Stimulate economy with tax cuts, says TUC

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date: 18 November 2008

embargo: 00:01 hours Wednesday Nov 19 2008

The TUC is calling on the Chancellor today (Wednesday) to use the Pre-Budget Report (PBR) next week to make tax cuts for low and middle income earners to stimulate the economy.

In a letter to Alistair Darling, the TUC says that putting extra money into the pockets of low paid workers and the unemployed is the most effective economic stimulus because they are likely to spend their money quickly.

The TUC has also urged the Government to help the victims of recession through suspending housing repossessions, higher benefits and better redundancy pay.

TUC General Secretary Brendan Barber praises the Government's reaction to the financial crisis but says the PBR must be: 'As bold in heading off unemployment, as it has been in resolving the banking crisis. Policy must be designed with three objectives in mind: to prevent job loss; to get the unemployed back to work; and to prevent those in unemployment facing hardship.'

Measures backed by the TUC include:

  • Tax cuts targeted at those on middle incomes and below to stimulate the economy. This should form part of a permanent rebalancing of the tax system that makes the super-rich pay more and those on low incomes less.
  • The Government to press lenders for a moratorium on repossessions and take action to help consumers with excessive debt.
  • An increase in unemployment benefits, statutory redundancy pay (in line with the 2005 manifesto commitment) and the amount of redundancy pay that can be taken tax free.
  • An extra £10,000 tax free allowance for redundancy pay spent on training.
  • Bring forward planned infrastructure spending, increasing funds into social housing and investment to make the UK a leading low carbon economy.
  • An industrial strategy which supports sectors that are already outperforming the rest of economy and have the potential to do better.
  • More investment in skills.

TUC General Secretary Brendan Barber said: 'The Government has shown the rest of the world the way in how to rescue the financial system. Now it must show the same commitment to making the recession as short and as shallow as possible.

'This requires not just a big boost to the economy, but a smart one. It should give extra resources to medium and low paid workers and the unemployed who are most likely to spend extra cash. And it should boost public spending in ways that will both produce immediate economic benefits but also make the UK a fairer and greener place.

'We are going to have a grim time, but at least at the end of it we should aim to emerge as a better balanced and more sustainable country that has decisively narrowed the gap between the super-rich and the rest of us.'

NOTES TO EDITORS:

- Exerts of letter to Alistair Darling

Like most commentators, the TUC believes that inflation has now peaked. Indeed, our assessment is that, in the medium term, the Governor of the Bank of England may be writing to you, not to explain why inflation has overshot its target, but why it has undershot that target. The biggest threat to the economy is not inflation, it is negative growth. For millions of ordinary men and women, the threat is of unemployment and, in worse case scenarios, the loss of their homes.

Employment and Unemployment

Although there had been some indications of a softening labour market for about a year, the unemployment level and rate only began to rise significantly in the late Spring/early Summer, when they took off rapidly. On current forecasts, the TUC expects unemployment to reach 2.5 million by the end of 2009.

Once the unemployment rate has risen, a legacy of long-term unemployment will be created that will continue after the recession has finished. If the last recession is a guide, there will be a time lag of up to three years before long-term unemployment starts to fall. From these points, we can draw two conclusions for employment services:

? Jobcentre Plus's (JCP) employment services need to be able to cope with a forthcoming round of redundancies and need to reach this position quickly;

? Over the longer term, JCP needs to be able to help a likely significant increase in the number of long-term unemployed people.

The TUC is concerned that the staffing cuts that have been inflicted on JobCentre Plus (JCP) are reducing its ability to assist people threatened by redundancy. 30,000 jobs have been cut from JCP over the past three years and the Government plans another 12,000 job losses by 2011. The immediate priority should be to reverse the staff reductions planned for JCP, making it possible to devote time to providing early support for workers threatened with redundancy. We welcome the doubling of the budget of the Rapid Response Service (RRS), from £3 million to £6 million, but we call for its remit to be widened. At present, the RRS is marketed only as a service to employers, helping them to cope with redundancies, but it could play a much stronger role as a service for individual workers. Ideally, the RRS can be used to run on-site advice for workers working under notice of redundancy, and this is offered sometimes. The TUC would like to see this become the norm for larger redundancies.

The TUC welcomes reports that the Government will use tax cuts as a route to stimulating the economy. However, it is vital that these cuts are targeted at those on middle incomes and below. This is important, not simply because this is the group that gets the worst deal out of a tax system currently skewed towards the very wealthy, but also because it is this group that will spend rather than save any extra income. This offers a superb opportunity for the Government to improve tax fairness in the UK and address the very widespread view that the system is deeply unfair. In particular, the current international negotiations on financial regulation would benefit from the promotion of a greater multilateral focus on addressing the damage done to national tax systems in the UK and elsewhere by the activities of tax havens.

