The really embarrassing thing about Labour’s police plans is not Diane Abbott’s gaffe. It’s that they simply don’t add up

The news coverage about Labour’s plans, announced today, to recruit an extra 10,000 police officers, has been dominated by the agonising interview given by Diane Abbott to LBC’s Nick Ferrari, in which the shadow Home Secretary seemed to forget how much the policy would cost.

Ms Abbott has since said that she simply misspoke this morning (she said the new officers would cost £300k, and then £80m). The actual costing for these extra police officers would be around £300m, she and Jeremy Corbyn said.

And indeed, the Labour press office has released a table explaining how they got their numbers, which do indeed result in a figure of £300m a year by 2021/22 (actually £299m).

And at first glance, the numbers add up: 2250 new officers on the lowest pay rank (£25,400) in year one, a further 250 in London (which pays a little more). There’s a line accounting for the fact that the new recruits will go up one point on the pay scale each year.

Here’s an alternative way of looking at it, but with each column showing you the grand total each category of officers would cost on this basis. Note the £299m in the bottom right cell, which is the key thing:

Tot it all up and by 2021/22 there you have it: 10,000 new police officers, 1,000 of them in London, costing a grand total, by then, of £299m. Now, one could ask why Labour is putting so few new officers in London – currently about 26% of all England/Wales police officers are in London.

Are Labour planning to underfund London in relation to the rest of the country? Is this part of their regional strategy? Or is it simply done to keep the costs down (London officers cost more than elsewhere)? We do not know. But leaving that aside, the numbers look, initially, quite plausible.

Except for one, very important omission. Whichever wonk in the Labour party put them together seems to have forgotten about inflation and pay increases.

Despite austerity, police salaries are planned to increase by up to 1% a year in the next few years. But the Labour costings assume that a new police officer in 2021/22 will earn precisely the same as a newly-recruited officer this year (£25,400). Were police starting salaries to increase by a mere 1% each year starting this year (2017/18), the starting salary by 2021/22 would actually be £26,431.

That might not sound like much of a difference, but the upshot is that by 2021/22 the policy would actually end up costing £310m, not £300m. See the workings here, and, again, note the bottom right cell:

 

So either Labour is indeed planning even tougher pay cuts than the Conservatives or they have got their numbers wrong.

In fact, a glance through the cuttings shows that Mr Corbyn has said on numerous occasions that he intends to remove the 1% pay cap for public sector workers such as the police. If he is indeed planning to raise police salaries in line with inflation, or indeed broader wage growth around the economy, that would imply them increasing by 2% or 4% a year respectively.

Those pay increases would imply that the policy would be even more expensive. If wages went up in line with CPI inflation of 2% a year, then the extra officers would cost £323m a year by 2021/22. If they went up in line with earnings of 4%, that would mean a cost of £350m a year by 2021/22.

Here’s a table for the cost of each year’s new spending assuming 4% inflation, for those who like such things:

And all this is before one considers the fact that the salaries used in the Labour party workings do not take account of extra allowances and overtime, which can be as high as £4,338 in London. Then there’s the cost of national insurance and pension contributions, which would raise the average cost of a police officer even further. The salary is just the beginning, so the workings above are likely quite generous to Labour. [UPDATE: actually the costings do include NI/pensions, as per this source]

Now, in the grand scheme of fiscal plans, £50m is hardly enormous (though it is considerably more than Ms Abbott briefly thought the entire policy would cost). And if Labour does indeed fund this policy by reversing the Tory plans to cut capital gains tax from 28% to 20%, that would bring in more than enough cash to pay for this (£760m, possibly more, by 2021/22) – though the party has already promised to pay for two other policies – a pupil arts premium and assistance for the steel industry with the CGT spoils.

But such things do matter. Small mistakes like this add up. And they underline something we often see in election campaigns – the party manifestos are often predicated on sloppy, rushed economic analysis that does not add up. Labour is not the only guilty party here: the 2015 Conservative manifesto was notorious for its enormous, open-ended fiscal promises. But this is not an encouraging start.

I have asked Labour for some comment on the numbers above, but they have yet to respond.

Ditching the triple lock is no silver bullet for the pensions crisis

The odd thing about the triple lock – the pensions formula which has become so expensive that the government is now considering ditching it – is that it was never expected to be all that costly.

When the coalition government introduced it in 2010, their models suggested it would rarely get triggered.

