Growth, Inequality and Overtime: What Does Britain Actually Want? | IEA Podcast

Added: 2026-05-31

[00:00:00]Let's say you earn one additional pound.

[00:00:03]So you go just over £75,000. Well, now all of this 20,000 is subject to a 40% tax rate. So you're suddenly faced with like this extra pound costs you £8,000 in income. We are essentially becoming like the sort of thing you know people used to criticize about Spain or like what they're doing in countries where we have like very high youth unemployment about do you think we should be hiring Tony Blair as a policy fellow at the IIA because we have said exactly these things time and time again on this podcast and also Hello and welcome to the IIA podcast.

[00:00:43]I'm Ken Price delighted to be joined by our senior economist Dr. Vonin Bobok and our managing editor Daniel Freeman. Now, before we get into plenty of meaty, juicy policy policy topics uh this week, remember to subscribe to us on Substack at insider.ia.org.uk and wherever you get your podcasts, particularly on YouTube, where we do always read the comments. So, please do leave us plenty of feedback in there as well. Now, first thing on the agenda this week is the great Tony Blair is back. if he ever left, which I don't think he really did. Uh, at the top of the news agenda, he's dropped a 5,000word essay on what the government's getting wrong, where it needs to go from here in the context of labor leadership questions, drama, new directions being considered. He basically says that the um the government is lacking a coherent plan for the country. Um and then goes in through in detail plenty of plenty of arguments in the minutia of those things in particular what certain uh challenges to the throne are suggesting and then ends on his own 10point agenda.

[00:01:54]Dan what was your takeaway from this diet tribe? Yeah, I I was impressed by just how radical large large parts of it were um in the context of politics today. like um you you have lot in fact I've I've got the 10point plan for radical centism uh as he calls it uh in in front of me and I've been going through them and like at least half of the points he makes could very easily be the point of an IA paper that we have published in in the last 10 years. So a few of them for example >> let's let's go through them.

[00:02:37]>> Yeah. Okay. So his his first point is that um yeah he has a bit of stuff about AI. He seems quite obsessed by that in sometimes a fairly unfocused way. But his first point is that uh the government ought to be removing obstacles to business growth. And by that he actually outlines it f further back in the paper where he cites for example the employment's rights uh act um as something that is a nice thing to have but in the current uh economic context uh the government should drop.

[00:03:14]He also says um the government should have dropped uh employment side national insurance contribution increases uh and instead gone for a uh a VAT hike. Have some slight issues with that but it's an interesting point. His second point is is uh quite forceful is that we need a radical program of planned reform and dere regulation. He calls the planning system in Britain uh an abomination and says the government has taken some steps but needs to go further. Again, that's that's got an A star rating. Uh the thing that actually surprised me most about this was he uh his third point is actually uh the UK should prioritize uh cheap uh cheap energy and electricity and electrification over net zero. And if that means we miss net zero by by uh 2050, he says basically fine. And he also criticizes the government for uh not sufficiently not not being willing to exploit North Sea oil and oil and gas which I think is um a a really interesting indication I think of how the argument has shifted even in the last two years or so where as as the costs of um well the current government's goal is to de uh decarbonize the electricity grid entirely by 2030. Um, as the costs of this are starting to add up and become really really clear, increasingly you you have uh people sort of who have previously been very very much on board and with net zero and are on board with it sort of as an overall target saying that well look the you know this is this is not a this is not a race. uh or well it is a race but maybe it's a marathon rather than a sprint and also highlighting which Blair does as well that you know the UK now accounts for significantly less than 1% of all carbon emissions globally and we're off our head if we think that say decisions being taken in the US, China or India are are being determined by like what Ed Milliban's policies are that you know no Chinese government is going to be so overwhelmingly impressed by us getting to to uh net zero on the electricity grid by 2030 that they're going to scrap coal. That's that's just not going to happen. I mean, there are there are some other things that I think are uh a bit more mixed. So, I'd say particularly again it's it's back to the AI thing. So the point nine uh he he comes back to you know the government should be reorganized around the possibilities of AI. Now AI has a lot of possibilities. that has a, you know, we're still working out exactly what it could do and it's developing all of the time, but I think one of one of the fair criticisms overall of the paper is that a lot of the time it it drifts into sort of TED talk language. Yeah.

