I posted this thread on Twitter this morning:
Rishi Sunak has claimed that to pay a 10% pay rise to all public sector employees will cost each household in the UK £1,000. This is what I call CRAp - which stands for a ‘completely rubbish approximation' to the truth. Let me explain…
There are so many things wrong with what Sunak has said that it is hard to know where to start, but first of all it ignores the fact that about 5 million people work for the public sector. This payment would not cost them £1,000 a year.
Then it assumes that all 28 million UK households make the same contribution in tax towards this cost, but that is also not true. Some households do not pay income tax, for example. And the amount of tax paid varies widely, thankfully, because the best off do pay more.
And Sunak assumes that this payment will come out of tax. It might not. It could be paid for with borrowing or money creation, which is commonly called quantitative easing. It looks like he does not even know how government spending is actually funded.
But worst of all, this claim assumes that if £28 billion in extra wages is paid out this money just disappears, never to be seen again, and this assumption is so stupid it is laughable - except very few politicians seem to understand this.
Let me explain. Let's start with the fact that if £28 billion is paid out then this will top up existing pay. It will all be taxable and subject to national insurance. Assume tax is 20%, employee NI 12% and employer NI is 13.8% and the full NI cost is included in the £28bn.
If you work the maths through the tax paid on that £28bn will be about 40.2% of the total in that case, or £11.3bn. That comes straight back to the government in other words. So the actual cost is already down to £16.7bn. That's a lot less than £1,000 per household.
And when that £16.7bn gets into people's pockets they will spend it. This means more tax is paid. Not everything has VAT on it, but assuming this new money is the top part of people's incomes and they've already covered the basic costs of living much of it will.
So, let's assume there's an average of 15% VAT on what is bought with this money. Do the maths and that's another £2.2bn or so of tax paid. That means the cost is down to £13.5bn now: half has already come back.
Then those who get paid this money also pay tax on it. Some will be income tax, and some corporation tax. Some more will be national insurance. We don't know the mix. Let's be generous and say it's 30%. That's another £4bn of tax paid. Cost now, £9.5bn.
But those who get this money will also pay tax on it. And so will the person who gets it after that. In fact, everyone will pay tax on it until some person who is wealthy enough to save gets it and puts it in a deposit account and stops the money rolling.
How long down the line will that be? We can't know for sure. But that does not alter the fact that the real cost of a public sector pay rise is vastly less than what politicians clam because they ignore the tax paid on the additional pay, and when the net pay is spent.
In theory it is possible that the whole cost of a pay rise could eventually be recovered in tax. But, I stress we cannot be sure of that unless we take another factor into account. And that is the gain to productivity from making pay rises.
If you believed politicians (and private sector bosses) all pay rises are given to greedy employees who just pocket the money and do nothing for it. That's not true, especially in public services right now. Pay people more and they will stay in the NHS, teaching, and much more.
More than that though, those already employed in the service can concentrate on the job rather than having to worry about how to pay the bills at home. And maybe some of the vacancies will be filled - which could massively improve the effectiveness of the service.
In other words, paying people enough so that they can afford to do the jobs that need to be done makes sense because those jobs are done well, and right now there is so little goodwill left in the public services that is not necessarily the case.
The whole £28bn cost campaign is in fact part of that undermining of public services that destroys goodwill. Saying that we can't afford to pay for what people are doing at work is not just an attack on those left in economic distress as a result, it undermines public services.
Do the opposite, and have a government (and Opposition) that says it values what people do and wants to pay them fairly for it then three things happen. Public sector employees are happier. Fewer leave. Productivity rises. We get better value for money as a result.
None of this should be rocket science to anyone who knows a) about economics b) about running organisations c) knows what it is like to be an employee d) has empathy, and yet it seems ministers are wholly unaware of these essential things.
My point is a simple one. Not only is the claim that £28bn of extra pubic sector pay will cost each household £1,000 straightforwardly grossly incorrect, because the cost is much smaller, it is also possible that the gain is bigger.
Why then can't politicians talk economic, management and straightforward human sense about these issues in that case? I really wish I knew. But I can offer a suggestion. Maybe they don't know what they're talking about. That's why they talk CRAp.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
thank you Richard
you always do make sense
& the politicians are still trying to hoodwink us
GIMMS have produced one of those elegant Sankey diagrams that illustrates the point you are making on the money returning to the treasury as tax. Perhaps we should send Sunak a copy. Perhaps we should send on to every single MP, too…
https://gimms.org.uk/2022/11/26/spending-chains-sankey-diagrams/
If we could….