To understand why, let’s start at the start.

For most of modern history, state pensions were increased in line with inflation. The upshot was that between the 1970s and the early 2000s, pensioner poverty became a big problem for the UK. Gordon Brown attempted to make amends – first by introducing the Winter Fuel Allowance, then by promising that in due course (for which read: after we’re out of office) the state pension would be increased in line with earnings rather than inflation.

The distinction doesn’t sound all that significant, until you recall that inflation (at least, as measured by the consumer price index) tends to rise by 2% a year and earnings tend to rise at about double that rate (in normal times, at least). The upshot is that over 30 years, a pension uprated by inflation will go up about 80%, a pension uprated by earnings will go up by about double that, 160%.

Such numbers are difficult to predict, of course. Over a few decades, there are often years when inflation outpaces earnings, or when both are very low. But the key thing to note is that the switch from inflation to earnings uprating was a Big Deal. Which is why Mr Brown fought so hard to avoid it for so long.

When George Osborne took over, with the LibDems looking over his shoulder, he made a dramatic shift. Not only did he say pensions should increase by either inflation or earnings – whichever was the higher – he said that if either dropped down low, the government would still pay out a minimum increase of 2.5%. Thus was born the triple lock.

As I’ve said, at the time it was introduced, there seemed little likelihood of the triple lock bit (the 2.5% minimum) being triggered all that much. Indeed, in no year between 1990 and 2009 were earnings and inflation simultaneously below 2.5%.* But fate has an odd way of surprising Chancellors who set targets such as these. In the following years, both earnings and inflation lurched around, with the event that the triple lock was triggered three times.

In the meantime, the amount spent on pensions has ratcheted ever higher while earnings for working age households have more or less stagnated. The upshot is that not only have pensioners caught up with non-pensioners in terms of their earnings (after you take account of housing costs), they have now exceeded them. Additionally, the extra costs have caused government spending to gallop higher, with pensions now accounting for more than half the total welfare budget.

All of which is why the Government is thinking about ditching the triple lock in its manifesto this year.

But what to replace it with? The Guardian reported this morning that one idea is to scrap the triple lock and bring in a double lock: make pensions increase by either or earnings or inflation – whichever is highest.

This sounds compelling in theory, but in practice it will make little difference. Consider our pension illustration (remember that such things are rules of thumb since making long-term predictions is a mug’s game): over 30 years, the triple lock would increase the state pension by 197%. A double lock would still increase it by a whopping 189%.

The Institute for Fiscal Studies has an alternative suggestion, a kind of adjusted double lock (an idea which has since been taken up by the Work and Pensions Select Committee):

“The state pension would be uprated with earnings, but with temporary price-indexation when inflation exceeded wage growth. Price indexation would continue once earnings growth again exceeded inflation, but only for as long as the value of the state pension remained above [an] original fixed minimum proportion of average earnings. Indexation would then revert to earnings.”

To translate: this would ensure that while pensions would not be unduly hit in the event of a big leap in inflation, nor would they gallop ahead of everyone else’s earnings in the coming years (which is more or less what has happened in recent years).

But the key thing is that whichever of these policies the government goes for, there is no magic solution that will dramatically reduce pensions costs. Which raises another question: how else do you cut pensions costs? The short answer is you raise the retirement age even further. In the end, that may be the only way to make pensions provision affordable. Just don’t expect it to come up in this year’s election campaign.

 

* Well, more precisely: in no September was CPI below 2.5% and in no July were earnings below 2.5% – those are the months whose figures are used for the uprating.

More than a u-turn. Why Philip Hammond’s reversal on National Insurance matters

It is difficult to know where to begin. There is nothing new about u-turns from Chancellors – Lord knows George Osborne did enough of them.

But Philip Hammond’s volte face on National Insurance must surely go down as one of the most screeching and humiliating in years.

Mr Osborne took two months to reverse his notorious pasty tax. Mr Hammond has taken less than a week.

There are a few obvious lessons. The first is that the Treasury is clearly weaker than it has been in decades. Under Gordon Brown and Mr Osborne, it was the powerhouse department no-one else could argue with – including, sometimes, the Prime Minister. No longer.

The Chancellor was very invested in the plan to raise national insurance rates for the self-employed – as was his department; he spent the day after the Budget defending the policy vigorously. He disputed claims that it broke the Tories’ manifesto pledge not to raise main tax rates. Indeed, in the last couple of days it seemed increasingly that he had managed to ride out the choppy waters: the headlines in recent days have been dominated by Scotland and Brexit.