[00:06:44]Whereas so all governments for the for this is Blair by the way. All governments for the foreseeable future will govern in the age of AI. Those who understand it will see their countries prosper. Those that don't won't. But but it never really comes to much like solid specific policy other other than you know good stuff to do with energy. It's all like some of this stuff is a bit vague and he also uh gets in like oh AI means that we need to do digital ID. uh you know to his old hobby hobby horses.

[00:07:23]Um so but then again like >> you know critic Tony Blair was never really an in-depth policy wonk. So criticizing him for that is kind of like criticizing a Labrador for not filling in your tax return. It's like okay it's true but that's not really what a Labrador is there for. And that isn't what Tony Blair is there for. Tony Tony Blair is basically I think in this essay trying to give a sense of like what he thinks the government should be doing at the moment and what he thinks is the flaw with the current government that um I think overall is is pretty accurate that they don't really have a sense of direction. they they have a s they have a sort of ingrained suspicion of the private sector. Yeah. Which I think is is quite unhealthy. Um and they're not really sort of and as a result their supposed priority for growth which they made an awful lot of in their first year has fallen by the wayside significantly because everything else has been prioritized over it.

[00:08:38]>> Yeah. Exactly. So I'm just going to pull out a line from it. The government, this is Tory Blair speaking, the government took with it into power commitments, which meant that there was an inevitable gap between the government rhetoric around growth and the impact of these commitments on what the business community needed to restore the so-called animal spirits and get the private sector movement moving. The commitments were the new workers rights laws, the net zero acceleration facing that with the British oil and gas industry, the uplift in the minimum wage beyond inflation, and the nondom changes. Val, do you think we should be hiring Tony Blair as a policy fellow at the IIA? Because we have said exactly these things time and time again on this podcast and elsewhere.

[00:09:14]>> No, I don't think that's my decision to make. Uh, if if if I'm ever in a position to interview a former prime minister, it means I've probably done quite well in my job uh beyond expectations. Um, I I I do think Dan struck like a really good point in there in terms of we're not we shouldn't be reading this sort of big essay in terms of like particular granular details or where you know he thinks the sort of like minute details um should be going to in terms of what we're implementing.

[00:09:41]But I think it does strike a point about kind of like a gap between the sense of like what you know what a sort of new exciting government is trying to deliver and what's actually being accomplished and I you know I think we can we can probably get quite a few more interesting quotes uh from there for example Tony tells us that politics has a supply side problem uh that probably applies to the economic situation as well uh quite well >> but I think there is the the sort of tension between proposing policies or advocating for growth. And this is something we mentioned like on previous episodes. It's something we've written about. Uh you know, the Labor Group for Growth also put out some kind of like big screed about, you know, trying to get growth going, trying to stop, you know, all these like um you know, multiple state vetos we have to activity when it comes to, you know, construction, doing business, hiring people and so on. Uh but I think the fundamental tension is really that we can say we like growth and we want to make things better but ultimately what these measures look like in practice really conflict with a lot of the government's sort of like more basic instincts. So for example some of the chief criticisms uh that were brought to this like Tony Blair essay were things about well that all sounds nice uh but what about inequality? So, um, let's talk about inequality. I've got my inequality figures, uh, right here. So, income inequality has been flat since the '90s, and it's actually one of the interesting things in terms of like what the state is actually what the British state is actually good at doing is it's pretty good at quashing income inequality. So, I think pre-tax, if you look at disposable income, uh, we have a genie coefficient of 47, which goes down to 26 after tax. is one of the lowest in the world and it's been completely flat and stable for decades.

[00:11:38]>> When it comes to wealth inequality, which is another figure we're like talking about, most of it, the vast majority of the so-called like a lot of so-called that there like the vast majority of these discrepancies are completely attributed to essentially who manages to end up owning a house.

