"A Budget for Jobs"
A Budget for Jobs STUC Budget Submission 2009 Introduction Scotland has not escaped the consequences of 18 months of unprecedented global economic turbulence: statistics already confirm falling employment and rising unemployment and are soon expected to confirm that Scotland has followed the UK into recession. The priority for Government at all levels must now be to avoid repeating the mistakes of the past. Recessions in the 1980s and 1990s and the disastrous labour market policies that accompanied them left Scotland with a legacy of lives ruined by persistent economic inactivity and communities decimated by the hollowing out of our industrial core. Scotland continues to pay a very high human and economic price for the policy failures of the past. With the failure of the G20 to agree a co-ordinated global stimulus package and monetary policy having reached the limits of its effectiveness, the Scottish Trades Union Congress (STUC) believes that Budget 2009 must bring forward another substantial fiscal stimulus in order to limit the length and depth of the current recession and to help prepare the economy for the challenges of the future. The STUC acknowledges that falling revenues, rising benefit payments and the mammoth bank rescue packages are all now biting on the public finances. However, those who preach austerity at this pivotal moment are dangerously wrong and seemingly complacent about the human devastation the recession (depression?) will undoubtedly leave in its wake if allowed to run its course unabated. This submission focuses on the case for a new stimulus package and the measures it should include. It recognises that the cost will be substantial and that it will be necessary for the Government to set out a clear path towards fiscal consolidation. However, it will also argue that there are costs associated with a do-nothing approach – a point that is often wilfully overlooked. These costs may well be longer-term and harder to quantify than the costs and benefits of stimulus measures but, as current levels of economic inactivity in Scotland testify, they will be very real nonetheless. Scottish Economy March 2009 The latest growth statistics1 suggest that the recession will be every bit as severe in Scotland as in the rest of the UK: • GDP rose by 1.4% annually and fell by 0.8% in the third quarter of 2008. The UK figures show that GDP rose by 1.9% over the year and fell by 0.6% over the quarter; 1 Scottish Government, GDP Statistics Q3 2008 http://www.scotland.gov.uk/Publications/2009/01/GDP2008Q3 2 • In the year to end-September 2008, the Scottish service sector grew by 2.0%, the production sector grew by 0.9% and the construction sector fell by 3.4%. The UK figures were 2.4%, -0.5% and -2.4% respectively; • In the third quarter of 2008, the service sector fell by 1.1%, the production sector grew by 0.8% and the construction sector fell by 1.0%. The figures for the UK were -0.5%, -1.4% and -0.2%. It is widely anticipated that the next set of Scottish GDP statistics due on 22 April 2009 will confirm that Scotland entered recession in Q4 2008. Labour market statistics2 published on 18 March show that in January 2009: • ILO unemployment was 135,000 – a rise of 1,000 over the quarter and 3,000 over the year; • The claimant count was 112,600 – a rise of 43,600 over the year; and, • Economic inactivity increased by 12,000 over the quarter and by 7,000 over the year. Scottish manufactured exports fell by 9.6% in the fourth quarter of 2008 and by 2.8% over the year to end December 20083. The case for a further fiscal stimulus Action to date It would be churlish and inaccurate to accuse the Government of inaction since the drama, which started with the collapse of Northern Rock in September 2007 became a full scale global crisis with the collapse of Lehman Brothers in September 2009. Interventions on a monumental scale have been necessary to prevent the failure of major UK banks, to get the propped up banks lending again and to provide support to industries particularly badly hit by the collapse in credit. Indeed, the total cost of the UK Government’s support for the financial sector is large by international standards and the upfront costs huge: 2 National Statistics First Release, Labour Market Statistics Scotland: March 2009 3 Index of Manufactured Exports, Q4 2008, the Scottish Government, April 2009 3 Headline Support for the Financial Sector and Upfront Financing Need4 (As of