I have posted this thread to Twitter in response to the government's announcement that it has agreed to pay review bodies' recommendations but has not agreed to fund the resulting costs:
Rishi Sunk has said that this year's public sector pay awards have been agreed in full but with no new or additional funding to cover them. There is literally no economic sense in this whatsoever. A short thread...
Pay rises of around 6% for education and healthy have been announced - with there being no room for discussion, apparently, whatsoever. In other words, the government has, by decree, just announced real pay cuts for millions of people.
This makes no sense. It guarantees three things. The first is more people leaving the public sector. They will quite simply not be able to afford to stay. So already massively depleted services will be undermined even further.
Second, this means that many workers will have less to spend back into the economy now, meaning that economic growth will be harder for the government to achieve. When that is one of their goals that also makes no sense.
Third, the policy presumes that proper pay awards to people will not motivate them. As such, the opportunity to add value by boosting productivity by having a better-motivated staff, instead of one that feels undervalued by a political leadership that clearly does not believe in what they do, has been foregone.
But the whole logic of also reducing to advance departmental budgets to cover these pay awards makes no sense. There are two main reasons.
Firstly, all of these pay awards will be taxed. They extra pay will be the top part of a person's pay. It's likely that tax of 20% and NIC of 12% will be paid by each employee as a result.
On top of that employer's NIC of 13.8% will be paid. In other words, of the gross cost (pay plus employer's NIC), just over 40% will return to the Treasury in tax.
It makes no sense, in that case, to refuse that 40% back to the departments that are paying these people. If it is not returned to them the Treasury is winning, and I guess that in that case we have to assume that is their aim. That is a wholly destructive decision.
Secondly, refusing to cover these costs assumes that these pay rises generate no further tax revenue beyond the departments that pay them, but they do. If someone gets a 6% pay rise they spend it. And the person they spend it with has more income as a result, and so they pay tax.
And that person who has got additional income also spends what they get, and the recipient of that money then pays some more tax, and on and on. It's actually wholly possible that eventually the entire additional cost goes back in tax paid to the government. But that's being ignored.
In the state sector what is called the multiplier effect (which is what I have just described) is usually sufficient to cover the whole cost of pay deals - but the government is choosing to ignore this.
And finally, there's another reason why the government need not impose any cuts on the money for these departments. That's because although the economy is not growing in real terms right now, there is a lot more money floating around in it. That's what happens when you have inflation.
If prices are rising by 8.7% then the VAT yield goes up by that much. If wages are on average rising by 7% then income tax goes up by that much. And taxes on profits should definitely be rising. In that case, the money is available to give to departments to cover these costs.
It's a straightforward lie to say that there is no money available in the government to pay these costs in that case. There clearly is. But the government is choosing to spend it on something else.
What is that something else? It is paying interest. And as I noted recently, this year the government will pay our commercial banks more than £40 billion more in interest than it did two years ago on the deposit accounts that they have to hold with the Bank of England.
The government does not need to pay all that. It could pay a great deal less, as happens in the Eurozone and Japan, for example. But it has instead decided that the banks must be paid in full, even though teachers, doctors, nurses and so many others apparently cannot be.
That is what is so hideous about this decision. What it hides is the fact that the government has chosen to favour banks over working people. The only reason why proper pay rises cannot be made is that banks are getting the money denied to our essential workers. There is nothing more or less to it than that.
Sunak, Hunt and all the other ministers who try to defend this deal will be lying when there is no money available to departments to pay for this deal and services must suffer instead. That's only true because they are shovelling money into our banks instead.
They had a choice to deny interest on bank balances that commercial banks only have with the government because new money was created by it during the Covid and banking crisis eras, or to pay workers decent living wages. They chose bankers. And that is unforgivable.