[00:11:53]>> Yeah.

[00:11:54]>> Um again, I think we've been talking about well Blair is talking about planning. We've been talking about planning for a very long time. We would love to fix this. this we would love to you know uh you know see this problem fixed and I think probably one of the best ways to address wealth inequality if this if this is something you genuinely care about in this country would be fixing the current housing shortage. Um so yeah I think in terms of like abolishing inequality we're pretty good at that. Uh the mid the minimum wage increases have brought the minimum wage quite close to the median wage. So we have wage compression from all directions at this point. So taxation on the higher end and then we have the minimum wage on the lower end. So yeah, in terms of inequality, we're quite equal uh due to stagnation, we've become poorer and we're quite miserable as a result. So yeah, I think if if people do have certain types of instincts when they want to say, well, let's talk about this other problem instead, why do we have to focus on growth? But the reason we focus on growth is because growth is fueling absolutely everything around us, right? The whole point of economic growth is that it changes everything. It changes your life. It changes what you do. Um, you know, you can sound like a bit of a school teacher when you say, you know, back in my grandma's day, they didn't know about electricity, but that is what economic growth does, right? So, back in my day, it was very fancy to kind of own an iPhone when I was in school. Now everyone has one and that's perfectly fine and accessible and we should be focusing on you know delivering more things like this or thinking about those examples when we think about like housing or other types of things but I think it's one of those things there is a tension when the government says we want growth but what those policies look like sometimes what it means to encourage activity what it means to like remove these blockers are things which come into direct conflict with some with some of the more basic instincts which are a bit more controlly there.

[00:13:44]>> Yeah.

[00:13:45]>> Yeah. I I mean it just so that we're not too nice to to Tony Blair uh just for for for some balance I think a fair point that has been raised uh with this is that okay it's easy for him to say this now that he is I don't know what a sort of global consultant kind of thing um uh when he's been out of power for a decade and a half Um but when Blair was actually in power, he doesn't well he didn't practice consistently what he's preaching now. So for example um it was it was very very clear by the early 2000s that uh planning was a big problem in the UK. you know, uh the affordability ratios were getting much much worse and in some ways were actually worse in say 2007 than they are even today. And yet under Blair's government, there were not really any significant reforms to to Britain's planning system. Uh again when it comes to energy prices um they start a lot of the sort of environmental regulation and the sort of stuff that set up then they start to creep up from about 2005 when Blair is still in power. I mean he has in this essay this this wonderful sort of final point which is his 10th point on the list which is our aim for the long term should be a reimagined state in which taxes and spending can be lower productivity higher and the government seen as enabling not directing. Now, that could basically be, you know, the IIA's model and it's it's not it's not that far far off it. But if we look at Blair's time in office, um you know, he didn't meet those criteria. So you know okay you can say you can say that in his first term so from 97 to 2001 you know in in 2000 uh the state was 35% of um uh of GDP which is about as low as it's ever been. That's about as low as it was in sort of late Thatcher era. So, so they did actually, you know, keep the state pretty small, keep taxes fairly low during that period and, you know, you even had small budget surpluses.

[00:16:20]Then during the second term, we do like uh of of Blair from 2001 to 2005, there was a conscious decision to expand the state quite significantly and quite rapidly. So uh state spending in that period went from uh 35% to 40% of GDP.

[00:16:42]So um now on one level you can criticize him for that but you know 40% of GDP is is a lot lower than it is now where about 46% of GDP being state spending.

[00:16:58]So, you know, I suppose one criticism you can have of him is that he he has a lot of these ambitions. He seems to have like quite um quite overall free market instincts. But then when he was actually in power, actually dealing with his own backbenches uh and and many of his fellow ministers, um he was willing to do things that expanded the state quite a lot that things like the minimum wage.

[00:17:31]He he one of the things he criticizes the current government for is uh ratcheting up the minimum wage at a rate that's faster in inflation. Well, you know, it was a Blair era introduction.