But it is clear, now, that he has been overruled by Number 10. Which raises a big question: given there is so much tricky economic policy that will need to happen in the next few years – on reforming the tax system, on changing planning laws, on throwing out long-standing EU regulations – how on earth will the Treasury be able to push it through?

The NICs change was undoubtedly controversial: some self-employed workers would have paid considerably more. But it was as nothing compared with the furore that will ensue if the Government considers anything that will equalise the intergenerational divide. It is tiny in comparison with the political impact of trying to dismantle planning restrictions over the green belt or reverse popular labour market regulations.

In short, any hopes economists had that this Chancellor would be a great reformer seem to have been quashed in one fell swoop.

Another broader lesson is that the Government’s wafer thin majority in Parliament means any contentious fiscal decisions are going to be very difficult to push through. This u-turn was largely driven by Conservative backbenchers, who were fighting the reforms. Their victory will only make their voices louder in the future.

To take this case alone: abolishing the NICs increase means the Budget will have a £1 billion hole in this parliament – potentially £2bn over the next five years. That hole will need to be made good – either through other spending cuts or tax rises, or more borrowing. Now, as it happens, the Government could comfortably borrow more without breaking its rules – indeed, as I pointed out on Budget day, the intriguing thing about the NICs change was that in purely fiscal terms (eg to make his sums add up) the Chancellor didn’t really need to do it.

But, again, the issue is more the precedent it sets.

Finally, there’s the question of what this u-turn does to the structure of the UK economy – and here there are at least two concerns. One is that the NICs increase was there for a reason (beyond raising money). There is a major tax incentive for anyone wanting to be self-employed. Some degree of incentive is fair enough, but most economists argue that in the UK’s case the balance is skewed too far in the direction of self-employment. That helps explain why self-employment rates have gone through the roof here compared with most other nations. The Government has commissioned an independent review on this and other gig economy related issues from RSA chief Matthew Taylor, so its publication may prompt more reforms. But given what happened today, you’d have to append a lower probability to any of those recommendations actually happening.

Then there’s the impact on inequality. The NICs change was the most progressive policy in the Budget – in other words, it took most from the richest and least from the poorest. Its absence will, all else equal, mean the UK is more unequal than would have been the case with the NICs increase. Given that by some measures this Government is already raising inequality more than any other for decades, that’s not a trivial concern.

The very final lesson (perhaps the most important of all) is that politicians should make silly promises at their peril. In the end, this comes back to the pre-election Conservative pledge not to raise the main rates of tax. That was always a preposterous promise – just like George Osborne’s surplus target and David Cameron/Theresa May’s vow to get net immigration down to the tens of thousands.

Such pledges might help you win an election. But they’re even more likely to help you lose the next one.

The real powerhouse of the UK economy

Which of the following sectors would you say has made the biggest contribution towards UK economic growth over the past two years: manufacturing, banking or domestic workers, such as cleaners and nannies?

The answer is domestic workers. That’s right: “Activities of households as employers of domestic personnel”, which means everyone from housekeepers to butlers, accounted for 2.1% of the extra UK national income generated over the past two years. The manufacturing sector, by contrast, accounted for just 0.2% of the extra growth, and the banking and finance industry generated only 0.3% of that growth.

Now, sub-sectoral estimates of UK economic growth are volatile, but this does underline something important about Britain’s economy. While we have presumptions about the most important constituent parts, the truth is much of the recent increase in gross domestic product has come from other places.

Consider the car industry. Much is made of the fact that Britain is making more cars than ever before. And indeed, over the past couple of years car manufacture accounted for 1.6% of total GDP growth. But far more important than that was car retail, which accounted for 7.8% of the extra growth.

All these figures, by the way, can be found by fiddling with this spreadsheet from the Office for National Statistics.

PS I spent the day asking members of the public the question at the top. Most people got it wrong (which is fair enough, so would I). I also asked the Chancellor. He got it right.

The Autumn Statement in seven charts

As Autumn Statements go, this was both thick and thin.

Thin in terms of the number of pages in the document itself – a mere 64 of them, which makes it more of a pamphlet than a major fiscal document, about half the length of its predecessors. But in terms of the changes to the official outlook for the economy, and the government’s own plans in the coming years, today was thick with changes.