February 18, 2009, in % of GDP) Capital Purchase of Central Liquidity Guarantees Total Upfront Injection Assets and Bank provision and Govt lending by support other support Financing Treasury provided by Central with Bank Treasury backing Advanced North America Canada 0.0 8.8 0.0 1.6 11.7 22.0 8.8 United States 4.0 6.0 1.1 31.3 31.3 73.7 6.3 Advanced Europe Austria 5.3 0.0 0.0 0.0 30.0 35.3 5.3 Belgium 4.7 0.0 0.0 0.0 26.2 30.9 4.7 France 1.2 1.3 0.0 0.0 16.4 19.0 1.5 Germany 3.7 0.4 0.0 0.0 17.6 21.7 3.7 Greece 2.1 3.3 0.0 0.0 6.2 11.6 5.4 Ireland 5.3 0.0 0.0 0.0 257 263 5.3 Italy 1.3 0.0 0.0 2.5 0.0 3.6 1.3 Netherlands 3.4 2.8 0.0 0.0 33.7 39.8 6.2 Norway 0.0 13.8 0.0 0.0 0.0 13.8 13.8 Portugal 2.1 0.0 0.0 0.0 12.0 14.4 2.4 Spain 0.0 4.6 0.0 0.0 18.3 22.8 4.6 Sweden 1.1 5.3 0.0 15.3 47.3 70.0 5.8 Switzerland 1.1 0.0 0.0 10.9 0.0 12.1 1.1 United Kingdom 3.5 13.8 12.9 0.0 17.4 47.5 19.8 Average G20 1.9 3.3 1.0 9.3 12.4 27.9 3.3 Advanced 2.9 5.2 1.3 13.9 1937 43.1 5.2 economies The Pre-Budget Report (PBR) announced on 24 November 2008 provided a fiscal stimulus to the economy worth £20bn including a temporary reduction in the Value Added Tax (VAT) rate to 15% with effect from 1 December 2008 to 31 December 2009. Three billion pounds of capital spending from 2010-11, including a green stimulus supporting low carbon growth and jobs, was also brought forward. The STUC welcomed the PBR and recognised that the choice offered by the main parties in Parliament that day was between a flawed stimulus package and none at all. However, the STUC would have preferred a more substantial package and one that was better targeted at low paid workers and the unemployed. The evidence base for targeting fiscal stimuli at those hit hardest by recession is strong and the STUC has struggled to identify a similarly strong evidence base for the VAT cut which was apparently prioritised simply because it could be implemented quickly. 4 Pg 7, ‘The State of the Public Finances: outlook and medium-term policies after the 2008 Crisis, International Monetary Fund, March 2009 4 The international response Stimulus packages in Large Countries (in % of GDP)5 2008 2009 2010 Total Canada 0.0 1.5 1.3 2.7 China 0.4 2.0 2.0 4.4 France 0.0 0.7 0.7 1.3 Germany 0.0 1.5 2.0 3.4 India 0.0 0.5 - 0.5 Italy 0.0 0.2 0.1 0.3 Japan 0.4 1.4 0.4 2.2 UK 0.2 1.4 -0.1 1.5 US 1.1 2.0 1.8 4.8 Average 0.5 1.6 1.3 3.4 The above table reveals some striking conclusions: • The UK’s fiscal stimulus well below the average. It is the only country studied in this report for which the stimulus turns negative in 2010. The only other country in the G20 with a negative value for 2010 is South Africa6; and, • For the 4 European countries listed above the average is 1.63% compared to 4.8% for the US. Many economists including current Nobel Laureate Paul Krugman7 have argued that the Obama administration’s stimulus plan is too small given the extent of the crisis. Martin Feldstein of Harvard University and Chairman of the Council of Economic Advisers under Reagan estimates that the US faces a $750bn shortfall in demand and that Obama’s plan will offset just 40% of the lost demand in 2009/108. Professor Krugman has recently argued that, ‘Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as in the US, yet it’s doing far less to combat the downturn’9. Analysis from the IMF suggests that he could be exaggerating the extent of the gap due to Europe’s significantly higher ‘automatic stabilisers’. Nevertheless, whilst Krugman acknowledges that higher welfare spending undoubtedly limits human suffering in a recession, he argues that it is ‘no substitute for positive action’. 5 Pg1, The Size of the Fiscal Expansion: an analysis for the largest countries, IMF, February 2009 6 See pg 14, the State of the Public Finances: outlook and medium-term policies after the 2008 crisis, IMF March 6 7 http://www.nytimes.com/2009/03/16/opinion/16krugman.html ‘A Continent Adrift’, New York Times, 16 March 2009 8 http://www.taipeitimes.com/News/editorials/archives/2009/03/03/2003437472 9 Ibid 5 The failure of the G20 to agree a co-ordinated global stimulus package renders the case for action at nation state level all the more compelling. As Martin Wolf of the Financial Times has recently argued, ‘the right thing to do is more than enough. It will always be possible to withdraw stimulus a year or two hence. It will be far more difficult to make action effective if depression, both economic and social, takes