[00:17:44]And I suppose one of the things is that like Blair introduced a lot of institutions, a lot of assumptions into politics that may have kind of worked in a context of well where you have Tony Blair and where you still have sort of late '9s levels of productivity growth. But they have allowed successive governments since then to actually ratchet up the side of the state, make the the tax system worse and more complicated. Um, and he he doesn't seem to sort of deal with, okay, how do you get from the current state we're in to a sort of better a better situation?

[00:18:30]He's just sort of like, oh, this should be our goal.

[00:18:34]>> Um, >> yeah. And and it's it's like all these things and you know think tanks as guilty of this as many others but it's comes back to what was said earlier about Blair being able to say this now that he's no longer in power. As soon as the >> the policy dream hits the grubby road of politics the reality gets somewhat more complicated because you have to worry about getting elected and all those things. And we will come on to in our third topic today on an issue that I think lays those problems bear quite clearly. But before then from one new Labour figure to another. Alan Milbour today has been up talking about needs uh NWT um people who are not in employment, education or training. Young people who are not in employment, education or training. Um the number of needs has risen above 1 million for the first time. Uh Val, what did you what have you made of of sort of the numbers and what Alan Milbour's been saying about the problem?

[00:19:31]Yeah. So I I I think this is probably one of the first topics I spoke about on this podcast, but uh let's let's look at some of the figures which look a bit concerning. So for example, we've had uh hospital vac hospitality not hospital uh hospitality vacancies have gone down by 50%. Apprenticeships have gone down by 35%. 58% of the inactive young people uh end up never having a job well since they became inactive. uh and of young uh people so under 35s if you have if you look at PIP recipients uh the number of PIP recipients has doubled uh in the past decade and it's set to double again by 2031 and many of these people are sort of like in long-term unemployment not searching for things um I think it's one of those situations where we have like a very unfortunate combination of things all happening at once so one of them is we had just after just after the pandemic, just after lockdown ended, we had like a reasonably hot labor market.

[00:20:37]Um there were quite a lot of vacancies.

[00:20:38]There was a bit of a labor shortage. Uh things seemed really nice. We're now at a point in the cycle where actually there is quite a bit of a contraction.

[00:20:48]Uh and people just started blaming it on all sorts of things like oh it must be AI, it must be the end of days and so on and so forth. But the fundamental reality of it is we are experiencing a bit of a cooler contracting labor market. Now that would be an issue in and of itself and it would be problematic. But since the beginning of this government, we've introduced a number of measures which have made the situation much more difficult for young people in particular. So when we talk about things like the national insurance employee employers contribution or things like lifting the minimum wage overall or or lifting it on like the specific age bands in particular, we are hitting hardest at the exact types of jobs, entry- level jobs that a lot of young people are doing in hospitality, in care services, just generically like um the service sector in general or even things like apprenticeships.

[00:21:47]We got a lot of these decisions making it very expensive to hire young people and then we added a bit of like a patchwork of like very bizarre almost like meme like policies on top of it to try to fix it. We keep talking about like youth hubs, employment hubs and things like the apprenticeship levy which had absolutely not the result that people were going for. So what happened with the apprenticeship levy and why apprenticeships are going down so much is that a lot of these funds are not being drawn down by employers because what they want to end up doing or what they have been doing actually is they've been channeling most of these funds the little that they could draw into graduate level apprenticeships or degree level apprenticeships. So often times they either get people into trading for a degree or they get people who are already trained. So it's mostly like on the more experienced side of things where this subsidy has been channeled as opposed to this kind of like imagined like oh we're going into this like critical shortage skills which it really hasn't happened because this is like not necessarily something that the government knew about the labor market.

[00:22:51]It's just something they wished they knew because it really fit a particular type of like you know story or narrative that they really wanted to believe. So we ended up with this like small misplaced subsidies all over the place doing absolutely nothing to help or they they're going to the direction that they didn't were were not necessarily intended. And we've made it more expensive and more like prohibitive well prohibitively expensive really to employ people in sectors which are both a very vulnerable when it comes to like a cool job market in general like hospitality, pubs and so on and b these happen also to be the exact sectors in which very young people work in. So it's like it's a perfect storm of things where the labor market has a bit of a contraction.

