The week has been dominated by the Tory leadership contest, with both of the final two candidates promising to cut taxes, even though one would rather wait until inflation is under control. Needless to say, IEA experts have been keen to contribute to the debate.

For example, I have tried to clear up some misunderstandings over the government’s debt interest bill. This jumped to £19.4 billion in June, providing more ammunition to those saying now is not the time to cut taxes. 

However, almost all (£16.7 billion) of the £19.4 billion was accounted for by the RPI uplift on the principal value of inflation index-linked gilts. This money will not actually be paid out until these bonds are redeemed, which will be years and even decades into the future.

This does not mean, of course, that these costs do not matter. These are still costs that have to be met by future taxpayers. But it seems odd to ignore the timing completely.

It is potentially misleading to suggest that the government actually paid out £19.4 billion in debt interest last month, or to compare this figure to recurring annual spending on, say, defence or education.

The increase in debt interest costs is not really about the level of debt, either. Inflation is increasing the cost of index-linked gilts, but the real interest rates on this borrowing are still negative, and inflation is helping the public finances in other ways. In particular, higher nominal incomes and prices mean that households and businesses are likely to pay far more in tax than anticipated.

The bigger picture is that the government still has more room for tax cuts, even based on the existing OBR forecasts for the public finances and on the current fiscal rules. What’s more, these forecasts may well turn out to be too pessimistic.

Julian Jessop
IEA Economics Fellow

SUMMERTIME BLUES

On Monday, the IEA published a new research paper authored by IEA Editorial and Research Fellow Professor Len Shackleton. The paper, 'Summertime Blues: Unions, strikes and the law in 2022', explores the options available to the government to tackle union militancy – if it wishes to take a tougher approach.



Len argues that the government should be wary of acquiescing to union threats and demands. According to Len's research, the economic impact of significantly increasing public spending could be inflationary and lead to monetary tightening that could be economically damaging. Further, conceding to union demands – particularly retaining antiquated work practices – could also hamper much-needed public sector reform.

Regarding the options available to the government, Len suggests a variety of measures that could be imposed without compromising the fundamental freedom to join a trade union. The paper sets out a long-term government strategy to deal with union militancy, including introducing minimum service agreements and replacing striking employees with agency workers.

The paper gained considerable media coverage. Len wrote for City AM and CapX and appeared on talkTV to discuss the upsurge in strikes and threats of strikes, and we also published a short explainer video, which can be viewed here.

iN THE MEDIA



Resist militancy... Both the number and scale of strikes this summer are dramatically higher than in the pre-Covid period. Writing for CapX, Len Shackleton explained the options the government has to prevent mass walk-outs.

Len commented: "The Government could tighten the rules on trade union recognition. At the moment, compulsory recognition procedures apply to bargaining units of 21 employees or more. This could be raised to, say, 50. Ballots could be made mandatory, with a higher hurdle (currently 50% of eligible employees) before recognition is granted."



Don't give in... IEA Acting Communications Director Emily Carver wrote for Conservative Home calling on the government to reduce the unions' scope for militancy. Emily wrote:

"Giving in to the RMT’s demand for a guarantee of no compulsory redundancies for 2022, for example, may seem to involve little cost in the short run, but on the railways – as would be the case in the NHS or the civil service – such concessions could make it very difficult to achieve useful and much-needed reform, with long-term negative consequences for productivity."

If it's broke, fix it... IEA Head of Public Policy Matthew Lesh, appeared on the BBC Radio 4 show 'Moral Maze' to debate the need for NHS reform with left-wing commentator, Ash Sarkar. Matthew pointed to the NHS' relatively poor health outcomes as evidence of the need for reform. Listen here. 



Whistle while you work... Writing for The Express, Len commented on public sector demands for large pay rises. He argued that until the public sector resolves its low productivity, sweeping increases in real pay could have damaging economic consequences.

Len noted: "It is understandable that, with inflation rising, workers resist a fall in their living standards. But large across-the-board increases for public sector workers would be a mistake."



Productivity stasis... Len also appeared on Talk TV to discuss the latest ONS labour market statistics with Mike Graham. He pointed out that, while the figures show that unemployment is down, without an improvement in UK productivity demands for sustained higher pay will not be met.



We're in the money... Julian Jessop also appeared on Talk TV to discuss the latest labour market data and provided a dose of optimism.

Julian stated: "Overall the numbers were reassuring. There's no sign of a recession in the UK labour market, it's still running pretty hot."



Down at the doctors... IEA Head of Lifestyle Economics Christopher Snowdon was quoted in The Telegraph commenting on reports that nurses and junior doctors will be holding strike ballots following dissatisfaction over the government's pay offer. 

Christopher sympathised with their concerns and commented: “Many people at the top of the NHS are fabulously well paid and have spent much of the last two years conducting their business by Zoom. Few people in the private or public sector should expect an above-inflation pay rise this year, but front-line workers deserve a more favourable settlement than mandarins.”

ON THE BLOG



In defence of "Stalinist" housing targets... Housing targets have come under fire during the Conservative Party’s leadership election, with one candidate describing them as “Stalinist”, while another complained about “socialist housing”. On the blog, IEA Head of Political Economy Dr Kristian Niemietz defended such housing targets.

Kristian wrote: "Needless to say, in my ideal system, there would be no housing targets. If I had my way, NIMBY obstructionists would be stripped of their power, and housebuilding levels would be primarily determined by consumer demand. In such a market-driven system, housing targets would not just be unnecessary – they would be a completely alien element. But in the current system, abolishing housing targets would only strengthen the stranglehold of the NIMBYocracy."



Off the rails... Referring to his new briefing paper, Summertime Blues: Unions, strikes and the law in 2022, Len expressed his concern that the RMT and other unions are holding back much-needed reform of the railways.

Len noted: "The railway network is still important to this country, as it has been since the 1830s. But it needs reshaping to meet changed demand patterns and  to benefit from new technology. To maintain the network and improve it for the future, backward-looking rail unions need to stop defending outdated practices, and the profligate use of an increasingly archaic strike weapon."

CALLING ALL STUDENTS!

We are excited to launch the Economic Thought Leaders’ Symposium at the University of Buckingham from 7-9 September 2022.

The theme for this year’s programme is The Economics of War and Peace. We will discuss topics like trade not war, international institutions, diplomacy and game theory. To apply, please send a CV and cover letter explaining why you’d like to attend, as well as 500 words on promoting the reconstruction of an economy after a war to [email protected] by 17 June 2022. You can find out more here.



We have launched the 2022 Dorian Fisher Essay Competition. Named after the beloved wife of our founder Sir Antony Fisher, this is our biggest essay competition of the year, exclusively for A-Level and IB students.

First prize will receive £500, with a separate prize of £500 for the school with the highest number of entrants. The deadline for this year’s competition is Friday 29 July 2022. You can find out more here.