In the Gower Sankey diagram, 43% of the Government spend ends in tax. The core assumption is that the money used is notes and coin (in continuous circulation). My concern is that in the digital age notes and coin are in sharp decline and the banks are cornering the market. Banks will take your cash, and hand it out if you insist (within limits), but that is not their business. Banks turn cash into credit. Your cash in a bak becomes credit; and the banks use your credit in a more complicated system of time value, deferral and margin calls. That is another order of business, and I am not sure how that process is represented on Sankey diagrams; but it is certainly more complicated, it is on a different order in the hierarchy of money, I am not sure how much of that credit leaks out of the tax flow to the non-tax flow.
I am not sure I wholly follow that
Why is the Sankey diagram restricted to notes and coin (I think it is notes because it is a simplification)? That is no longer how most people spend a signficant proportion of their money. To put it simply, are Gower saying it makes no difference that, if its through a bank, where the transaction is not notes but bank credit; if you follow the bank bookkeeping through, since I doubt if the money flow follows the same direct trail shown in the Sankey diagram, what are the implications of the real flow? to the Sankey diagram? Are they necessarily the same? I do not have the answer, I can’t imagine it, and I presume nothing; I am asking the question. I think it a fair one.
I admit I have little inclination to follow this one through
All absolutely true, Richard; but I confess I am currently more exercised by Sunak’s defence of the “Edinburgh Reforms”. As soon as I heard these two words my heart sank, and the first thought was to tell everyone to count their spoons. The shoddy use of Edinburgh to spin this ignorant stupidity reminds me the last time the Conservatives exploited Scotland in financial reform was 1986 Big Bang which (as a direct consequence of its effects) destroyed the semi-autonomous Scottish banking system, and its hard earned reputation for stability and high standards; and then destroyed Scottish banking.
Challenged about Hunt’s grotesque claim that removing regulation would “turbocharge” growth, at no added risk to banking security, Sunak made this scandalously unjustifiable comment: “No, the UK has always had and always will have an incredibly respected and robust system of regulation for the financial services sector,”
Let me be clear. No it hasn’t. Some of the most egregious failure in the lead up to 2007-8 took place in American banks operating in London, because the regulation here was weaker than Wall Street. Was Sunak in nappies in 2008? Is he still in nappies? Is he plain ignorant, or just a stupid banker?
The Conservatives are trying to use the City financial sector (the initial cause of our present hopeless economic plight) to find some growth, because every other economic route in Britain lies in ruins; but we all know to achieve this means only one thing; turbocharging the high probablity of another financial crash.
We have enetered the world of crackpot neoliberalism, operated by politicians who either do not understand risk or the nature of financial instability, or do not care. I leave you to work out how much Sunak and his Green Card will be personally affected, if this ends badly for a Britain that is in no shape to take much more of this utter lunacy.
Absolutely nailed that one Richard and this needs to be sent to everyone possible. I will share this with my friends and family. Thanks again.
Thanks
Thanks for this timely post, Richard.
This is a good breakdown of the figures. There is another thing which seems deliberately CRAp – right at the very start when the government says an increase in public spending will “cost” a household £XYZ, for whatever the value ends up really being. What does that actually mean?
Does they mean that at some point down the line council/income/vat tax will have to go up to capture £1000 and then it goes back down (or does it)? Over what time period? When does it have to be repaid? Because even if it was costing be £1000, if that’s just an extra £10 every month over the next decade, I’d be happy to pay that if it means nurses, teachers and bin collectors get a raise.
I wish politicians would be more accurate, precise and explicit with their announcements.
I fear it is nothing more scientific than £28 billion divided by about 28 million households in the UK equals about £1000 per household. Which as Richard explains is nonsense in stilts. Firstly the “cost” is not £28 billion, and secondly it is not evenly distributed among all households.
The government’s position today appears to be that it has no choice but to accept the advice from so-called “independent” pay review bodies, despite managing the outcome by appointing their members and setting their overarching terms of reference and remit each year. (It would be interesting to know how often they have declined to follow this sort of advise before.)
A similar sleight of hand is used to disclaim responsibility for the decision made by the “independent” Bank of England.
As the saying goes, advisers advise and ministers decide.
James Cleverly was this morning implying that the NHS is not the responsibility of the government
“the government gets back at £98 for every £100 it spends.”
Source: “We pay for it by spending the money”, by Alan Hutchison · Published 27th September 2018
Online: http://www.matchesinthedark.uk/we-pay-for-it-by-spending-the-money/
Anything We Can Do, We Can Afford
John Maynard Keynes, in a 1942 BBC address:
Let us not submit to the vile doctrine of the nineteenth century that every enterprise must justify itself in pounds, shillings and pence of cash income … Why should we not add in every substantial city the dignity of an ancient university or a European capital … an ample theatre, a concert hall, a dance hall, a gallery, cafes, and so forth. Assuredly we can afford this and so much more. Anything we can actually do, we can afford. … We are immeasurably richer than our predecessors. Is it not evident that some sophistry, some fallacy, governs our collective action if we are forced to be so much meaner than they in the embellishments of life? …
Yet these must be only the trimmings on the more solid, urgent and necessary outgoings on housing the people, on reconstructing industry and transport and on replanning the environment of our daily life. Not only shall we come to possess these excellent things. With a big programme carried out at a regulated pace we can hope to keep employment good for many years to come. We shall, in fact, have built our New Jerusalem out of the labour which in our former vain folly we were keeping unused and unhappy in enforced idleness.