[00:23:36]We make it very expensive for people to hire in vulnerable sectors which also happen to be the sectors which hire young people. Like we've just been piling up all these things on top of each other and then we announce a bunch of hubs and subsidies to do nothing in particular to be helping given the numbers and given the trajectory of numbers. Um so yeah, I think we're at a point where the situation has been going worse and now this report predicts even worse things coming down the road. And I think it's one of those terrible unforced errors we've been doing by compounding a lot of really bad policy ideas. One of the most interesting things about the United Kingdom was that in the past people would always draw a big contrast between youth unemployment rates in south in southern Europe or the rest of Europe, continental Europe and the United Kingdom specifically because we had a tiered minimum wage system which made employment like much cheaper kind of like on the lower end side of things. We also had a much more flexible labor market. Uh and we had a booming, you know, hospitality sector. We like all of these sectors used to be like slightly more resilient when it come when it came to things like, you know, like energy cost, the cost of running a business and so on. Um so people were able to find these opportunities. There was more flexibility. There was more things going around. And now we're hitting double digits. we are essentially becoming like the sort of thing, you know, people used to criticize about Spain or like what they're doing um in countries where we have like very high youth unemployment.

[00:25:02]Um so it it's a bit of a trend reversal and it's generally one of those situations where it's just an unforced error. There was no there was no need to introduce all these costs at this particular time. Um and now we have all these things adding up and it's not quite clear how you start unraveling this. Yeah, the government's in the sort of what is the government doing answer, they've pointed to things that they announced in the budget, announcing 820 million pounds of funding to support 18 to 21 year olds into education or paid employment. Uh those have been neat for more than 18 months, given a six-month paid work placement, uh making do giving free apprentichip training and stuff.

[00:25:41]It's sort of it's it's increasing. It's sort of the supply side rather than the demand side to an extent and it's similar to what Tony Blair is saying, right? Well, it points to the problems that Tony Ber has pointed out. That's what I mean.

[00:25:51]>> Yeah. I mean, I I think uh Val is completely right that you have to look at this issue of like needs and and youth unemployment in the context of the broader labor market which has over the last decade really. It's not just something entirely new uh with this government has been basically consciously becoming less flexible and also more hostile to entrylevel low productivity jobs. So part of that is um is the minimum wage. So what one of the points highlighted in the the report is that since 2019 the minimum wage for a uh a 19year-old has increased 76%.

[00:26:42]um it is highly likely that is having at least some impact on your likelihood to hire someone who is you know 18 19 relatively inexperienced and I think there's also a broader a broader issue that this ever ever ever since sort of 2015 2016 and policy makers and economists have started to become a bit concerned about productivity growth in the UK um labor productivity is there's sort of been an idea that um oh it's actually a good thing if some of these hospitality jobs get destroyed because uh and in fact you get some people quite explicitly saying this is that this is um you know a bonus because the idea is that oh well you get rid of these low productivity entrylevel jobs through a mix of higher higher minimum wages, uh higher uh employer side national insurance contributions, more labor regulation, and the idea being that these people would just be perfectly reallocated into higher productivity, higher paid jobs. Well, it seems that really isn't happening. we're we're having because we've basically got this skewed idea of creative destruction where the idea is that you basically just destroy things and that will automatically be creative. But that's really not what's happened. Essentially what you've done as Val outlined is you've made it a lot more difficult for people who uh who either have low few relatively few skills and little experience because they're young or who have some other sort of aspect that make means they're less likely to be really really productive. So, if you have some health issues or mental health issues or you've been out of the labor force for a while because you've been looking after children for whatever, by constantly ratcheting up the minimum wage and consciously trying to destroy these entry-level jobs, um you are making it much more difficult for these people to have any employment. And you know that is not that is not good for people overall. It's not good as far as the evidence goes for people's mental health for them to just be sort of sitting around at home on some sort of benefits.

