Monday, 13 April 2020

YPP's proposals - how to deal with the corona virus crisis

Our proposals would achieve various things which the government's do not:
- keeping households afloat;
- helping businesses stay in shape during the lock down;
- minimising the cost to the government/the taxpayer;
- recognising that rental values have - temporarily - collapsed.

David Ricardo came up with his famous law of rent in 1809, and it remains one of the most important and firmly accepted principles in economics. The law states that rental values are equal to the economic advantage of using one site over the marginal (rent free) site for the same purpose. In other words, the economic surplus from using one site over the cheapest available.

In this time of national lock down, the "economic advantage" of using one site over another falls to negligible amounts. Imagine you need to rent somewhere for the next three months- would you price central London over rural Devon? Normally, the market does - by a factor of many multiples. Today - we doubt it.

This brings us on to the Governments response to COVID 19- specifically the Job Retention Scheme (aka 'furlough scheme'), but we can include the business loans and a few other policies with the same analysis. For an initial period of 3 months, if an employee is furloughed, the employer must continue to pay the full salary (liable to PAYE as normal) and the government will later reimburse employers 80% of the salaries of furloughed workers (up to a cap of £2,500 per month) (from Taxation.co.uk).

The government initially said it expected 10% of businesses to take this scheme up, but recent figures suggest that more than nine million employees (about one-third of all employees) will be furloughed (from the BBC).

The monthly cost of a furloughed worker on an average salary (say £2,500 per month) can be estimated as follows (from Listentotaxman.com)
Employer pays £2,500 plus £244 Employer's NIC (unchanged)
HMRC receives £740 PAYE
HMRC then later refunds £2,000
Net cost to HMRC £1,260.
Net cost to employer £744
Net income of employee £2,004

Multiplied by nine million furloughed workers is a net cost to HMRC of £11 billion per month.

The scheme does not cover the self-employed, although the government has said that something similar will be introduced, this will add another £1 billion or £2 billion to the cost. HMRC also expect that there will be significant fraud and error involved (from The Guardian) which will increase the cost further.

So the Government (i.e. current and future taxpayers) is diverting massive sums of cash that could be used in other ways to ensure that affected workers can cope through the crisis. Lovely - except when you look at where most of this largesse will go. For most households, their single largest payment (after taxes of course) is to their landlord or bank in the form of rent or mortgage payments. The payments were negotiated and contracted according to Ricardo's famous law - that is - they reflected the economic surplus available at that time.

But the economic surplus has largely collapsed; and true rental values (or notional house prices based thereon) have also collapsed. So, of all the money being used by the government to keep furloughed workers going will end up in the pocket of landlords and banks, based on the fiction that the economic surplus and hence rental values have not collapsed, however temporarily.

So we are paying surpluses that don't exist to groups that in their role as rent collectors produce nothing. Are we mad? That is above the problems and fraud risks associated with the scheme.

The government has therefore come up with the wrong answer to the wrong question.

The question is not "How do we maintain landlords' and banks' unearned income?". The correct  question is "how much do people really need to live on as a bare minimum during the lock down period, assuming they have no rent or mortgage to pay?". There's no right or wrong answer, the lowest defensible figure is approx. £75/week per adult, just enough for food, utilities, broadband and mobile phone (there are arguments for higher amounts such as £100/week). People do not need extra for clothes, entertainment or holidays at the moment, for obvious reasons. People who smoke or drink will just have to cut back or dip into their savings.

Our proposals answer the right question - making sure funds are directed to where they are needed most in an efficient and simple way and at the lowest cost to the government (i.e. current and future taxpayers)

For the duration of the crisis:
• Suspend the enforceability of rent payments by all tenants: residential, commercial and retail  (except those largely unaffected by the lock down - such as supermarkets);
• Suspend interest charges on all mortgages: commercial, residential and buy to let, except for those businesses largely unaffected by the lock down such as supermarkets. (As a quid pro quo, any deposit or savings accounts currently paying interest will become non-interest bearing.);
• Allow mortgage borrowers to defer mortgage repayments if they wish;
• Offer a UBI of £75 per week to every legally resident adult in the country who is not already receiving welfare payments or a state pension in excess of that;
• The claims process should be as simple and automated as possible. All claimants should have to do is provide their National Insurance number and bank details. Payments can start almost immediately;
• To minimise the number of claims, the quid pro quo of claiming is that a claimant foregoes the income tax free personal allowance and the National Insurance exempt threshold, so would be paying approx. £75/week more in income tax and NIC. So the lucky majority still in paid employment have no incentive to claim, meaning that HMRC and/or DWP can process the neediest claimants first;
• The same general principle applies to Child Benefit and Child Tax Credit. HMRC pay a total of £30 billion a year for 12.7 million children (from HMRC Annual Report 2018-19). These could be replaced with a flat £45/week for each child (there is no reason for long-term unemployed parents to receive more than the short-term unemployed or furloughed parents);
• A family of four would therefore have a basic income of £240/week, which is surely enough for the basic necessities.

The total cost of YPP's proposal would be less than half the total cost of the furlough scheme, it  would cover the self-employed and it would place a much smaller drag on the economy. The saving to the taxpayer is broadly speaking equal and opposite to the fall in income that landlords and banks will have to bear in the interim. The homes they own and the stock of outstanding mortgages will still be there in a few months time - people's businesses and jobs might not!

The other important question is "how do we ensure that businesses survive the crisis?"

People need jobs to go back to once this is all over. Many businesses will run out of cash to pay salaries long before HMRC start paying out the furlough refunds. Those businesses will fold through no fault of their own, which will set off a chain reaction. It is madness to expect employers to pay the £744 a month cost of a furloughed employee (workings above) for nothing in return, which is the best case scenario assuming HMRC can implement the scheme very quickly.

We will just have to give employers the flexibility to put employees on temporary leave or ask them to cut their hours (with a corresponding salary reduction) with the guarantee that the old terms and conditions will be reinstated once the lock down is relaxed or lifted. This would be similar to Maternity or Paternity Leave. Yes, this will mean a fall in income for many, but there will always be the £75/week per adult and £45/week per child to keep them going.

Businesses would also be exempt from payment of rent or mortgages for the time being (see above). Instead of waiving Business Rates for a year for small businesses, there should be a general waiver of all Business Rates (except for businesses still allowed to trade as normal, such as supermarkets) for the months that the lock down continues. Large businesses are just as much at risk and provide as many jobs as small ones. Under YPP's proposals, businesses would just go into hibernation for a few months and can hopefully pick up where they left off afterwards.

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