ENDS
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There is nowhere else I’ve found online or in print where I can find what you provide here – clarity, evidence, the connections between different parts of the economic picture, all explained clearly and genuinely. For instance, nowhere nowhere else will note that if there’s money to pay interest there’s money to pay people. What counts for much of what gets called journalism is little more than what Chomsky would call propaganda – it neither holds power to account nor tells the truth. It is shockingly incoherent drivel, loaded with stock phrases masquerading as knowledge (such as raising interest rates to combat inflation, repeated ad infinitum), barely reworded press releases, with no regard to the content beyond not upsetting the paymaster. I’ve known for decades (I’ve been angry for a good while) that newspapers are largely mouthpieces for wealth, but it seems to have reached new depths of reality reversing depravity.
Thank you
They’ve lately come to realise, I suspect, that they can’t compete with the internet and that their only hope of any future is as propaganda outlets for the government. I find I’m saying this daily now.
Interesting to compare these proposed pay rises of 6% with the rise in civil service pensions this April, just over 10%.
Indeed
NHS pensions also went up 10%
Most pension schemes define exactly how annual rises will be calculated. Are you suggesting that should not happen?
I am not sure I follow you
At least he has admitted that he is responsible for pay rises at last. He’s always pretended it’s by negotiation and the government has nothing to do with it.
He also thinks that a junior doctor on £14 an hour is worth less of a pay rise than an MP on £82,000 a year, in the top 10% of pay.
I hope the doctors stay on strike, even though I have had an appointment to find out about the results of a scan put off from next Monday to October.
I think this thread should be put on every facebook page and twitter feed we can, as well as every other group we are involved with. Talking to the converted, I know, but there are a lot more getting converted.
Anyone in the north east there is a webinar in ten minutes with Jamie Driscoll, in case you don’t know. Hope there’s a chance to put it on there.
Can you expand a bit more on your point about eurozone & Japan ‘choosing ‘ to pay less interest to commercial banks – would be intereste d to understand this dynamic more
See my recent thread on this issue. Also see the new economic foundation on tiered interest rates.
The NEF tiered reserves issue is central. The BoJ is always treated as an irrelevant ‘outlier’; presumably because it isn’t orthodox neoliberalism (although the ECB can’t be so dismissed, so its unorthodoxy here is ignored). In fact it is the future. I noted that McDonald, the C4 News Economist was charting a future of 300%+ Debt/GDP into the further future (being used presumably to frighten the horses). What should be frightening the horeses is blowing £40Bn++ on paying interest for nothing (strictly, paying interest to commerical banks for keeping reserves in the Bank solely because NOBODY RESPONSIBLE CAN TRUST THEM NOT TO DESTROY THEM< US AND EVERYTHING). We gave them the QE; virtually none of it reached the public or consumer because it was managed and controlled by the charmed circle of BoE, dealers, commercial banks, and their exclusively selected beneficiaries of largesse. It never reached the public. The economy stalled. The Reserves were the collatoral for QE – NOT A WINDFALL PROFIT OPPORTUNITY. We are now lavishing them with windfall profits, entirely free of depositors or commercial borrowers. Therefore they pass nothing on to depositors, or protect mortgagees: and the Govergnment flaps around as if it can do nothing to help, save ask the rip-off Banks to do the decent thing. You are all being "screwed". There is no other word for it. It is despicable. Frankly Sunak and the fools responsible for this rubbish are a damnable disgrace. They can fix the worst of this.
‘Collateral’. Blooper number 3,043? I keep missing them before posting. Festina lente…
Join the club
“…. this year the government will pay our commercial banks more than £40 billion more in interest than it did two years ago on the deposit accounts that they have to hold with the Bank of England. The government does not need to pay all that.”
It always comes back to Government money and reserves. Or austerity (almost fifteen years of a perpetuatal Conservative blunder – for no gain even on the Conservative’s ill conceived tests of deficit and debt; in short, for nothing at all except grief, pain and cost). Or Brexit: don’t mention Brexit; it is now a taboo subject.
Think of yourselves now on an underground journey; the new, unfinished Brexit line. Rishi Sunak in the cab. Standing room only. It is hot and humid. Next stop, River Styx. Mind the gap, its a big one. Final destination: Hades.