[00:29:19]And I think perhaps we should actually, you know, start making the case for low productivity drops >> like in in the sense that there does seem to be good evidence that um higher minimum wages do seem to correlate with a higher intensity of work. So that previously, let's say in in 1997 or or whatever, you might hire, you know, you might hire someone on a relatively low wage, but on the understanding that, you know, they're not going to be hugely productive.

[00:29:58]>> Whereas, if you if you increase the minimum wage more and more and more, employers are basically going to think, well, right, we need to get everything out of this person. And if you're someone with limited experience or who has some other issue that means then they're not going to be as productive that can mean it is impossible for them to enter the labor market and the costs are borne by the people themselves as ads report highlights but also everyone else.

[00:30:33]It's it's sort of baffling that the government has gone in this direction in which they've for most people the writing is on the wall. If you if you implement all these three things at the same time, the the tax rises, the minimum wage rises and the employment rights act that this is the effect that will that will be have. But it also at the same time sort of feels like the over window might be moving slightly with both Tony Blair and Alan Melbourne talking about cut to the minimum wage or at least slowing down the raises for young people. So do you do we think that there is optimism that there will be a little bit of rational thought off the back of all of this um in terms of government policy or is it going to go the other direction? I partly a political question I realize but do we think that the tide is turning?

[00:31:15]>> Hard to say. I think I I I think one of the things about um looking at youth unemployment and probably something that is highly correlated with like things like you know our housing shortage, our inability to sort of like build things is that we usually hit every problem with like a combination of um some kind of like supply side tax like we're always trying to place a chokeold. it's either some kind of bureaucratic veto or it's some kind of like monetary price like there is an additional tax like there's employers national insurance. Um and once we panic when we see what happens like oh there's a housing shortage or well ch you know young people aren't really working nowadays uh what we end up noticing is that oh we come up with some sort of like measly demand subsidy on the other side like either with some kind of like apprenticeship levy or some kind of help to buy scheme. Uh but we real we realize this is not really working. We really need to sort of like unblock the thing that was blocked in the in the very beginning. In terms of like you know the question of like will the tide turn? I really doubt it simply because that would necessitate a sort of like major U-turn on quite core manifesto promises from this government.

[00:32:27]So maybe that will happen. Maybe there is sort of like space for that to happen. If if if if this if if this is the sort of like rate of the the pace of change in the conversation, maybe that will happen. But I think this this is probably quite a big obstacle to overcome. Yeah. Mhm. I I'll give the listeners a tiny crumb of optimism in that I think um yes uh I I think it's quite unlikely that the the current government is going to roll back on the the workers rights act or or or you know reduce the the minimum wage. Um but I think there's there's a sense even among labor ranks that you know you can't keep trying to solve everything just by hiking the minimum wage ever higher and also the overton window is seems to be shifting quite significantly um uh on the the right of British politics on this question. So one thing that was very interesting actually kind of on the uh how the sausage is made sort of point of view was uh Rishi Sunnak's uh piece uh in the in the times earlier this week um where he points out he he discusses his decision as chancellor to increase um minimum wages and how he was really hoping that uh I think it was the uh the CBI would come out against minimum wage increases for uh for younger people >> basically to give him an excuse to to block it. But as he says in his um Times piece, um uh the bis business groups were not willing to stick their head above the parapit and say that you know this will create serious problems because they were worried about sort of uh media media blowback and you know >> were quite riskaverse. And so he therefore even though he had a very clear sense that this is going to create serious problems for the labor market um he went ahead with it because he felt he didn't have the political cover to to do it. I mean maybe the decision would be different today.

[00:34:49]>> Yeah. potentially there is a lot of there's this does seem to be a lot more noise from the business community saying >> that the pressure has got too much and that they have the sort of bad press be damned we have to say something um but before we run out of time I do want to move on to our last topic uh a policy debate on the other side of the political spectrum reform this week have um made a new tax cut pledge uh they're saying that income tax on overtime above a 40hour week should be scrapped for workers earning less than £75,000 a year. H they think this will cost 5 billion quid which they will make up in welfare cuts they say. Uh Dan, what's what's your take on this policy?