It should also not be forgotten that raising unemployment benefit is an effective economic stimulus. The fastest acting fiscal policies, those that produce the biggest boost to demand, are those that put money directly into the hands of people with low incomes. Direct income transfers - benefits and tax credits - are most effective. They will out-perform tax cuts, because they are targeted on the poor, and are more effective than capital spending, because recipients will spend the money quickly. A recent study by the US Congressional Budget Office showed that extending Unemployment Insurance benefits and increasing food stamps was the most cost-effective stimulus option.

Personal Debt

The massive rise in personal debt over the last decade fed the capital markets which ultimately crashed, dragging the global economy into recession behind them. There is now a risk that personal debt could pull us further into recession and make it harder to escape. It is vital that those in debt are treated fairly, both to prevent hardship and to avoid a worsening of the recession.

Immediate Measures to Stimulate Economic Activity

The TUC welcomes newspaper reports that the PBR will be used to fast-track targeted spending on large infrastructure projects. The TUC has been calling for such action and we are pleased that pressure from trade unions has paid off. In particular, you are reported as highlighting housing and energy as classic examples where people are feeling squeezed.

The TUC warmly welcomes the news that the Energy Bill will now include a feed-in tariff for small scale power generation. This could help to kick-start a new microgeneration industry, which might form a part of a green answer to the economic slowdown. This is a major shift in Government policy, but more detail is required in order for us to hit the ground running on this initiative. Germany has implemented a renewable energy tariff. This has led directly to the installation of 130,000 solar power units in 2007 alone and the creation of a renewable energy sector employing 249,000 people, compared to 7,000 people in the UK. The German renewable energy sector now has a turnover of 24 billion euros.

Plans to increase the rate of house building will suffer a serious reversal unless further action is taken as a matter of urgency. The private sector is currently finding it impossible to deliver on the housing targets, so we must rely on the public sector to take up the slack. The Government has recently made a further £13 million available for local authorities to buy surplus private build for use as social housing. This is welcome, but a much larger intervention will be needed in order to deliver the planned homes, the skills development and the labour mobility that is needed. With private housing in the doldrums, the provision of more social housing must be the highest priority. The Government must therefore address the significant legal, financial and political barriers that exist to local authorities taking a lead on house building in their areas as a matter of urgency.

Procurement Policy

The TUC has long championed the role that public sector procurement could play in support of a modern industrial strategy. In the current economic circumstances, we would urge public sector bodies, including central Government, to make full use of the opportunities provided by procurement law. For example, it would be possible to include contract clauses that provide for employment creation in areas of social and economic deprivation, which are particularly likely to feel the pain of a recession. Procurement can also be used to promote skills training, innovation and sustainability. These will be much needed practices as we seek to build a higher value-added economy after the financial crisis has subsided.

A modern industrial strategy

Whilst the economic downturn dominates our current thinking, it is important not to lose focus on longer term objectives. In previous Budget submissions, the TUC has set out its belief in the need for a modern industrial strategy. We have argued that, if the UK is to rise to the challenge of a new world economic order, dominated by the growth of China, India and other fast growing developing economies, we must focus more directly on areas of economic strength. The UK has introduced horizontal industrial support mechanisms, covering skills, research and development, innovation etc. The TUC is happy to support these, yet in our view, a more targeted focus is necessary on those industries and sectors that are or could be competitive in the era of globalisation, and could remain competitive in the decades to come.

We have previously highlighted The Race to the Top, Lord Sainsbury's report into science and innovation. This report specifies sectors where the UK could succeed in the future, including aerospace, pharmaceuticals, biotechnology, regenerative medicine, telemedicine, nanotechnology, the space industry, intelligent transport systems, new sources of energy, creative industries, computer games, the instrumentation sector, business and financial services, computer services and education.

The TUC believes that, if the Sainsbury report was important in October 2007, when it was first published, it is absolutely vital one year on. So many of its recommendations are valuable. We particularly highlight the importance of science, technology, engineering and mathematical (STEM) skills at school, college and university level.

Skills

The TUC has largely supported the thrust of the Government's skills policy over recent years and in particular the central aim of rapidly expanding training opportunities at work in order to support both economic and social priorities. These priorities include both the increasing demand for more skilled workers in the labour market of the future and the need to support all workers in enhancing their work and life chances. Lord Leitch's ambitious plan for developing a world-class skills base by 2020 gave a further impetus to this 'upskilling agenda' whilst also calling for welcome new reforms, including the integration of employment and skills policy and provision.

- The full text of the letter to Alistair Darling is available from the TUC press office.

- All TUC press releases can be found at www.tuc.org.uk

- Register for the TUC's press extranet: a service exclusive to journalists wanting to access pre-embargo releases and reports from the TUC. Visit www.tuc.org.uk/pressextranet

Contacts:

Media enquiries:
Liz Chinchen T: 020 7467 1248 M: 07778 158175 E: media@tuc.org.uk
Rob Holdsworth T: 020 7467 1372 M: 07717 531150 E: rholdsworth@tuc.org.uk
Elly Brenchley T: 020 7467 1337 M: 07900 910624 E: ebrenchley@tuc.org.uk

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