It seemed like a good idea at the time
A very interesting new report from Policy Exchange today. Andrew Lilico and Hiba Sameen have been looking at the effect of various different types of tax on economic growth and employment, and have come up with some striking conclusions.
They've used the Oxford Economic Forecasting model - which is very similar to the Treasury's model of the economy - to analyse the impact of various tax changes. And they raise a big red flag over Labour's planned increase in National Insurance Contributions (NICs).
Now as we all know, National Insurance Contributions are a tax on jobs - pure and simple. They make it more expensive for companies to employ people. When Labour came to power, the standard rate of employers NICs (contracted in) was 10%, but after a string of increases, as from April 2011, they will be 13.8% - one percentage point higher than now.
So Policy Exchange has run the model, and discovered that a 2 percentage point increase in employers' NICs after three years produces a one million increase in unemployment. Which would imply that the planned increase of one percentage point next year will cost half a million jobs.
Now, sure, you can argue with the detailed assumptions built into the model, but this must be pretty close to what HMT discovered when they ran their own model. And yet Brown went ahead with the NICs increases anyway.
When Darling gets up on Wednesday and tells us how they don't need to increase VAT because they've already taken the tough tax decisions, you want to remember this. Labour's planned tax increases are just about the most jobs destructive of all.
PS The Policy Exchange report also has a good summary of the increasing volume of research showing a link between the tax burden and long-term GDP growth (see page 20). For example, a 2008 study of OECD and EU countries over the period 1970 - 2004 found that a one percentage point increase in the share of total tax in GDP reduces output growth by 0.12 percentage points.
PPS Several correspondents have drawn attention to today's report that UK government spending has now reached 52% of GDP, as opposed to the 48% quoted on BOM's sidebar. The 52% comes from the OECD and differs somewhat from HMT's definition of public spending - the source of the 48%. But we're investigating further and will report back.
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