Since all forms of money are promises in hierarchical form the question is therefore who is best placed to regulate these promises, to expand and contract them according to events, and ensure the distribution of those promises is equitable. Ultimately this can only be the state and it should not be subcontracting this out to the officials of a central bank under a quasi-independent arrangement because it blurs the lines of responsibility and this blurring allows corrupt capture.
Hi Richard, if public pay is increased by a percentage could this be considered regressive? A senior NHS staff member on £200,000 isnt really at risk in the current climate when compared to nurses/assistants/cleaners who are likely at median salary or below. Would a flat pay increase be a more effective, affordable and equitable approach? If bills, including mortgages, have increased by an average of say £2000 would paying a flat increase be preferable? In addition this would avoid the existing worries regarding inflationary effects of pay rises. Apologies if this a stupid question I dont claim any credetials in finance or economics.
In principle yes
But I think you will find very few on £209k covered by this
On BBC no ‘experts’ or economics correspondents are even remotely interested in querying Sunak’s framing of the governments options as either ‘this is it’ or ‘put up ‘your’ taxes’, or ‘borrow’ .
Nor do they point out that under the multiplier effect most of the pay increases could well end up back with the government.
Only Ben Chu on Newsnight seemed to suggest that goverment might pretty easily ‘afford’ these pay rises, and the radio 4 PM programme’s invited IFS economist – also hinted that this is not breaking the bank, but no challenge to the overall narrative – of ‘no more money’.
So refreshing that you can say it is ‘a straightforward lie’ – when government says no more money – and that much of the £40bn to the banks need not be paid.
Why dont the unions say it? They should be getting your twitter feed as should the BBC
I wish I knew why they won’t say this
They’d probably be a bit out of their depth trying to explain it.
On the multiplier effect.
My brother, retired 2 years has a company penson along with his state pension.
His state pension was increased, his tax relief was balanced off against this, net result is his monthly income has reduced by the extra £30 a month he’s paying on tax from his company pension against what he thought he would have. His company pension rise was 3%.
I think something sounds wrong there
Unfortunately tax for pensioners is always complicated – but it sounds like he might need to call HMRC (a nightmare) or do a tax return to put things right
Or just do a tax return through his online portal.
Is he forgetting to include the rise in pension in his sums?
It looks to me like I get £20 a month less in my private pension, but that is more than covered by the extra £20 a week I get in state pension.
What’s wrong is that the tax free allowance has stayed the same for at least the last 3 years.
Spot on! This has always been an issue when the personal allowances are frozen! As the state pension has increased it uses more of the tax free allowance, so less is available to the private pension. Hence more tax is taken from the private pension!
A different Andrew
It has not always been an issue when personal allowances have been frozen because they never were until Johnson saw it as a good wheeze that no-one would notice or complain about.
As it stands any increase in income that takes annual income over £12579 is taxed at 20%. Failing to increase the basic tax free allowance means that, very soon, a part of basic state pension will be taxed. How mad is that?
Cyndy Hodgson
It has happened at least once before, I think perhaps when Gordon Brown was chancellor? It certainly didn’t feel as prolonged as the freeze set by the current government!
It also becomes an issue when the increase in state pension is more than the increase in personal allowances.
The joys of fiscal drag!
There is a very weird dance going on. No one, at least in politics is actually telling the truth, or indeed engaged with the facts at least in the narrative they peddle.
The economy is like a household budget for example. What politicians never tell anyone is that the economy is not like a household, a household is on a fixed income, it can’t issue it’s own money or invite people into the household and tax them for five generations.
Every politician mentions economic growth and cutting migration? With falling birth rates and an ageing population, you can have one or the other but not both.
The amazing one, which seems to be based on the Reinhart and Roghoff paper (which was never peer reviewed and it turns out the authors excluded vital datasets, was rapidly debunked they and couldn’t use Excel) is the expantionary fiscal contraction.
When you cut spending in the public sector, the private sector contracts as well. You end up with the same amount of debt but on a smaller denominator. As a percentage of GDP, your debt has grown (even if not in real terms).
If you have strong public sector spending, private sector spending increases because they are more confident of getting a return. The benefits are a healthier workforce, a better educated workforce and a workforce that can actually get to where they need to as well as deliver the product they are selling to the right places.