hold’10. Public Finances Public Finances (in % of GDP)11 Fiscal balance Country 2007 2008 2009 2010 2014 France -2.7 -3.3 -5.5 -6.3 -2.7 Germany -0.2 -0.1 -3.3 -4.6 0.1 Italy -1.6 -2.7 -3.9 -4.3 -4.2 Japan -3.4 -4.7 -7.1 -7.2 -6.4 UK -2.7 -4.2 -7.2 -8.1 -4.8 US -2.9 -6.4 -12.0 -8.9 -5.1 G20 -1.1 -2.6 -6.2 -5.3 -3.0 Advanced -1.9 -4.1 -7.9 -6.8 -3.8 G20 Government Debt France 63.9 66.1 72.3 77.1 79.4 Germany 65.0 68.7 76.1 80.1 77.2 Italy 104.1 105.6 109.4 112.4 118.0 Japan 195.5 202.5 217.0 225.1 222.3 UK 44.0 50.4 61.0 68.7 76.2 US 63.1 68.7 81.2 90.2 99.5 G20 63.5 65.5 72.5 76.7 76.8 Advanced 78.8 83.2 93.2 99.8 103.5 G20 Again, the above table suggests some conclusions which will be counter- intuitive to some: • UK Government debt, although high by historical standards, is far from unusual in the international context; and, • On the IMF’s projections, by 2014 the UK Government’s debt will be proportionately only around one-third the size of Japan’s and three- quarters the size of the United States’. 10 Why the G20 must focus on sustaining demand, Martin Wolf, Financial Times 10 March 2009 11 Ibid pg 25 6 What kind of stimulus? The Brookings Institution paper ‘If, When and How: A Primer on Fiscal Stimulus’12 identifies three key principles to underpin an effective fiscal stimulus: these principles are that fiscal stimulus should be timely, targeted and temporary. • Timely: policymakers should act in a timely manner to lessen any economic downturn. Thus, fiscal stimulus should not be enacted prematurely, delayed too long or consist of tax cuts or spending increases that would take too long to be implemented or to boost output. • Targeted: from a macroeconomic perspective, policymakers should ensure that each pound of tax cuts or higher spending raises output in the short run by the maximum amount. From the perspective of households, policy makers should ensure that money ends up in the pockets of families that are most vulnerable in a weakening economy. Fortunately, these two goals are complementary, because the families that most need the money are also the most likely to stimulate the economy by spending it quickly. • Temporary: Taxes should be cut or spending increased in order to raise output in the short-run. However, these policy changes should not increase the budget deficit in the long run. Allowing for a larger long- run deficit could reduce the extent of short-run stimulus by raising interest rates and it would reduce long-run living standards by crimping national savings. On the basis of these principles the authors identified the following policy responses in the US as ‘more effective’: • Extending unemployment benefits temporarily; • Increasing food stamps temporarily; and, • Issuing flat, refundable tax credits temporarily. The following as ‘less effective’: • Increasing infrastructure investment; and, • Creating temporary investment tax incentives. And the following as ‘ineffective or counterproductive’: • Reducing tax rates; and, • Making the 2001 and 2003 tax cuts permanent. 12 If, When and How: A Primer on Fiscal Stimulus, Douglas W. Elmendorf and Jason Furman, Brookings Institution 2008 7 These conclusions are broadly supported by the recent IMF paper, Fiscal Policy for the Crisis13 which recommended that: “The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived probability of another “Great Depression” requires a commitment to do more, if needed; collective, since each country that has fiscal space should contribute; and sustainable, so as not to lead to a debt explosion and adverse reactions of financial markets. Looking at the content of the fiscal package, in the current circumstances, spending increases, and targeted tax cuts and transfers, are likely to have the highest multipliers. General tax cuts or subsidies, either for consumers or for firms, are likely to have lower multipliers”. The report recommends measures such as infrastructure investment, expansion of unemployment benefits and expansion of in-kind or cash transfers to low-income households. Specific measures In a paper published in February 2009, David Blanchflower of the Monetary Policy Committee and David Bell of Stirling University note that the stimulus measures undertaken to date in the UK are of a substantially smaller scale than those undertaken in the US and estimate that the UK would have to spend £87bn to match the US investment. They also note that this is likely to translate into 750,000 new jobs and