Let’s go a through of them, told through the medium of some of the most important charts of the day.

chart1-obrbreakdown

And the best place to start is with this chart, showing you just how much government borrowing is due to increase in the coming years (£122bn in total, compared with the March Budget), and where all that extra borrowing comes from. As you can see, a fair chunk of it is down to the usual stuff: extra spending commitments from the Government (the green bit), forecast changes (red) and reclassifications of where the debt sits in the national accounts (yellow).

But as you can see, by far and away the biggest chunk of the increase in the deficit each year is down to Brexit-related effects. In short, the Office for Budget Responsibility (who do these forecasts) think the economy will be weaker in the coming years. That, in turn, means less income shared across the country, which means less income tax, which means a higher deficit.

In other words, the big story from the Autumn Statement this year is less about the extra money the Government is spending and more about the ginormous fiscal impact of Brexit – a cumulative £58.6bn or more than half of the total deficit increase.

chart-2-dissecting-the-brexit-effect

Which raises the question: why does Brexit cause so much fiscal damage. The answer can be found in this next chart, which I’ve put together from some of the figures in the OBR’s documents today. In short, most of the Brexit weakness is associated with three things: lower migration, weaker productivity (itself partly a consequence of weaker investment) and a likely cyclical economic downturn caused by uncertainty and a squeeze on wages. In other words, all the stuff those economists were warning about before the referendum will mean the UK economy will be significantly weaker (2.4% over the forecast horizon) and households will be left with a major chunk of extra borrowing (£122bn) to pay off in future.

Then again, these are still forecasts, so if you’re one of those people who’s inclined not to believe them, then that’s your prerogative.

chart-3-lordknowswhathappensnext

And that brings us to this chart, which shows you just how unsure economists out there in the UK are about the potential growth rate in the coming years. As you can see, the OBR has set its own forecast somewhere in the middle, but it admits that the room for error is far greater than ever before. Indeed, it revealed today that despite imploring the Government for more detail about the likely path of the negotiations, it knows about as much as the rest of us. Which is to say not a lot.

chart-4-fiscal-rules

Still, we are where we are. And with the deficit and the national debt now much higher than before, that means the Treasury has already broken the three fiscal rules set by George Osborne to keep borrowing in check. Philip Hammond’s solution? Get another three fiscal rules. His new rules (which, as you can see from this helpful checklist from the OBR) are all being met at the moment. That’s not a surprise, since they’re so much easier than the previous ones. In fact, by some measures they’re easier to meet than those proposed by Labour Shadow Chancellor John McDonnell. Interestingly, despite this sudden fiscal lurch, markets remain relatively sanguine, and while the UK’s cost of borrowing increased a touch, it’s still well, well below recent levels. Which just about tells you how much they care about missing fiscal rules (or indeed needing them in the first place).

chart-5-wheres-the-money-being-spent

Anyway, now for the question you’re all no doubt asking: who gets all the money? Well, such as it is (this was not a big rabbit-out-of-hat moment), the vast majority of it will be spent on infrastructure: roads, railway, broadband and all that. That’s the grey-blue chunk in this next chart from the OBR. That’s leavened out by some small tax rises (stuff like an increase in insurance premium tax (again) and removal of salary sacrifice and other such loopholes) and sits alongside some smallish increases in welfare spending.

chart-6-netinvestment

But, and this is important, note that in the grand sweep of things, Government spending on investment will remain very low in the coming years. Indeed, as this long-run chart shows, public sector net investment (eg with depreciation subtracted) will still, in 2021, be lower than it was in 2010. So not as big as it looks at first.

chart-7-distributional

Finally, the Treasury did something welcome and honest in this Autumn Statement (how often can we say that?) and provided a bit of detail about winners and losers. This chart shows you which income groups will benefit and suffer most as a result of the policies both in today’s statement but also in the announcements we’ve had since last year’s election. As you can see, the wealthiest 10% of the population are by far and away the biggest losers. However, they are followed by the poorest 10% of the population, who of course will bear the brunt of the benefits freeze introduced by Mr Osborne.

And that raises one, big, unanswered question from today’s announcements: why is the Government not addressing the one policy that will cause most pain to the Just About Managing families and reconsidering this freeze? The upshot is that for many people, working and reliant on benefits to keep them financially afloat, the coming winter and spring will be very chilly indeed.