40 years ago, Corporation tax made up 20% of the total tax take, today it’s 6%. Even if the bare minimum we can do it just to get people to pay their taxes that would probably make up every spending deficit we have in the UK. There’s north of £100bn in taxes that have been avoided or evaded currently outstanding, which would make up every shortfall in government spending.
If we included a wealth tax in there, that could transform the UK.
I know I’m ranting a little now, but I can never understand how people cannot join the dots, but more worryingly, we reject the advice of experts for media commentators. I notice that Politics Live had another shill from the IEA on today. Same thing, if you tax the wealthy they will leave. They don’t, it’s a myth and they own assets in the UK. Roman Abramovich could not take Chelsea football club with him, just an example.
This scandalous nonsense from Sunak derives from either complete lack of understanding of the monetary and fiscal processes, or he is quite blatantly lying to the people of Britain. In either case he is manifestly unsuitable for the office he holds.
As one of those public sector workers, I appreciate you pointing out that as soon as we get the increase in pay – as there was no increment in April as it was still in dispute – it will get paid as a back-pay lump sum and our tax and NI contributions will claim a huge amount of it (as if we are always paid that amount every month) as a result – so the government will also get a load of money back the month the paid rise is paid. So, tax and NI will eat into the actual pay increase.
You are not lying at all Richard – the government however is.
This is what happened last year – and can I also point out, there was no tax rebate given either as happened if you get a spike in taxable earnings in the tax year.
Yes – some detractors will claim that we are lucky and we should put up and shut up – but they’re just obedient fascists falling for the oldest trick in the book – divide and conquer.
And the money does not last does it, it gets spent on higher utility/food bills – the period of being better off is a brief one.
The thing is we are still having problems recruiting and retaining. A local construction firm has recently gone bust (thank you Mr Bailey) in the town where I work, but it seems the staff have been mopped up by other private firms offering higher rates than public sector pay. They won’t be joining my public sector company which is still haemorrhaging staff.
I say this again, because inflation is blamed on workers – but it is employers fighting over labour in the labour market who need staff to fulfill work and are prepared to pay the rates. But those rates are still below inflation.
This not the employer’s fault either, but this fact leads us down the route of other causals and this is where BREXIT comes sharply into focus and all those vocational units in schools closed down due to Tory austerity that could have produced the homegrown labour that BREXIT created the need for does as well.
So there we go – BREXIT, austerity and lets throw in Covid mis-management and Truss & Kwarteng for good measure and what we have is the most callously stupid bunch of politicians to have ever taken a seat in parliament.
Ladies and Gentleman – I give you the Tory/Conservative Party!
Let’s try not forget that eh? They’re NEVER to be trusted again in my view (no that I ever did, so don’t blame me!).
Surely this £40bn to the bank should be going viral in the press. I appreciate why the majority loathsome right wing press won’t pick this up but it should be FRONT page news in the Guardian and the Mirror.
The Guardian have had a letter from me on it
It has not been published
RE: The Guardian
If there is anything more useless than a stupid government, it’s a stupid supposedly left wing newspapers not publishing letters like yours.
That’s why Byline Times gets my money and the Guardian will not.
The Guardian just spins round in circles. It has no analytical approach to anything on the economic and monetary front. I just read it for the exposures about who’s causing trouble for the country and the planet.
Excellent Richard!
However, I am very pessimistic about the prospects when Labour takes charge of the wreckage in 2025. If they try to undo the destruction of public services and ransacking of our country, the £ will be trashed by the international financial system. If they pander to the financial markets, there will be industrial mayhem as unions try to claw back what the Tories have stolen.
An area where I think MMT has not fully developed its thinking is international trade.
I see international trade just like any other trade, but with a currency transaction somewhere in the process. If the UK exports more, buyers need to purchase more £s, the £ rises in value, and imports become cheaper.
However, the overall value of the £ is the sum of all the different types of transaction involving currency exchange.
When the BoE raises interest rates, it makes UK bonds more attractive to overseas investors and will push the £ up.