put this into perspective by reminding us that this is just under half of the increase in unemployment forecast by the ITEM club for 201114. The authors refer to recent Work Foundation proposals for a one off fiscal boost of around 1% of GDP (or £15bn) comprising: • a one-off tax credit to the poorest households who are most likely to spend any additional income; • public works programme: the government should bring forward as many construction projects as possible, focusing on those that are labour intensive including: social housing, hospitals, schools and transport; 13 Fiscal Policy for the Crisis, IMF December 2008 14 Pg 53, What should be done about rising unemployment in the UK?, David Bell and David Blanchflower, February 2009 8 • increased out-of-work benefits: a time-limited scheme to increase unemployment benefits to around 60 per cent of previous net earnings. This would help alleviate the adverse consequences that unemployment may have on the housing market; • support for the unemployed: expand the capacity of job search and support services (such as JobCentre Plus), tailored to the needs of local areas where possible. Quality must be maintained, despite the numbers of unemployed people; • short-time working: incentives should be offered through a publicly funded short-time working scheme, to encourage employers to retain human capital, rather than dismiss workers. The scheme would be suspended once recovery is under way; and • regional aid: devolve necessary funds and powers to encourage local authorities and Regional Development Agencies to invest in worklessness and skills schemes (or labour market policies) that respond to the particular challenges of the area. The authors agree that these are sensible proposals but ‘would be less cautious’ about the scale of the ‘necessary injection’. They also argue for a particular focus on the young, ‘not only for the short-term and long-term labour market benefits that we have already discussed, but also for reasons of intergenerational equity’. Bell and Blanchflower then go onto propose a number of other measures including: • Large cuts in income taxes and National Insurance Contributions aimed at low paid workers and the young. For the unemployed, mortgage interest payments could also be paid by the government in the form of a loan, with the proviso that it would have to be paid back eventually; • Increase the education leaving age to eighteen; • Provide further encouragement for those in 18-24 age group to undertake further/higher education by increasing number of places available; • Provide further encouragement for those in 18-24 age group to undertake further/higher education by providing financial inducements for them to do so; • Expand the numbers of teacher training places; • Do direct job creation through increased investment in the infrastructure with particular emphasis on ‘shovel ready’ projects that could start quickly; • Allow public sector and non-profit organisations to fill vacancies by providing increased funding for two years; • Temporary, limited and targeted expansion of active labour market programmes; 9 • Provide incentives to encourage the use of short-time working and job sharing as alternatives to redundancy and unemployment. These might take the form of time limited tax incentives. Bell and Blanchflower’s paper concludes with a message both short and stark: “Unemployment will certainly increase sharply in the UK over the next two years. Its effects on many participants in the labour market will be negative and long-lasting. While much of the remedy to the problems lies within the product and credit markets, these alone will not prevent a substantial rise in unemployment. Hence direct interventions in the labour market will be necessary and even a very large intervention stimulus package is unlikely to offset as much as 50% of the increase in unemployment that some commentators are now forecasting. The time to act is now15”. STUC Budget proposals 1 Fiscal stimulus Mindful of both the above referenced evidence and the UK’s tight public finances, the STUC believes that Budget 2009 should include a stimulus package of around 2% of GDP over this year and next to bring the UK into line with the average for large nations. This package should be introduced immediately and focus on: • Targeted tax cuts for low paid workers and benefit increases. JSA should rise to £75 per week from its current level of £60. The STUC also supports the