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National Insurance: How to get the rise in proportion

Michael Blastland
Different ways of seeing stats

It's THE story of the election campaign so far - whether or not to raise National Insurance by 1%. In fact, the figures show what is at stake here is a relatively trifling amount of money, says Michael Blastland in his regular column.

If you are Conservative, Labour risks wrecking the economic recovery by lumping an extra £6bn of taxes onto National Insurance next year.

If you are Labour, Conservatives risk wrecking the economic recovery by taking an axe to an extra £6bn of public spending next year.

NI Pie Chart

Here's an odd question, given the electoral rage already expended on it: does this matter? The pie chart on the right shows the £6bn they are fighting over, compared with the forecast size of the economy next year - approximately £1,500bn.

At issue is not the existence of the £6bn, but simply who gets to use it - taxpayers or government - for whatever they think important. Each of the main parties says the other will pull the rug from under the economy, but in truth they are pulling on opposite ends of the same rug, arguing about where to put it, not whether to have one.

This choice might matter for many reasons, but keep them in check and focus on whether it will - as the big claims imply - wreck the economy. Is the difference here the stuff that wrecks are made of? Or does the pie chart make you wonder if the economy would even notice who spent the money?

The Liberal Democrats have so far avoided pulling one way or another on this one, or making big claims about it, except to argue that if the Conservatives are honest, they need to spell out what would be cut.

Let's say the whole economy is 100, the value of everything produced for which money changes hands, the national income. What is the NI row worth?

Politics is not about a sense of proportion - it's about follow the creed of the other lot to apocalypse, or follow ours to the sunlit uplands where children frolic and mirth resounds

The amount affected by increasing this tax more than the opposition proposes is about 0.4.

The amount affected by cutting spending more than the government proposes is about 0.4.

How does this compare with previous variations in taxation? Take the past four prime ministers.

Margaret Thatcher, over a period of 11 years, varied taxes by a six, all on her own - forget the opposition for a moment - an amount 15 times bigger as a share of the whole economy than the difference between the parties on National Insurance now. She finished at a similar level to where she started.

John Major varied taxes by about a four, 10 times bigger than the NI quarrel, Tony Blair and Gordon Brown by about 2.5 each, six times bigger than the NI difference.

Tax rate variance
Margaret Thatcher moved about within a range that at its peak went more than five percentage points above where she started and finished up slightly below
John Major moved about with a range that at its maximum was four percentage points below where he started
Tony Blair and Gordon Brown moved around within a range of about 2.5
'Now' shows how much variation in tax there would be between Labour and conservative on NI, about 0.4 in total, which we have split either side of zero

Politics is not about a sense of proportion. Politics is often about anything but: follow the creed of the other lot to apocalypse, says one side; follow ours to the sunlit uplands where children frolic and mirth resounds.

In some contexts, £6bn makes a big difference. In others, rather less. So are the accusations on both sides on the right planet in terms of proportion? In this case, the £6bn falls within the typical margin of error on Treasury forecasting. Economic growth and tax revenues could easily turn out far more, or far less, than this.

Many feel, though, that the route money takes makes a big difference, whether through private hands or government. Perhaps if it were big money relative to the whole economy, those arguments would be more relevant.

Does the NI differences matter at all? As a sign of further things to come, maybe, although even long-term differences in tax and spend between the parties are smaller than people often think. As an issue of principle or ideology, like fairness or freedom? Possibly, though not many principles have died on this scale. Is it an important detail about where the burden should fall? Certainly.

Who really pays?

For example, Antoine Bozio of the Institute for Fiscal Studies, has written that the cost of a tax like NI isn't always met in the way people expect.

"What if the company simply lowers the worker's wage by the amount of the tax?" he asked. "Then the tax isn't really being paid for by the company at all - it's being paid for by the worker, through lower wages. So the company hands over the money but the worker is made worse off."

Is this what really happens in practice? Study after study suggests that it is, he wrote.

Labour might not be any happier either way. For though this argument suggests that the party should be off the hook of taxing jobs, would it enjoy any better the accusation of lumping the whole burden on workers?

So details matter. But it's a characteristic of politics to throw in the kitchen sink and claim that not just these but everything - the whole economy - is at stake.

Sometimes, though, there are parts of the argument that really take place on a pinhead. If only for the sake of our limited concentration, we should leave them there. Is the whole economy trembling on this choice, of this size? I doubt it.

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