The most pressing issue is a lack of pensions savingsby Alan Lockey / April 25, 2018 / Leave a comment
The populist turn in politics might tell you otherwise, but most ideals end up constrained by an imperfect world. The language of priorities is, to badly paraphrase Nye Bevan, the religion of government. Trade-offs and tough decisions are the nature of the beast.
Britain’s self-employed millions might well empathise with such sentiment. After all, the self-employed experience is characterised by a trade-off well understood by those who choose that path. On one hand, it brings freedom from the rigidity of employment, with greater levels of flexibility and control over your working life. On the other, it is often characterised by economic insecurity, with irregular income patterns and lower overall earnings than employees.
Alas, when it comes to improving the lot of the self-employed however, such empathy is likely to end. Everyone aspires to a labour market which delivers flexibility and security for all workers—but the polices needed to deliver the latter for the self-employed receive too little attention. In fact, in some seminar rooms it can feel like the default impulse is to discourage self-employment in favour of employment. Even now, with 4.77m self-employees plying their trade in the British economy, it is sometimes still described as an “abnormal” or “irregular” arrangement.
Perhaps this is a result of self-employment’s frequent elision with other labour market outrages, such as zero hour contracts. Alongside an outsize obsession with the digital platform economy, this may have encouraged a view that rising self-employment is fundamentally a story of enforced vulnerability. In blunt terms, this is nonsense—countless research, including by Demos, finds self-employment to be both overwhelmingly chosen and popular.
But that is not the only reason that discouraging self-employment is such a mistake. Economically, it comes close to committing the “lump of labour fallacy”—the vast majority of self-employed work cannot be simply “converted” into employee work. More importantly, it misses how rising self-employment could be telling us something profound about Britain’s employee experience and changing attitudes to work. Indeed, our research finds that self-employment is already in some respects the de facto flexible working policy for millions of British workers. Even, perhaps especially, for disadvantaged groups such as those with extensive caring responsibilities or long-term health conditions.
For that reason alone, boosting the economic security of the self-employed requires urgent attention. Demos’ latest report offers 30 ways of achieving that, with suggested policies on financial inclusion, the tax system, training infrastructure, workers’ rights and benefit entitlements. Yet at the heart of this broader new deal is the issue which created such a political firestorm during last year’s Budget: self-employed national insurance contributions.
It is not hard to fathom a cash-strapped Treasury’s motivations in that debate. Equally, it seems pretty clear that some shoddy employers have used the varying tax regimes to exploit arbitrage opportunities via “false self-employment.” Yet what seems more difficult to understand is why the government decided self-employed individuals, rather than firms, should make up the difference. For one, it is quite clear that the vast bulk of the tax gap stems from employer contributions. But more importantly, the move to raise class four national insurance contributions was a tax on people who could be earning as little as £8,424 a year. This is difficult to defend when a new “engagers’ tax” could be levied on a firm’s spend on self-employed labour. This would also have the added benefit of disincentivising “false self-employment” by firms, who are the main beneficiaries of both the tax gap and that malpractice.
Demos believes the government should take this alternative approach. Not only that, it should use the proceeds to arrest the most pressing economic security issue for the self-employed: a lack of pension savings. Make no mistake this is a social crisis to come—only 17 per cent of self-employed workers participate in a pension scheme and just 13 per cent of self-employed women. Our research found it to be a significant source of anxiety too—46 per cent of self-employed workers were “seriously concerned” about their lack of retirement savings. In contrast, automatic enrolment for employees has been a clear policy success, with 50 per cent of employees now participating in a workplace pensions scheme. The government should step in by offering and funding a state-backed version for the self-employed. This would also meet a 2017 manifesto commitment now in danger of the dreaded long grass.
Raising new taxes is rarely a politically easy choice. But sometimes it is necessary for a government to show that its “language of priorities” is also fluent in social justice.