However, it will only be a short term fix. It makes UK exports less competitive and harder for UK companies to invest for the future.
In the longer term, the interest and capital on the bond will need to be repaid and even more £s sold to buy another currency.
To be fair to Rachel Reeves, she will be between a rock and a very hard place.
MMT has a fully developed theory of international trade
It says let the currency float
So des everyone else, mind you
The point is that in the short term, raising interest rates should lead to overseas purchases of bonds and raise the value of sterling, reducing inflation today. In the longer run, interest and repayment of those bonds will lead to a greater overall selling of sterling. Giving increased inflation tomorrow, strengthening your argument that the BoE is completely wrongheaded.
Cynically, I wonder if Reeves is not just economically, but tactically wrong. Markets anticipate, and a bit more socialist rhetoric now would drive down sterling on the Tories’ watch, rather than mini-crashes every time the next Labour government tries to do anything.
At local level, the only power councils have is to decide which services to cut. Will this be true at national level? Will the grip of Bailey and the market be so tight that our only choice is over which party reduces services?
I think the overseas issue re bonds of little consequence
In the social housing world, we’ve just learnt that the Department of Housing and Levelling Up has returned nearly a billion pounds or more worth of unspent grant for capital and revenue funding in housing to the Treasury because of the rise in interest rates meaning that housing associations cannot afford to take on private loans to increase affordable housing supply.
The only way to spend this money now is to increase the proportion of grant funding per unit above the original rather low levels of subsidy, in order to lower the amount being borrowed from the private banks.
So, see how the BoE’s own interest rate policy trips up the government’s own policy!!!
How stupid can you get? We are governed by morons folks I tell you! Who is in charge around here?
And get this – my council housing rent arrears are shooting through the roof. Housing Associations (HAs) routinely evict people for rent arrears and whom have been turning up on our housing waiting lists along with private tenants making our lists grow longer.
And who insists that the HAs have such aggressive eviction policies? Why the lenders of course – the banks.
We learnt from the introduction of universal credit that to evict tenants is just as expensive as building up rent arrears, so we don’t evict, we warehouse the non-payers in our stock and just get the tenants to pay as much as they can plus arrears.
Another example of the residualised role of council housing but also yet again the public sector propping up market failure again. Where would we be if council housing was not here?
You’d be seeing a lot more tents near where you live that’s for sure.
But this is 2023. It feels more like 1823 to be honest. Or how about further back than that?
I was reading today about people sorting out claims for those on universal credit and then having to put in claims for universal credit themselves.
Shows how stupid the system is.
My grandson wants to know if you called him Rishi Sunk on purpose or not. Whichever way he thinks it’s clever.
Mistake….
“The government has chosen bankers over state employees and public sector workers today, and that is unforgiveable”
So has Tory Boy Starmer it would seem:-
https://www.independent.co.uk/news/uk/politics/keir-starmer-labour-pay-rises-policy-forum-unison-unite-b2375587.html
Unite were told to stay away from Starmer’s speech out of respect. They were told not to protest. That was the day after they agreed to carry on supporting labour. I have a feeling there will be a lot of unite members stopping their subs.
https://skwawkbox.org/2023/07/10/unite-tells-delegates-to-stay-away-from-starmer-speech-and-not-protest-out-of-respect/
Indeed the unions have been remarkably quiet about Starmer’s appalling behaviour. Things are clearly going to get much worse in this country before moral probity returns.
I tread very carefully here and suggest that your claim that a 7% increase in income would raise 7% more income tax. Would it not raise more than that as the tax allowance reduces the tax paid on the original income.
For example let’s say on £100 there is a tax allowance of £20 and 20% tax is levied on the remaining £80, the tax tax is £16. If the income increases by 10% then £90 is taxed at 20% hence the tax tax is £18, an increase of 12.5% not 10%. This is especially true when the thresholds have been frozen.
What would you think of a policy which tried to take public sector wages out of the political arena by guaranteeing that they increase with inflation as a minimum ?
I did not say that
I said it would all be taxed for the reason you note
Thank you once again for clarity and bullshit bashing, very much appreciated