The Tories are suggesting a small cut in national insurance payments for very small businesses, lasting six months, as well as allowing small businesses to defer VAT payments for six months. It doesn’t seem like much, and it isn’t. Does anyone think the economy will be peachy again by April?
But they can’t propose anything significant in the way of fiscal stimulus – they’ve been pushing the too-much-public-borrowing line very hard, and have been insisting that “the cupboard is bare”. They have to say that, give or take a morsel, we’ll have to tough it out. And, indeed, even this modest, short-term NI cut is to be funded by cutting business tax reliefs and allowances elsewhere.
Labour, conversely, is planning to bring forward some public infrastructure projects a couple of years. This will have a bigger effect, but will be slower to enact.
A US study [PDF] of a range of different fiscal stimulus policies is telling here. Will Hutton sums it up:
Douglas Elmendorf and Jason Furman show that by far the quickest and most effective means is to put cash into the hands of the unemployed by raising unemployment benefit, increasing temporary cash payments to them for specific items such as food and clothing, and making benefit unconditional for longer. It is not just they need the cash; they spend it fastest.
The next most effective measure is to increase spending on the national infrastructure - housing, roads, ports, hospitals, schools. The trouble is that there tends to be such a long time between the decision to spend and execution, so that too frequently spending kicks in not during the recession but the upturn. Tax cuts are the least effective. None act quickly, although reducing the tax on employment - payroll and employer national insurance contributions - does moderately well.
So, boosting unemployment benefit, eh? On that subject, another study [PDF], by Stephen Machin and Olivier Marie of the LSE, has something to report. They looked at the effects on crime of introducing job seekers allowance in 1996, a less generous and more conditional system than its predecessor:
We study crime rates in areas more and less affected by the policy before and after JSA introduction. In the areas more affected by JSA introduction, crime rose by more. These were also the areas with higher outflows from unemployment and particularly to people dropping off the register but not into work or onto other benefits. Studying the relation between crime and sanctions after introduction also confirms that areas where more people were sanctioned were those where crime rose by more. As such these results seem to reflect that benefit cuts and sanctions in JSA shifted people off the benefit system and raised crime.
So there we are. More generous and less conditional unemployment benefit is a very cost-effective way of stimulating the economy, as well as the fact that it alleviates poverty among those who can’t find work, and it may also help to fight crime. Oh yes, and I said it could make you feel sick. Well, see what happens when you phrase it this way: increasing public borrowing even further so that we can pay feckless workshy scroungers with criminal tendencies not to nick stuff. Got the stomach for that?
Another thought is that similar effects (bar the nausea) might be achieved by introducing a citizen’s basic income.