(Collected Works XXVII)
ARE THERE NO JOURNALISTS WHO KNOW ABOUT KEYNES TO CHALLENGE THE POLITICIANS?
It seems not
Thank you for this Ian – this is the sort of thinking that Labour must rediscover unless it is unwittingly going to catapult us into the dark ages.
Labour must come to terms with the fact that Thatcherite created wealth does not like to share, because it’s misbegotten gains were created by a rule book which gives them everything and in doing so takes everything from everybody else.
Just reading this Keynes quotation makes me feel better! And to think it was written when the UK was in the throes of WW2. We need these messages of hope instead of continually being told by this government that the cupboard is bare and we must brace ourselves for a bleaker, more austere decade.
And we know spending on some public services – health in particular – has a large positive multiplier effect. So economic activity can be increased by more than you spend, and then we tax that increased activity. At some level much of the spending can pay for itself (and that is without taking well-being into account, which it should be).
I agree
I decided not to go that far – there was enough already in this
@ Richard,
Your argument is OK as far as it goes. The correct argument though does require a more through understanding of economics than many/most possess.
Your argument is essentially that if Government pays out extra money then it doesn’t cost us anything because that money comes back as taxes. It is true that it does come back as taxes. If we apply this to something we all agree with such as the pay level of nurses, we’ll all nod approvingly. However, suppose we apply it to something we may not agree with. Suppose Govt comes up with a program to stop young people dealing in drugs by simply paying them not to. Or suppose we say that anyone earning money in the black economy doesn’t need to pay income tax because they will spend the money anyway and the Government will get it back in VAT and other legitimate taxes in both primary and subsequent transactions. Or suppose we say it doesn’t matter if Tory MPs are corrupt because the money they gain will come back as taxes sooner or later.
It all costs us. The question of what comes back in taxes isn’t the point. It does mean that those individuals do end up consuming more available resources than they otherwise would. This is the real point.
This is not to say that nurses shouldn’t be paid more. Of course they should be paid closer to the European average for a country of our economic standing. At the same time we need to understand our economics correctly.
I am aware my argument is incomplete: externalities because of the benefit from public services working are ignored e.g. if social care can take patients the NHS massively gains in terms of effic iency
But your argument misses stage one of my argument actually paying tax in the first place at the highest overall rate
I am afraid I am not sure you understand this at all
And you certainly are playing a silly economics where you think there are finite productive uses for labour and that is simply not true
I think reinforces what the conclusions I have reached.
In effect all the money that is out there only exists because either it has yet to be taxed out of existence by the government (which it will eventually except for a minuscule and decreasing fraction with each taxable transaction) or is yet to be paid back to the bank/institution that has lent it out.
In terms of national debt, this is a measure of the money in the economy that has been created by the government.
For banking created money, there are two parts, the principle which gets repaid out of existence, and the interest (or profit). The interest has to come either from the national debt or from further lending. So part of the government debt is actually banking profits.
Feel free to correct the above if I’m totally wrong, I’ve just been trying to get something simple in my mind for when I’m discussing such things with others.
You’re pretty much right
as we pay more for food, fuel and heating , we have less for other purchases. Our spending is the income of business so if our spending falls, many businesses will fail and folk will be made unemployed. More claims on the state and less revenue. Less investment for future growth.
Recession is more expensive than some inflation. (That seems to be their reason for not meeting the claims)
They seem happen for us to go into recession. But then bankers always go for unemployment rather than inflation. The money not skimmed off by tax will be spent into the private sector. It is so obvious.
It makes me so angry that so many people are suffering and it is largely avoidable.
I read what Sunak had to say about this and was appalled.
It is yet another shining example of Tim Snyder’s ‘inevitability politics’ at work.
A totally false yet powerful proposition that is essentially a cul-de-sac of ideas – a self defeating dead end – ‘you can’t earn more because it would cost you more’.
The perfect excuse which is in fact a lie.
I mean I ask you?
Desperate? Scraping the barrel? I suppose however, some will still still fall for it.
Looking at this now from a micro, frontline point of view, I can tell you that my department – public housing – has incurred a huge loss of staff to the public sector over the summer and autumn which is seriously addling our ability to make progress simply because our pay scales were lagging behind at government stipulated levels. We are struggling and recruitment is tough. God knows what it must be like in the NHS and ambulance sectors.