[00:35:30]>> Okay, I'm going to say the one nice thing about this because we could have because then you know the the bad stuff about this policy could take up like an hour and a half quite easily. So the good thing about this is, you know, it's nice when political parties are are talking about trying to reduce the tax burden. Uh when political parties have a set uh an understanding that incentives really matter uh in in uh the labor market and if you have high tax rates, this can disincentivize people from working um as as much as they'd like to.

[00:36:08]Now, unfortunately, this policy from reform is one of the least wellthought through tax cuts I think I can I've come across. Um, at least that I can remember in the last four to four to five years. Like there are there are so so many issues with this. One of them is uh a simple issue of uh fairness. So as you say this is abolishing income tax on uh people who do more than 40 hours a week for a single company. They have to be employees. So if you are self-employed, you do not benefit from this at all. So, it it skews the labor market very heavily towards uh employment over self-employment if you're working more than 40 hours a week and earning under £75,000.

[00:37:07]Also, as far as the policy goes, as it's currently announced, it doesn't seem to apply to people who have second jobs.

[00:37:15]So, for example, if you're working 40 hours a week for one company and then you have a side business where you do an extra 8 hours a week, you will still have to pay tax on all of those additional hours as your side business um or working for a different company.

[00:37:35]Whereas someone who is working 48 hours a week would be uh for a single company would be treated much much more favorably. Um, now th this this is a problem because overall the tax system should not be trying to discriminate very heavily or push people into economic relationships that they otherwise wouldn't have. It shouldn't be trying to push people out of self-employment or out of second jobs into just working working more hours.

[00:38:07]Secondly, I am very very skeptical that this actually will cost just5 billion pounds year because one of the things that immediately jumps out at you is this policy is incredibly easy to gain.

[00:38:22]So if you have a system where you pay normal tax on your first 40 40 hours um but then no income tax on hours above 40 hours. There is currently nothing to stop say say the IEA saying everyone is paid minimum wage for the first 40 hours and then everyone who works an extra 2 hours a week will be paid you know £500 per hour or £1,000 per hour however much it takes to get you up to the um the the the rate that you're you're actually able to employ people. Um so you know there are all sorts of things that you can do in that direction where it completely skews um uh the labor market.

[00:39:14]It completely skews uh people's contracts and this has actually happened before in a more limited sense where in in France where they attempted to do the same thing in 2007 it caused all sorts of distortions. Uh and then other than that, but even even worse than all of this stuff, um is it creates a massive massive tax cliff edge.

[00:39:41]>> Now, um we already have quite a few like far too many cliff edges in uh in our current tax system where you go from a relatively low marginal rate to a really high one and then it comes back down. So you get this if you have children and you're earning between 60 and £80,000 because uh child benefit gets withdrawn.

[00:40:03]So you end up with a high marginal tax rate. And then you get this again in an even more extreme way if you're earning over a 100,000. You end up with a sort of 71% marginal tax rate once you include student loan payments. Uh now this is bad because it artificially uh skews people to just below that level and discourages them from taking um you know from developing new skills and taking work that would put them over that threshold.

[00:40:34]This policy by reform would introduce uh a cliff edge that is far far worse than either of these cliff edges at 75 um at £75,000 because as it is currently outlined once you go once you earn over £75,000 um you uh you lose this all.

[00:41:00]>> Yeah, you lose this all. So, let let's say you're in a situation where you're you're getting like uh let let's say you're a a skilled plumber working for working for a plumbing firm. Uh let's say you're getting paid 55,000 a year and then uh 20,000 um in in overtime. Now as it under this policy that 20,000 is completely without income tax. Now let's say you earn one additional pound. So you go just over £75,000. Well now all of this 20,000 is subject to a 40% tax rate. So, you're suddenly faced with like this extra pound costs you £8,000 in income. So, it it it's it's an insane uh it's just an insane insane moronic policy that I I I just cannot comprehend why they why why they went for this.

