Tax spending, not earnings, to raise public sector pay

Philip Hammond is right that any public sector pay rises must come from the government’s current account — and VAT is our best bet for the £1.5 billion we need annually, writes Alec Marsh

With each percentage point increase in the pay of Britain’s 5.1 million public sector workers estimated to cost taxpayers at least £1.5 billion a year, it doesn’t take many such rises to leave a socking great hole in the public finances.

As a result just one percent more (on top of the one per cent agreed with many public sector workers already for the year), would cost us the best part of £8 billion over the next five years. For comparison’s sake that’s just short of the UK annual net contribution to the EU, but against the context of wider government spending, its minuscule – barely 1 per cent of the £804 billion that the government is forecast to spend in 2017-18.

And here is part of the problem, when it comes to government spending we’re in such dizzying numbers that even a lot often doesn’t sound like it. The £1.5 billion would build half of Britain’s new aircraft carrier HMS Queen Elizabeth all over again. A one per cent pay rise for public sector workers is therefore worth two and half new aircraft carriers over five years. After ten years, at the same build rate, we’d soon begin to be returning to a Royal Navy the size of which we’ve not seen since we sank the Bismarck.

So the humble £1.5 billion a year, ad infinitum, is a lot, albeit a small nudge up on the current spend £179 billion payroll or when compared to Britain’s gargantuan public spending total.

That problem, of course, is that bleating about fiscal rectitude is all very well and good until you go and blow a cool £1 billion, as Theresa May has done, in propping up your government. The fruits of the ‘magic money tree’ are now up for grabs.

Couple this with the current rate of inflation – running at 2.9 per cent at the last count, and with the runaway inflation in key assets such as housing – then whizz in the fact that ‘austerity’ has been a fact of life in the public sector for seven years, and the case for a rise becomes compelling. Then if you remember that Labour walked off with another 50-odd seats in June and factor in jumpy Tory backbenchers, and it’s increasingly difficult to see how this limping government can avoid a reversal over public sector pay.

The overriding priority, therefore, is how we pay for it. The good news is that Philip Hammond, the chancellor, seems to be on side here – he’s insisting that any rise must be paid for today and not merely tacked onto the extraordinary £1.7 trillion of debt that we are bequeathing to our children. Quite right, too. When you consider that they’re already looking at being relatively poorer than us anyway and that there are likely to be fewer of them in work, too, supporting more elderly people, then you begin to recognise the scale of the enormously poisonous legacy that we are leaving in this debt mountain. The squeezed middle ain’t seen nothing yet; this will be the squished majority.

For now, however, if the public sector needs more money, then it must be found – and found from today’s running account. So where will the dosh come from? Well the Corbynite Left will all be for squeezing the rich; but as the rich will tell you – they already pay most income tax so why should they pay any more. And that’s not untrue. Yet if you raise lower bands of income tax or national insurance you’ll also just be accused of robbing Peter to pay Paul.

So, aside from perhaps returning to the grey area of reducing some of the tax benefits of self-employment over which the government got its fingers burnt in March, my vote is to increase VAT. Currently the government forecasts recouping £143 billion in 2017-18 from VAT. Raising this by one per cent would cover most of the increase in public sector pay. It would also offer the virtue of arresting some of the inflationary consumption that the mass pay-rise would cause, too (which might, or might not help reduce the changes of an interest rate rise in the autumn – after all we don’t want Carney taking away what Hammond has just given). Finally, a VAT rise might reduce some of the current account challenges created by five million workers suddenly rushing out to splurge in new iPhones or other imported gadgets.

The final thing about VAT is, of course, that it taxes spending, much of which is discretionary, so it doesn’t touch the earnings of an individual nor does it reduce their savings’ potential. Many will argue that it’s unfair, because those on benefits will suffer disproportionately, for instance, and as ever, there is no perfect solution. As Tony Benn noted in one of his last interviews with me, nobody likes paying tax, not even him. With the top one per cent of earners already paying 27 per cent of all income taxes (and with more than four million people now swept into the higher rate tax band, too), touching the rich does not seem fair – plus they are more mobile. If you want to tax the rich, therefore, better still to get them to pay it in their spending habits, too – using VAT.

Either way, post-Grenfell and post-DUP deal, if hard-working nurses and firefighters need more money; then the political will of Britain is that it will have to be found from somewhere no matter how ‘selfish’ David Cameron, or anyone else believes it to be.

Finally, if you are unconvinced by the arguments of political necessity then consider this: a gentle uplift to 5.1 million public sector workers – one in six of the total –might just be the ticket to reviving the UK’s flagging domestic demand. Helicopter money with a difference.

Alec Marsh is the editor of Spear’s

 

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