Today’s announcement from the Office for National Statistics that employment is at a record high and unemployment has dropped to a seven year low of 5.3% follows a great success story for the Government.
It is worth remembering that the spectacular fall in unemployment over the past five years was not expected. In 2013 the Bank of England was projecting unemployment to be at 7% by the end of 2016. There were also more alarmist predictions from some economists before the election of 2010. A former member of the Bank of England’s Monetary Policy Committee even predicted that Osborne’s economic plans would lead to unemployment reaching four million. These predictions have proven to be spectacularly wrong, and George Osborne should be commended for ‘sticking to the course’.
However, Osborne needs to make sure that his great record on employment is not ruined by ill-advised measures that penalise the low-paid. This is particularly the case with his proposed reforms to tax credits.
There is no doubt that tax credits are ripe for reform. The bill for tax credits rose exponentially to £30bn in 2010, and high marginal tax rates associated with the system are a fundamental flaw. However, as Rupert Darwall points out in his Economic Bulletin, Osborne’s original plans would have discouraged work even further by giving some of the lowest paid marginal tax rates of up to 93%.
There are, of course, no easy answers to pursuing reform of tax credits while simultaneously ensuring that marginal tax rates for the low-paid are not adversely affected. Suggested alternatives to the initial Osborne plan highlight this. For example, Frank Field’s proposal – which is laid out by the House of Commons Library – would protect households earning less than £13,100 at the expense of families earning more than this amount. This proposal would give some families an effective marginal tax rate of close to 100%.
The Work and Pensions Select Committee has today called for a major overhaul of Osborne’s tax credits plan. This does not mean Osborne should pull back from reform completely, but he should certainly think again. When Osborne presents his revised plans on tax credits at the Autumn Statement later this month, we should focus on whether the effects on marginal rates of tax have been mitigated.