[00:42:11]like um and and it's just like it's not like we have a shortage of bad taxes that you could get rid of for five five billion5 billion pound you could uh cut stamp duty by 40%. You could knock uh 1% of uh uh employee national insurance contributions. There is there are so so many things that you could do to make our tax system better.

[00:42:44]Um but you know they've decided to go for this utterly stupid gimmick.

[00:42:52]Very well put, very strongly put. The problem is though, Val, isn't it that with all of that being said, it's much more appeal, this comes back to the point we made earlier about when you when the sort of rubber meets the road of politics, policy to politics, that the cut to 1% cut in uh national church uh employees national church contributions, for example, is probably isn't going to win as many votes as uh no tax on overtime as a sort of headline, is it? What do you think? You you've been inside the machine. you've been a civil servant, you know, the sort of you have some understanding of how how the machine the sausage factory works. What's your take from that?

[00:43:30]>> Um, I I think I really sympathize I really sympathize with Dan when he says I don't understand how you come up with this, but deep down I actually do. So the reason and something I, you know, comment on on on things in the past is that something that really annoys me is that every time we make a tax change in either direction, it's always in an incredibly specific, incredibly narrow, very niche, bizarre way. So it it's always things about like, oh, we just identified this particular oddlike duty on a random good almost no one buys.

[00:44:01]We're going to quintuple it and make sure no one buys it whatsoever. Um or we look for like very specific things like um like we had those like changes to for example like on things like inheritance tax where we know most people who pay it like are very like both numerically and geographically very concentrated. Um we're always looking for things which are like narrow. We're always looking for specific things. And I think the reason why is because it just sounds like a nice thing to explain. It's like, oh, no, no tax on overtime or lots of tax on second homes or I don't know, something very odd and very something that sometimes happens like very rarely.

[00:44:41]Um, I think most of the vast majority of tax increases that happen in Britain are actually quite not obvious. They're not necessarily visible. Like sometimes we talk about things like fiscal drag, right? Like we don't really change the thresholds for income tax or like most taxation. So then people naturally end up paying a little bit more because they just end up to be shifted into the next category if they go for the threshold.

[00:45:06]The same thing happens with having different thresholds for stamp duty, you know, because we have a housing shortage because prices are going up. A lot of people end up, you know, going above a threshold and then they start gaming the system. They start saying for a pound lower than the threshold to make sure they make some kind of savings on tax or they just don't sell at all. if if that's not particularly achievable if you go like much further above the threshold and it's just completely like a bad deal for you. So I think it's one of those situations where every time taxation goes up by a lot because the tax system is so complicated often times political figures really struggle to explain what is actually happening. But when it comes to making these like very symbolic odd kind of like spite moves about like oh no tax on this or triple the tax on that, it always feels like it's just something very targeted, very specific. is just very easy to understand. But when it comes to the sort of like things which have a big impact on us, people really struggle to explain how and why the precise mechanism of how this happens. It's not intuitive to say like oh it's because of fiscal drag. Like that just sounds like a very boring thing like I would write about, right? Um but but when it comes to like boring things like oh one penny off the pint that just like rolls off the tongue. It's so easy to say but it also just doesn't make much of a difference or it makes or it it it it distorts things in such a bizarre way that either employers start behaving in absolutely like you know unex inexplicable ways or we just completely stop doing certain activities like selling houses because they got too expensive. Mhm.

[00:46:35]>> Yeah, that's exactly right. And I think that speaks to the point when you were speaking about what Rushi Sur was right about. We sort of need and arguably Tony Blair's argument is out with above the policy element is you sort of need political leaders to be leaders and set a direction and take take the country in that direction, explain why they're doing these things in a proper way and and and follow through on them. Um I'm afraid that is all we've got time for.

[00:46:57]Thank you very much for joining us.

[00:46:58]Thank you both for joining me. Um, as always, do remember to subscribe to us on Insider at Substack at IIA insider.ia.org.uk.

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