Labour Lack Economic Credibility

It will soon be the second anniversary of Labour’s 2024 election victory, but hardly a cause for celebration – especially for those of us who recognise that this government has reached the natural limits of credibility on almost every front, but most especially on the economy. Every new government enters office on the tide of promises made when it was seeking election, but these are easily forgotten when facing the harsh discipline of economic reality. As for the current UK government, both PM Starmer and Chancellor Reeves vowed that two key metrics – productivity and growth – would, under Labour, achieve improvements that eluded the Tories for over a decade.

These two terms, properly understood, are crucially interlinked: economic growth may be difficult, if not impossible, without enhanced productivity. In the case of a single business, growth is the desired result, but raised productivity is the means of achieving it, and what is true for the individual enterprise applies equally at the level of the nation as a whole.

Let’s linger on these terms for a moment. Productivity is a rate of production: the number of widgets produced per hour/ month/ year. Even if that rate remains static, business production may nevertheless be profitable – provided (i) the total sales proceeds exceed direct production costs and the relevant share of overheads; and (ii) the customer base continues to buy our products.

The tax-free incentive

Some 40 years ago I headed an economic research consultancy and wrote a series of articles for the prestigious journal ‘Management Today’, whose editor, Robert Heller, expressed a particular interest in the means of achieving growth and improved productivity at the corporate level. At the same time, a close friend, John Allen, editor of ‘Construction News’, introduced me to the owners of two clothing-manufacturing companies. Their businesses had (independently of each other) achieved hugely improved financial results by the simple device of paying shop-floor workers their full, or ‘gross’, pay every week without deduction.

This meant, of course, that to comply with the law, the ‘gross’ payments to factory-workers had to be treated as if they were ‘net’ to arrive at the amount to be remitted to the Inland Revenue authorities every month. At one of these businesses – ‘Stylewear’, a trouser factory in Birkenhead employing 250 piece-workers – productive output rose by 20% within the first seven days of introducing the tax-free wages system, and even higher levels were maintained over the years that ensued.

You may find this information unsurprising, but it merits closer assessment. The psychological impact on employees of receiving tax-free earnings was transformative. Staff turnover and absenteeism virtually disappeared, and 80% of employees were at their cutting and stitching machines 15 minutes before the 8 am starting time. The proprietor, Len Ferns, even set up a creche for the children of young mothers. And there was no resistance when overtime had to be worked – after all, employees’ pay packets, filled with their tax-free earnings, significantly exceeded those of colleagues in other factories.

A similar scheme was introduced in 1979 by Bill Finley, owner of Bradford Workwear, a garment-manufacturing business, where productivity improved by a consistent 45% with the same workforce, measured by comparing industry-wide standard hours with actual hours worked after the tax-free wage system was introduced. Natural motivation had been restored  by removing the tax barrier. One Bradford operative put it like this: ‘I felt as if I was working for the tax man until 11 o’clock, and for my family only after that’. Before tax-free earnings were introduced most operators worked at a leisurely pace, content to settle for the minimum required output, and few were interested in working overtime. After completing a job, many would have chat or a cigarette, clocking up excess time.

But after the tax-free system was introduced, to quote Bill Finley, “the business achieved more production; employees earned more take-home pay; the Inland Revenue netted more tax; and customers received better quality clothes at a lower price.” In both businesses the additional tax paid was more than compensated by the productivity gains achieved – having, in effect, converted the incidence of taxation from personal to corporate.

And services too

Businesses providing services benefitted too. At a pharmaceutical distributor in North London, operating on fine margins in a highly competitive field, orders from hospitals were received by telephonists, then keyed-in to an online computer that provided instant printouts for the assemblers and packers who then collected goods from shelves for delivery on the next van round – all of which had to be achieved within a two-hour window if the sale was to be assured. Prior to the tax-free earnings scheme an average of only 85% of orders resulted in sales, mainly because of inaccurate keying. After the tax-free earnings scheme was introduced, improved productivity more than compensated for the additional employment tax.

Of several well-established schemes none has produced results less striking than the three described above. In 1981, to ease the “grossing-up” calculations, I called on Nicholas Ridley, Minister for Trade & Industry under Margaret Thatcher, and requested “grossing-up” tables to be made available to facilitate the introduction of tax-free earnings schemes. News of the productivity gains achieved by ‘tax-free pay’ schemes became widely reported, and in 1981 the Duke of Edinburgh visited the Birkenhead factory. He was certainly impressed by what he saw and heard from the machinists he spoke to, and he distributed relevant data on the schemes, and the gains they achieved, to contacts in industrial and political circles, not only in this country, but also in Ireland, USA, Australia, New Zealand, India, South Africa and Jamaica.

Why am I telling readers about incentive schemes that were phenomenally successful 45 years ago? I don’t even know whether the businesses described still exist, or whether schemes like those referred to are still being operated by enterprising proprietors. I am describing the operation of human nature in the workplace. The underlying psychology to which the success of these schemes was owed was simple. Diligent effort by employees was rewarded by employers paying an acceptable level of remuneration, with a minimum of bureaucratic process and without a complex, unprincipled  and arbitrarily contrived tax deduction.

Unleashing potential is the secret

The industrial lesson highlighted by the Birkenhead and Bradford schemes all those years ago is the huge potential that they unleashed. Britain suffers under the heaviest peacetime tax burden in its history, and under this yoke it is no surprise that it now supports over two million jobless “workers”, enjoying all the entitlements that our benightedly misplaced welfare system  offers.

While honest citizens accept that paying tax is one of life’s necessities, by far the greatest obstacle to the successful implementation of similar incentive schemes today is the insane length and complexity of the UK’s incomprehensible tax code, which currently stands at more than 20,000 pages containing more than 10 times the number of words in the complete works of William Shakespeare. The crucial perception of a rational link between effort and reward has been severed by blind ignorance and, with it, the possibility of growth or productivity enhancement in the economy at large.
 

© Emile Woolf May 2026 (website)