Ending the public sector pay cap could raise millions

Lifting the pay cap would be beneficial for both the exchequer and the economy.

Strike ncrj

Lifting the pay cap would be beneficial for both the exchequer and the economy

The argument that public sector pay rises are unaffordable has been seriously dented by a new report published yesterday. Howard Reed, the highly regarded former IFS economist who now runs Landman Economics, has written Lifting the cap: The economic impact of increasing public sector wages in the UK.

A compelling case for lifting the punitive 1 per cent public sector pay cap can be made on moral and pragmatic grounds. Workers in local government and schools went on strike on July 10 to pile further pressure on what is clearly an unsustainable policy.

But Reed’s report looks at the issue from the point of view of the government, and shows the impact of modest increases would be beneficial for both the exchequer and the economy.

For the first time, this research gives us a projection of the wider effect of each % point increase in public sector pay. It shows us that every 1 per cent increase “…generates between £710 million and £820 million for the government in increased income tax, National Insurance contributions, and expenditure tax receipts, and reduced benefit and tax credit expenditure”.

This reduces the net cost of a public sector pay increase to around £600 million, contrasting sharply with the up-front wage-bill increase of £1.4 billion. So the cost of lifting the cap would be roughly half the amount which is often assumed.

Compare that to the cost of cutting corporation tax (the rate for firms with profits of over £1.5 million has been cut from 28 per cent in 2010 to 21 per cent in 2014). A 1 per cent increase in the main rate of corporation tax would raise around £480 million.

Or we could go further, as Howard Reed does, and look at the thorny issue of tax avoidance and evasion. HMRC suggest tax evasion in 2011-12 amounted to around £15 billion and avoidance to £4 billion. There are many much higher estimates of the tax gap. And yet vast amounts of political resources and capital is dedicated to holding down public sector pay, and relatively little to addressing the evasion and avoidance. This simply makes no sense.

It’s also clear from the report that the benefits of injecting public sector pay increases into the economy would have significant social as well as economic benefits. Each 1 per cent increase would pump between £470m and £880m of demand into the economy and generate between 10,000 and 18,000 full-time equivalent jobs, particularly for sectors such as leisure and transport.

So isn’t it time for our main political parties to get real about the issue of public sector pay? Quality public services need to be paid for. We cannot continue to exempt the wages of public sector staff from this cost simply because it fits with ideological prejudice or media hostility to public provision.

Demands for adequate public sector pay are not going to go away. The pay cap, which is planned to last until at least 2018, is not sustainable, equitable or just. If we look at this issue on its merits, reasonable people will now conclude that the pay cap has to end.

Gavin Edwards is national officer for UNISON Bargaining Support

You can find out more about UNISON’s ‘Worth It’ Campaign here

8 Responses to “Ending the public sector pay cap could raise millions”

  1. Jason Buck

    Henry Ford realised that by paying his workers more he could turn them in to customers.

  2. Frank

    Henry Ford understood a balanced budget

  3. frank

    it is very very very misleading to try to pretend salary increases for public sector employees are affordable because they pay tax.

    Public servants do not generate tax revenues. They are recipients of the tax generated by the private sector. Public sector employees paying tax is meaningless, it is just a wasteful recycling exercise. It would make much more sense to pay public sector employees an income with no tax, and save all the bureaucracy

  4. Luke

    ? Frank what are you on? Work is still work whether you do it here or on Mars.

    A wealthy fat CEO appearing two weeks after intensive heart surgery in front of concerned shareholders to prove they are still at the reins of the company is producing economically valuable and taxable work with impacts in the future, just as the twenty people who prevented him dying on or before the table also produced valuable work which impacts us into the future.

    Tax is a form of a collective buying group where everyone which joins it by birth or activity pays in differing amounts, and gets out differing amounts. The hope is that that more at less cost than buying individually, but that’s only a second order concern because there are somethings which can only be purchased, contractually negotiated and produced collectively, ie common law and order. Which since without it its hard to have even a stone age, is pretty priceless.

    Tax is topped up with Debt secured against future tax revenues to buy in, invest to create or provide itself all the goods and services it buys. Just because a member of a buying group may receive money or goods and services concurrently doesn’t necessarily mean there has been waste. Indeed there are lots of tax breaks for ‘private’ employees who do public good ie by reducing the engine size of there city motor. In fact it may be private sector workers who do nothing public except pay in less than they get out who may or indeed are the real problem layabouts in society.

    It is so important people pay the real costs of the economic and other factors they enjoy. While income tax may well be best when kept below 54% top, there should be surcharges for shirkers and layabouts in either the public or private sectors and at any income level who don’t reduce their liability through work for and by the public good.

  5. blarg1987

    Be careful what you say, bearing in mind companies like BAE, Serco, G4S etc are classed as private sector jobs, however most if not all their income is generated form the tax payer.

  6. Guest

    “Yada yada there’s no value to having the NHS, schools, etc.”

  7. Guest

    Making more silly claims I see, LB.

  8. Peter Martin

    If government spend an extra amount of money on anything at all , most of it will come back in taxes: income tax, VAT, NI contributions, corporation tax etc as that money is spent and respent. After three or four respendings there won’t be much left in the economy!

    Conversely, we can say that if the same amount of money is cut from spending, the saving for government will be nothing like it might appear at first sight. But the multiplier effect on economic activity will be more than it appears.

    Do our highly educated government economists take all this into consideration when deciding the budget? Or do they simply assume that every £ of extra spending, or taxation reduction, increases the deficit by the same amount?

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