersect. This grassroots connection to the firms we represent means we have crucial insight into the issues facing local economies in every part of the United Kingdom.

Many businesses have been battered by the pandemic, yet they have been amazingly adaptable, changing how  they operate and pivoting their business models to survive. But two years of Covid-19 has inevitably taken its toll – particularly on smaller firms – and current conditions plus ongoing uncertainty mean we are not out of the woods yet. The government needs to work with us to ensure an equitable recovery from Covid-19 for firms across the country. This requires action across several areas.

In recent months firms have experienced an explosion in energy and shipping costs, huge increases in steel and fuel prices and shortages for many raw materials. While larger firms have the balance sheets and credit lines to enable them to more readily weather current pressures, smaller firms need to see action sooner rather than later to ensure they are not left behind. For example, an  SME  energy price cap would provide some relief while delaying the planned national insurance hike by  at  least a year would help to keep down the upfront cost of doing business.

The impact of Covid-19 has cast a long shadow over the UK economy. Many firms have been left with reduced cash flow and higher levels of debt. The fear of a future pandemic wave and a return to restrictions fills many business leaders with dread. To encourage investment, firms need more certainty which is why they need the  government to set out what support will be made available in the event of future restrictions.

British Chambers of Commerce research tells us that companies that export are more productive, resilient and innovative. Yet  only 10  per cent of UK businesses are currently involved in exporting. If we want more firms to get involved in overseas trade, then trade agreements alone are not enough – we need to see more end-to-end support to help them make the leap.

Many businesses have also told us that they do not know their carbon footprint or do not yet have a plan to reach net zero. There must be more support from government to create momentum on the switch to a more sustainable and carbon-neutral future. If  business can be helped along this path, then a whole new  world of economic opportunity will open up.

Promises in the government’s recent White Paper on levelling up must be seen through. For example, the funding system needs to be simplified – there are too many pots of money, which are too small and too short-term, and are unnecessarily complicated to access. By creating bigger regional funds and putting more control over them in the hands of stakeholders, including accredited chambers who understand what will make the biggest difference to their communities, then real progress can be made.

Business performs a vital role in bringing prosperity to communities and generating the sustainable tax receipts needed to fund our public services. That is why measures to actively stimulate the recovery, for businesses large and small, will also be ones which pass those benefits on to people across communities as well as the public purse.

Claire Walker is co-executive director of the British Chambers of Commerce

REGIONS THAT THRIVE

If government is serious about levelling up, it must first address the cost of living crisis—Zoë Billingham

The renewed political focus on regional inequality in the UK – now often described as the levelling up agenda – is welcome and necessary. It has become an accepted mantra that the UK is one of the most regionally unbalanced amongst industrialised nations and, according to an Ipsos Mori poll last year, this is central to voter concerns.

The recent levelling up White Paper set out 12 missions that rightly broadened the agenda to a whole government effort. But the ambitions of the agenda will be undermined by the cost of living crisis unless more and better targeted support is urgently put in place and our safety net strengthened. As we enter the biggest fall in living standards for 30 years, this must be government’s priority.

There is plenty of reason to be concerned about the current cost of living crisis. Soaring energy prices and sharp inflation growth coupled with upcoming tax rises on working people were previously forecast to cost the average family an extra £1,200 a year and this is set to rise. Meanwhile, almost 4  million families are already behind on their bills and our security net is threadbare, with protection at its lowest point in decades for people out of work.

The crisis will undermine the new levelling up missions without more serious intervention by the government. While one of the new levelling up missions is to increase healthy life expectancy, we know that worsening levels of poverty and an increasing number of people turning off their heating to put food on the table will only work against this goal.

And it is our ‘left behind’ communities, full of talent and potential but held back by a lack of access to opportunity, that will suffer the most. Levelling up has sent local political leaders out bargaining with government and investors, pitching the potential of their places. This advocacy is becoming one of the most visible roles of our city and regional mayors. But the vision sold to these communities in the levelling up White Paper, one of investment in infrastructure and education, higher productivity and research and development spend, will seem a million miles away from the day-to-day reality of empty pockets and cold homes faced by millions across the UK.

To make a success of levelling up, the government can no longer give with one hand and take away with the other. The cost of living crisis is making our inequalities worse and will work directly against many of the objectives set out in the new White Paper.

To help people this year, the government should supplement the one-off support provided to date with a proper uprating of universal credit in  line with expected inflation whilst also addressing the ongoing precariousness of this safety net. People need to know how they will get through the week before they can make positive choices for the long term. Without a level of economic security, we are held back in our ability to envision the type of future we want and progress in life, which also has a significant cost in terms of productivity and economic growth.

The leader, or political party, that confronts this new economic reality and offers security and stability whilst understanding the need for optimism about our regions will be the one who has the best chance at really levelling up the country

Zoë Billingham is co-director at the Centre for Progressive Policy and a Crook fellow at the University of Sheffield