Work Foundation’s call for a time-limited scheme to increase unemployment benefits to around 60 per cent of previous net earnings. It should be noted that the best functioning labour market in the world – Denmark – operates such a scheme on a permanent basis. These measures will not only ensure that the maximum stimulus is produced for every pound spent, it will also help address growing income and wealth inequality; • Public works programmes: the government should bring forward as many construction projects as possible, focusing on those that are labour intensive including: social housing, hospitals, schools and transport. Again, these projects will not only help boost demand but also help set the economy on a sounder footing to face the challenges of the future; • Short-time working: incentives should be offered through a publicly funded short-time working scheme, to encourage employers to retain human capital, rather than dismiss workers. The scheme would be suspended once recovery is under way. The STUC recognizes that weak administration of such a scheme could produce substantial 15 Ibid pg 62 10 deadweight costs. Therefore, the scheme must involve social partners in an oversight role similar to the Proact scheme in Wales; • Enhanced support for the unemployed through expanding the capacity of job search and support services (such as JobCentre Plus), tailored to the needs of local areas where possible. Quality must be maintained, despite the numbers of unemployed people. The STUC is of course discussing devolved support mechanisms with the Scottish Government on an ongoing basis. 2 Taxation Whilst the STUC welcomed the change in direction signalled by the new top rate for high earners announced in the PBR, the changes are insufficient. It is unfair that fiscal consolidation will be achieved by cuts in public spending, rather than increases in taxation for those who can afford it. Building on the action agreed by the G20, priorities should include: action on tax evasion and avoidance, action to address offshore tax havens, a higher rate of tax on top earners and action to collect the fair rates of corporation tax. The STUC believes that the case for a radical overhaul of the UK’s fiscal framework set out in our 2008 Budget submission16 remains relevant in 2009. The STUC seeks a fiscal framework which: • Is truly progressive, ensuring that all income taxes have progressive rates and that indirect taxes operate with exemptions to assist the poor; • Ensures that the capital gains tax regime does not offer significant tax incentives when compared to income taxes; • Includes fair and proportionate inheritance taxes; • Removes allowances only available to the wealthy; and • Seeks to apply the mantra of global solutions to global problems to the issue of corporate taxation and tax avoidance. Priorities for this budget should be: • The introduction of a new law called a ‘general anti-avoidance principle’ that treats all tax avoidance as unacceptable and therefore open to challenge. Tax avoidance by UK business is a serious problem. Recent estimates put the cost of avoidance at around £40bn a year – sufficient to make a substantial contribution to reducing public sector debt. • A National Commission on the Distribution of Wealth and Income should be established to consider the type of fiscal framework necessary to fund the requirements of a mature western democracy in the 21st century. 16 STUC Budget Submission 2008 – available on STUC website www.stuc.org.uk 11 • The UK Government should act to increase cooperation on tax internationally to ensure companies are held to account for where and how they operate and are required to act as good corporate citizens, including payment of their dues to society as a whole. 3 Efficiencies The STUC was surprised and disappointed by the scale of the additional public sector efficiencies announced in the PBR – we do not believe that they can be introduced without job losses and severe detrimental impacts on the delivery of public services. The STUC strongly opposes these cuts which appear to be entirely arbitrary and poorly timed. The growth forecasts on which the PBR was predicated look increasingly optimistic and, as noted above, the UK is currently alone amongst the group of large economies studied by the IMF with a negative stimulus for 2010. The STUC recommends that these efficiency plans are dropped or at least postponed until the economy has recovered. STUC April 2009 12