This is my second Twitter thread of the morning (and no, for the record, I could not sleep):
The government wants a summer of pay disputes as it seeks to blame inflation on pay rises (which is not true). But is it really the case that it can't afford the pay rises public sector employees need? Another thread….
There or two parts to answering question. One is to estimate how much extra tax inflation is bringing in. The other is to estimate how much the pay rises will cost.
First, let's look at tax. Four taxes are likely to bring in a lot of extra money because of inflation reaching 10% or more. They are VAT, excise duties, income tax and national insurance.
VAT was expected to bring in around £150 billion this year. There is some inflation allowed for in that but it's still very likely that will increase dramatically, but not maybe by quite 10%. The economy is slowing. But £10 billion extra is quite possible.
Excise duties on fuel, drink and so on are likely to rise a lot because of rising prices. They were going to bring in more than £50 billion, near enough. To expect £3 billion more is fair.
Income tax should bring in £245 billion and national insurance maybe £155 billion. Pay is not going up by as much as inflation. But for technical reasons inflation is very good at boosting income from these taxes. A 4% increase is possible. That is £16bn extra between them.
Add these up and that's around £29 to £30 billion of extra tax to be paid because of inflation. When I say that Sunak is really coining it in right now because of his inaction on inflation, I really mean it.
So, how much will a 4% pay rise plus 4% bonus for all state employees cost this year? The Office for National Statistics says 5.7 million people work in the public sector. On average they earn about national average wages (which is hardly surprising).
That figure is around £38,000 gross. So the pay will is around £216 billion. I know there are pensions on top, so add at least 10%. But we don't need to worry about national insurance, because that does straight back to the government anyway. So, call it £240 billion.
Let's assume they were going to get at least 2% anyway. Now let's suppose they need 8% to be satisfied right now, half in pay and half in a bonus, to be reviewed in a year's time. So that is 6% extra now.
6% of £240 billion is £14.4 billion. But Sunak has a pot of £30 billion to play with. Now, of course, there are other demands. He needs to increase benefits and other costs will rise. But he has £15 billion left for that.
Now I admit that's probably not enough to cover all the additional costs on other issues. But I can find him other savings.
For example, I could knock well over £10 billion out of government interest costs next year by changing the rules on the amount of interest to be paid to banks on their deposits with the Bank of England, which are set to skyrocket because the BoE has increased interest rates.
And government ministers often say government interest costs were £83bn last year but that's only because of some exceptionally dodgy accounting on their part. Nothing like that amount was paid. And if inflation falls - as it will - nothing like that amount will ever be paid.
In other words, I can find tens of billions of savings with regard to interest with only a few straightforward policy changes. As a banker Sunak should have been able to spot these. It's anyone's guess why he can't see them.
And the government could always run a small deficit to make sure people are protected from harm. That, after all, is what the government's job is. Well, that and preventing recession, which will happen if they don't pay these increases.
So in that case, why is the government choosing to fight workers and crush public services when there is no need to as it could easily afford to pay public sector employees enough to protect them from the worst of inflation right now?
Your guess is as good as mine. But what I note is that they and their friends in the Mail are very keen to say is that there is class warfare going on. And I agree, there is. But it's the government waging it on people who are simply desperate just to survive.
What I know is that the economics of these pay disputes don't stack. The government could pay up. They won't. But don't believe that is because they can't afford to do so. It's because they want this fight.
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In the year to April 2021, inflation was below 2%. In the year to April 2022, inflation was around 8%. Who knows what inflation in the year to April 2023 will be, but I’d be surprised if it remains above 8% for that long.
Anyone getting a pay rise of less than 8% now is being required to accept a lower standard of living. On top of austerity cuts since 2010.
How do the Conservatives expect to be able to sell this to people? Asking millions of people to accept a lower standard of living is not a recipe for electoral success. Perhaps they hope to repeat the feat of winning an 80 seat majority on fewer than 14 million votes (less than 44% of the vote share on a 67% turnout).
Under the geriatric 19C voting system we have as opposed to what the civilised world uses i.e. PR the Tories have 75 more seats than they are entitled to. LDs get 11 seats not the 76 they should have. The other figures are no better.
