Cameron Tries To "Nudge" His Way Out Of Recession

The Tories have announced a plan today to give companies National Insurance breaks on employing people who have been unemployed for over 3 months. Detail on their website, but the gist is this:

It costs the government £8100 per annum in benefits payments and lost income tax receipts to support an unemployed person. So their proposal is as follows:

Private sector employers, who hire someone who has been claiming unemployment benefits for more than three months (13 weeks) and who has not previously worked for that company in the previous year, would receive a credit against Employers National Insurance Contributions. The credit would be worth £2,500 for full time jobs of 30 hours a week or more, or half that amount for part time work of 16 hours a week or more. It would be phased out beyond the higher rate tax threshold so that only basic rate taxpayers would be eligible for the full amount.
• To prevent companies making people redundant in order to replace them and claim the tax cut, the payment would only be available to companies that had made no redundancies in the previous three months, or for three months after claiming the credit.
• To limit the amount given in tax cuts to companies who are already growing rapidly, the tax cut would be limited to a maximum of 20 per cent of the workforce of any one company.
• The credit would be available for one year after the employee starts their new job.

David Cameron doesn't believe you can borrow your way out of a recession, it seems. Instead, he seems to intend to Nudge his way out of one. It's a pity, then, that in the words of Nick Clegg, "Cameron has drawn the fly on the floor". This doesn't help anyone who is already in a job. It doesn't help businesses who are struggling to keep employing the people they already employ. It doesn't seem likely to boost consumer spending all that much. It doesn't even seem likely to genuinely get all that many people back into employment. All it really does is tip the scales in favour of people who have been unemployed for over 3 months.

Let's look at this from the point of view of the people it's aimed at: employers (and note, in passing, that the last two Tory tax announcements - VAT delay, and now this - have been aimed at helping business, not people in the most direct sense).

To employ someone on minimum wage full time costs them about £11,000 (depends what hours they're on, so no point being too precise here). £5682 of that is above the Earnings Threshold, so National Insurance is paid on it, to the tune of 12.8%, or £727. So overall it costs the employer £11,727 to employ someone on the minimum wage. The Tory credit reduces that to £9227. Essentially, the Tories want to reduce the price of employing someone on minimum wage by 21%.

The significance of these credits only gets lower the higher the wage you're talking about. Someone on £20,000 costs their employer £21,891 to employ. That becomes £19,391, a cut of 11%. Or if you're on £30,000, it costs your employer £33,171, becoming £30,671, a cut of 8%. Much beyond that, the credits stop under the plan in question. So the jobs this is likely to have most impact on is those at the bottom end of the pay scale.

Fair enough. But now ask yourself this: Are you, a struggling company in the middle of a recession, going to set yourself back £9227 a year to employ someone who is currently unemployed out of the goodness of your own heart? I suggest that the answer is no. I suggest that most of the companies who are going to be taking people on in the next few years are the ones who had a pretty good chance of employing some extra people anyway: businesses who are just filling gaps left by employees leaving, or who are recruiting people they would have needed anyway. The Tories themselves admit that this would be true to some extent; the £2500 figure is based on an estimate that only ~31% of the jobs that would be created under this scheme wouldn't have been created anyway. I suspect it would be rather less than that, depending on how bad the recession gets.

Is it too cynical of me to suspect that this isn't really a Tory prescription for the recession at all? I reckon what this is is a bit of policy they had on the back burner as a remedy for long-term unemployment, which has been tweaked a bit and packed up in a shiny new box that says "Tax Cut!" on it, to cover up for the fact that the Tories, and specifically Gideon Osborne, don't know anything about the economy, really, and it has only become obvious to them relatively recently that the "responsibility ... sharing the proceeds of growth ... no irresponsible tax cuts" line wasn't going to cut it any more. Everyone else is talking tax cuts now, but they've got nothing much to announce, and the fiddly bits and pieces they'd come up with so far (Council Tax "freeze", Marriage Bonus, Inheritance Tax threshold to millionaire-friendly level, etc) were looking a bit shabby and tight-fisted in comparison. Hence today's policy.

It's a good job we've got an economic team who were able to beat the rest of the parties to it, despite the slowing effect of the Lib Dem policy ratification process, isn't it? We've had a revenue neutral package to really help people on low and middle incomes for over a year now. The way to create job growth is to give everyone a significant amount of their own money back. Spending goes up, jobs are really created, etc. Today's Tory plan does next to nothing to mitigate the recession.

Go back to your drawing board and try again, Gideon and Dave.