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Time for a tax cut to save jobs

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John Philpott

4 Nov 2008 | 09:30

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With the prime minister, chancellor and business secretary all warning that the emerging recession will have a significant impact on jobs it is time for direct policy action in order to limit the scale of job losses. Although a further substantial cut in interest rates – hopefully beginning this week - is the principal necessary condition, there is an urgent short-term need for targeted fiscal policy measures designed to help prevent people from losing their jobs. Consideration of the role and effectiveness of such measures should take centre stage in the current debate on the merit of increased public spending and borrowing.

Assuming that substantially higher public borrowing is deemed acceptable in today’s adverse circumstances – which seems reasonable so long as it is made clear how and when borrowing will subsequently be reduced – the acid test should be the impact of deficit financing on the level of employment. In this respect, however, there are limits on the efficiency of public infrastructure projects (which the government seems to prefer), generalised tax cuts of the kind that appeal to its critics, and welfare to work measures targeted at those people already jobless which politicians of all persuasions support. All these approaches have their place, but none has a clear or immediate impact on sustaining the level of employment in the depths of a severe economic downturn.

A preferable alternative would be a time-limited cut in employers’ national insurance contributions, targeted at employers in the private or voluntary sectors to enable them to keep on and provide training to any member of staff who would otherwise be made redundant because of short-term trading difficulties. The size of the tax cut could be set as equivalent to the average cost of unemployment to the exchequer – taking into account benefit payments and lost tax revenues - which would limit the net cost to the public purse of every job saved.

Unlike other possible methods of protecting jobs – such as continental European-style legal restrictions on employers’ ability to make staff redundant – this approach would not adversely affect employers’ willingness to hire staff and would be withdrawn once the economy starts to recover. A tax cut to save jobs also has an advantage over welfare to work measures in that it would encourage employers to retain workers known to them, thus avoiding the difficult process of trying to persuade employers to hire workers from the welfare roll.

Whether by this method or some other formula, the chancellor should use the forthcoming pre-budget report to highlight ways of curbing the rise in unemployment and prevent a return to the mass joblessness of the 1980s and early 1990s.

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Lyndon Bird, technical development director at the BCI, Specialist HR