Robert is right to focus on our antiquated FPTP voting system. Sadly the Tories will hold onto it till the earth freezes over because it gives them the electoral dictatorship they seek in order to establish their blatantly anti-democratic and antisocial ideology. They cite their fraudulent voting referendum (both choices giving the same result) as their mandate. Unfortunately FPTP is also the choice of a misguided Labour Party who think that only FPTP will give them the power to implement their policies. This, and the nonsense of ‘fiscal unaffordability’ theory enabling poverty, social welfare and civilised institutions like the NHS to be unjustifiably and malevolently underfunded, conspire to create a cancer that is eating away at the fabric of society. Richard has devoted his career to expose both FPTP and conventional money supply theory against rabid, reactionary opposition. We owe him a debt of gratitude.
I hope I have done more than that
But thank you
Sorry Richard I didn’t realise my comment ‘Richard has devoted his career to exposing both FPTP and conventional money supply theory against rabid, reactionary opposition’ was actually a bit insulting to the breadth of your work. Apologies
I took it as you intended
But there is more, that’s all I was saying 🙂
Thank you, Richard.
I’ve sent a copy to my MP asking for her comments. I’m not expecting much in the way of a response as she hasn’t responded to my previous efforts to get a comment!
Thanks
Typo: “For example, I could not knock will over £10 billion out of government interest costs next year ” has a spurious “not” in it.
(Also, “well” not “will”.)
Thanks, done
Here is an interesting perspective from of all places Conservative Home’s Mike Hill
“Blaming one’s problems on the preceding Labour government, as the Coalition did, is one thing; blaming them on the next one strains credulity.”
https://capx.co/who-governs-britain-the-tories-need-to-show-they-are-in-charge-not-blame-problems-on-labour/
I noticed that, with amusement
Ooops –
Mike– Henry HillRegarding unions ‘holding the country to ransom’ why do people not recognise that for several years the rail companies have been holding the country to ransom by increasing rail fares significantly above the level of inflation?
And the law let them do it
Same con RPI as student loans. ( RIP soon?)
Unfortunately being able to increase railway fares by RPI + 1% hasn’t increased railway workers’ pay by RPI + 1%. I suspect executive pay and shareholder dividends have increased by more than this…
I have just viewed John Redwood MP (Conservative) and Torsten Bell (Resolution Foundation, and a soft-left leaning economist), debating the economy on C4 News. Redwood and Bell; sounds like an expensive soap product, and both were selling us a particularly soapy soap. Neither can even face the raw reality of the Brexit elephant in the room (although Bell at least acknowledges it is making Britain poorer); but if the confused, unconvincing ideas, and dismal future they both want or worse, expect for Britain is the best we or they can do?
Beam me and Scotland up, Scottie! We can do better than that guff.
The Resolution Foundation that Bell leads is deeply neoliberal
I don’t call the head of the Resolution Foundation ‘Bell-end’ for nothing.
And as for Redwood – he’s just Dalek – which is very unkind to Daleks – sorry.
‘Privatise! Privatise! Privatise!
[…] Cross-posted from Tax Research UK […]
Is it a coincidence that the ‘national debt/borrowing’ in 2016 was £1.65 trillion and the economic output in the same year was £1.67 trillion? Or was the extra spending – the ‘debt’ – merely what paid for the economic output? ie no output without the ‘dept’ spending?
I am not aware they were the same that year
Richard, pls say some more re this:
“by changing the rules on the amount of interest to be paid to banks on their deposits with the Bank of England”
& re the £83B last year being inaccurate. I’m asking to learn more not to contradict. Thanks.
Coming, but maybe not until tomorrow now
I’m interested in the source of your average pay figure of £38,000 gross. According to the ONS, median average full-time salary for is £31,285 for the year to April 2021 (https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/2021#employee-earnings-and-hours-worked), and this decreases for all workers since part-time workers typically earn less than the average. I presume your figure is the mean average full-time salary, because the mean average is skewed towards large values even if these are very few samples, but I cannot find a primary source for this figure.
The only source I’ve found is this: https://www.avtrinity.com/uk-average-salary
The median average salary for all workers in the UK is £25,971.
The mean average salary for all workers in the UK is £31,447.
The median average salary for full-time workers in the UK is £31,285.
The mean average salary for full-time workers in the UK is £38,131.
Given the median full-time salary is the same as the ONS figure I presume these are correct. They may well be buried in the ONS’s spreadsheets.
I used gross
You may be using net
But I used ONS data