The result of all this lack of investment and decent pay is that the new normal in the pubic sector is ‘very slow’ across all service sectors.
And this is deliberate and it is all actually to do with the very simple and erroneous claim that taxes pay for things. That it will cost us all to pay for decent pay for those who look after us.
Let’s not forget what happened in 2008 when the banks were bailed out of their own criminality and greed.
Let’s not forget the central bank reserve account now so inflated literally inviting banks to misbehave again.
Why does that side of economy (finance) get all the government money it needs whilst the rest of us get so little?
Economics?! I ask you! You don’t have to be even thinking about economics to see that injustice in this.
Economics my arse. It’s nothing to do with economics.
It’s about the abuse of power and the abuse of the fair allocation of money-resource in our society. That’s what it’s about.
Agreed
[…] HomeNeo-Liberalism in the EUAusterityRichard Murphy – Sunak’s talk of a £28bn cost of public sector pay rises is total CRAp […]
Thank you for this explanation. I would like to send a copy to my MP ; Peter Bottomley. I do not expect any action as he is nearly as old as me, but it is necessary to keep up the pressure.
Please do
Thanks
Perhaps the people who would find your article most immediately useful would be the Union leaders who are currently trying to get a decent deal for their workers. Given that they are currently in the spotlight they could also be a great way to get the message out. On the same point I contacted Good Morning Britain via Facebook last week after Martin Lewis’ interview with Health Secretary Steve Barclay who said the Government can’t afford £28 billion on pay rises.
I hope they read it
You do seem taken the theory that more money given by government is a public good. Definition being something that is non-rivalrous and non-excludable. You don’t need to pay (in useful hours worked) to get some more and giving more to one group doesn’t exclude any other group getting some.
As we like public goods, we should do even more QE than we have in the last 3 years.
I admit I di not quite follow your logic, but think it is going in the right direction
Tories whinge about £28Bn spending on public sector pay increases (which will get re-cycled within the economy) but write off £38Bn wasted on an app that never worked, without batting an eyelid.
The “Reality Check Team” of the BBC are also questioning the sum total of £28 bn as in the link below.
Interestingly, they go part of the way to a similar explanation of Public finances by saying “there’s also the question of the tax public sector workers would be paying if they got an inflation-linked pay deal. If it cost the government £18bn, it would be getting some of this back through tax – roughly a third – bringing the bill down further.”
I’m not sure why they stop there. The extra money that isn’t paid in tax by public sector workers will still be spent, and then respent in subsequent transactions, and it will all go back to the government in tax unless someone temporarily prevents it doing so by saving it.
So it isn’t too difficult to argue that it won’t actually cost anything at all – no matter how large the pay rise might be and no matter how many workers receive a pay rise.
However, surely if some sectors get more we can ask: “won’t someone else will have to “pay for it”? Yes, they probably will. The mistake we are making is to think in solely in terms of pounds rather than resources. If there is significant slack in the economy the government can create the extra spending to use up the slack and so it won’t cost anything at all. However, if there isn’t, the government will be diverting resources from some to give to others, probably by creating an increase in the rate of inflation.
This is not to say that low paid public sector workers aren’t deserving of a pay rise. This is a political rather than an economic question, and I’m firmly on their side!
https://www.bbc.co.uk/news/63917967
Well argued
I find it hard to believe that it is just ignorance on the part of politicians (I was going to say Tory politicians, but now I’m not so sure) and journalists. I think it must be deliberate policy to force the privatisation of everything, most notably the NHS, by under-resourcing, forcing failure, creating dis-satisfaction and opening the way for an almost completely paid for and profit making business. The process is well under way with the NHS. There must be very strong pressure from somewhere on politicians not to deviate from the fiction of services having to be paid for out of taxation and on journalists not to challenge that fiction. The cat nearly got out of the bag in 2007-08 with QE and great efforts have gone into stuffing it back in ever since.
I agree, there’s little profit to be made from investing in public services, so privatising services makes sense if you’re after financial gain. The Covid epidemic and the need for massive amounts of PPE illustrates that point as Tory politicians and their mates fell over themselves to make a fast buck.
There is massive money to be made from investing in public services – but the return is public and we are really not good at measuring it
Tax and spending has been deliberately framed as such by neo-liberals and “free marketeers” who know exactly what they are doing, but the vast majority of people, including journalists do not see it… because that is what they have been taught.
Quantitative Easing did show us another way, but the cat has been put back in the bag. Deregulation which contributed to the 2008 financial crisis has already been forgotten. There is a serious lack of critical thinking from most people, beautifully demonstrated by the Donald Trump school of politics.