Current Affairs Digest: Economics

Catch up on economics articles you may have missed from May 2020, including on opportunities for reform of the UK tax system and how key workers should be rewarded after coronavirus.

Reform of the UK tax system

Gemma Tetlow of the Institute for Government (IfG) argues that the current circumstances provide an opportunity for much needed longer-term reform of the UK tax system. She also presents reasons why she believes the overall burden of taxation will need to rise. First, she says, the higher debt caused by the Government’s response to coronavirus (Covid-19) will need to be serviced. Second, the virus will lead to calls for a “more expansive” state sector. And third, she highlights longer terms trends unrelated to coronavirus, such as the ageing population, the rise of internet retailing and the transition to net zero carbon emissions.

The article coincides with the latest in a series of IfG publications on tax reform. In the most recent paper, the Institute presents its recommendations. It argues that the Government should set clear objectives for the tax system. It also suggests a tax commission to gather evidence and stimulate discussion. Other proposals in the report include: more open consultation on tax policy; gathering evidence on the cost of existing problems; greater parliamentary scrutiny; and more thought about how tax and spending proposals are packaged. In the blog, Ms Tetlow suggests that the “aftermath of the coronavirus crisis presents an opportunity as well as a necessity” for such changes, because major external threats generate public acceptance of higher taxes.

Read the full article: Gemma Tetlow, ‘The UK tax system is in need of reform—that requires a different approach from government’, Institute for Government for Chartered Institute of Taxation, 17 April 2020.

How should key workers be rewarded for their work to tackle coronavirus?

These two contributions reach different conclusions about how NHS and other key workers should be rewarded for their work to combat coronavirus (Covid-19). Chris Thomas and Harry Quilton-Pinner from the Institute for Public Policy Research argue for a 10 percent pay bonus for “all workers in health and care”. They say this would recognise these workers’ “unprecedented stresses” and their work “in the trenches” against the virus. The authors state that healthcare workers have seen declines in their mental health and are more likely to leave the profession due to coronavirus. The article calls for “comprehensive support” to combat these issues. As well as a pay bonus, the authors propose other measures, such as: appropriate personal protective equipment (PPE); grants and other support for accommodation during the pandemic; priority access to mental health therapy; and help with childcare. The Trades Union Congress and the Royal College of Nursing have made similar calls for across-the-board pay rises for key workers.

In contrast, Len Shackleton, from the Institute for Economic Affairs, suggests that the free market, rather than sector-wide collective bargaining, should be allowed to set pay rates amongst key workers. He argues that if the market determines pay, a “significant premium” arises for jobs with a greater risk of death. He believes such premiums are “suppressed” by factors such as national pay scales, strong unions, national minimum wage rates and gender pay gap rules. For example, he suggests that pay rises for all Transport for London staff would suppress differentials between train drivers, who are less at risk, and bus drivers or platform staff, who are more so. Without such pay differences, Shackleton states, there will be a shortage of key workers in areas where the risks are highest. He also argues that a flat structure will lead to unaffordable “extra” payments to workers in these sectors who are not at higher risk. Citing evidence that men are more vulnerable to coronavirus than women, he says that another possible outcome is a disproportionate “retreat” of male workers from frontline roles. He therefore concludes that market forces, rather than governments, should be allowed to determine pay settlements.

Read the full articles: Chris Thomas and Harry Quilton-Pinner, ‘Care Fit for Carers’, Institute for Public Policy Research, 23 April 2020; and Len Shackleton, ‘Covid-19, pay stuctures and compensating differentials: why we need greater wage flexibility’, Institute for Economic Affairs, 6 May 2020.