Public sector pay

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Earlier this week on Comment Central, Daniel Finkelstein noted that contributors to ConservativeHome's 'Star Chamber' seem to be having trouble identifying any substantial cuts to make in public expenditure. He also said, " I have always argued that there has been a tendency on the right to be flippant about how easy it is to control public spending."

He may be right. Controlling public spending probably is pretty difficult, given the nature of democratic politics. After all, even when Margaret Thatcher was prime minister, public spending grew at an average of 1.2 percent a year in real terms – and she was accused of savage cuts.

But that doesn't mean that cutting spending is impossible. Nor does it change that fact that – given the dire state of Britain's public finances (the government is now overspending by £20m per hour, twenty-four hours a day, seven days a week) – cuts are absolutely necessary. The question is where to start.

My top candidate would be public sector pay. As Mike Denham has pointed out on the Taxpayers' Alliance's Burning Our Money blog, as of April 2008:

• Average pay in the public sector was £582pw, compared with £574pw in the private sector.
• Median pay in the public sector was 13 percent higher than in the private sector.
• The median public sector pay had risen by 49.6 percent since 1997, compared with 48.8 percent in the private sector.

However, over the course of 2008, private sector pay fell by 1 percent, while public sector pay went up by 4 percent – so the gaps are now much wider. Furthermore, those figures do not take account of the other benefits – like gold-plated public sector pensions, for instance – that workers in the private sector can only dream of.

Total public sector pay is currently running at £160bn. If you were to cut it by 10 percent immediately, and then freeze it in real terms, you'd save around £60bn over three years.

Reform's recent report Back to Black made some more nuanced suggestions. Freezing all civil service salaries would save approximately £166m this year, and £169m next year. If no civil service bonuses were paid, around £25m a year would be saved. Alternatively, switching the civil service to a four-day week and cutting their pay by 20 percent would save £2bn a year. Reducing the pay of doctors (whose pay has rocketed in recent years) and NHS managers by 10 percent would save another £1.3bn a year.

There is no shortage of other options.

Stamp duty: The truth

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Following recent revelations that some MPs have been claiming stamp duty on second homes as parliamentary expenses – notably Theresa Villiers (£10,350) and Kevin Brennan (£10,200) – and bearing in mind that when Labour sold their Westminster HQ back in 2006 they avoided a £210,000 stamp duty bill, it is perhaps time to concede that the politicians haven’t got it all wrong: perhaps this is a tax we shouldn’t be paying.

Whilst avoiding this tax would appear to have been standard practice in Westminster, in the rest of the country revenue raised by stamp duty on residential property had increased markedly under Labour, soaring nearly eight-fold from £830 million in 1997/98 to £6.5 billion in 2006/07. This has been partly due to a move away from a single rate to a tiered system and partly due to an increase in house prices. Put into perspective, the Stamp duty land tax (SDLT) is currently increasing at five times the rate of UK salaries. Annual gross income in the UK rose by 54.3% between 1997 and 2007, whilst the stamp duty bill on the average UK property rose by 289.2% in the same period.

Raising the thresholds in line with house prices would be a good start as would a tiered rate system where consumers are only taxed on the proportion of their property value that exceeds the stamp duty threshold rather than the current system which levies a higher rate on the entire value of a property when a band is crossed; this places distorting pressure on prices in order to remain with a particular stamp duty band. It also induces people to sell their house at a particular price within a lower band on the condition that the purchaser buys the contents of the house at a fixed price and other such unusual behaviour.

As the average UK house price have increased, more and more people are drawn into a system that taxes a necessity as a luxury.

Free to choose the unexpected

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Coffee, research, or both?

Blog Review 978

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This idea that the State should finance political parties. The Incumbents Protection Act don't you think?

No, this really isn't the Great Depression Mk II.

Climate change already killing 300,000 people a year? No, not really.

Any objective measure of poverty shows that capitalism is an outrageous success.

Taxing height and why a political philosophy is not a smorgasbord.

Creating 200 jobs is not the same thing at all as employing 200 people.

And finally, meet the Devenish-Phibbs family.

A small thought about climate change

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We've just had a crowd of Nobel Laureates telling us all how urgent is the need to do something about climate change. And we've also just had a group of not scientists telling us that hundreds of thousands are already dying from the effects. That latter used some, umm, creative methods to reach that conclusion, for I was previously entirely unaware that earthquakes were indeed caused by climate change.

However, this leads to me to ponder a little on what Lord Stern told us. That was that we could sort this all out for the remarkably low price of 1-2% of GDP, spent year by year over the next few decades. Given the size of the UK economy this means some £14 billion to £28 billion a year. And we're also told that this amount should be used to correct the price system, so that matters currently external to the markets become internal to the pricing system. This so called Pigou taxation.

This makes sense, I have to say, as the amount of damage, by Lord Stern's figures again, done by Britain's emissions are again in this sort of range: £14 billion to £28 billion.

Now whether I actually swallow all of these numbers is a different matter, but let's take them at the logic of their proponents. We know  the problem, we know how to solve it, we know how much the problem costs and we know how much the solution costs. Excellent.

But, but....well, how much are we already paying in such green taxes? That depends a little on exactly how you want to calculate what is a green tax but adding up landfill tax, air passenger duty, the petrol tax rises from the fuel duty escalator and so on we get to a figure of....£14 billion to £28 billion again. Which means that, by the logic of the Stern Review, we've actually already solved climate change.

No, not even I think that to be actually correct, as Lord Stern himself doesn't. For he keeps telling us that we must do much more, much more quickly, in order to solve the problem, as those Nobel Laureates were also telling us last week.

Which, sadly, leaves us with one inescapable conclusion. We're not going to crack this at that low cost of 1-2% of GDP per year over the decades. It's going to be much much more expensive than that: which means we really need to reopen the calculations of whether we want to stop climate change or would prefer to adapt to it.

Will US conservatives embrace VAT?

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Discussion of a value-added tax in the US has long been limited to academics and political extremists. That changed when Senator Kent Conrad, chair of the Senate Budget Committee, recently spoke in favor of including VAT in the forthcoming congressional discussion of federal tax reform.

Any VAT proposal will face stiff opposition from American conservatives who would prefer to reduce taxes at every turn. Resistance to a VAT will be all the more hostile if, as rumored, it will be used to support a universal, socialized healthcare system. However, if, and only if, that fight is lost and publicly funded health care becomes an inescapable conclusion, the political right could actually come to favour a value-added tax.

Just walk in to a barber shop in any conservative American community and ask the patrons about their objections to universal health care. There will be those who complain about creating a culture of dependence on the government, those who are concerned about negative effects on the quality of health care, and those who simply do not want to pay other people’s medical bills. This last group might be most inclined to warm up to VAT.

The main criticism of VAT is its potentially regressive nature. Although everyone pays the same markup on purchases, VAT represents a higher percentage of total income for the poor than the wealthy. It is the burden on the disadvantaged, however, that may placate some conservatives because it means that everyone, rich or poor, will be paying for at least some of their own health care. Compared to an increase in the current progressive federal income tax, a value-added tax might be seen by some as a lesser evil.

The end of law

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The end of the law is, not to abolish or restrain, but to preserve and enlarge freedom.

John Locke

Blog Review 977

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Well, if you start out by asking the wrong questions about the virtues of different labour market models then you're obviously going to come up with the wrong answers.

Are we bloggertarians making too much of the avariciousness of the politicians? Mhm, could be, eh? Naaah.

No, really, we're not making enough of it.

And why do they seek to minimise their tax bills anyway? Doesn't government know how to spend the money better than any indivdual?

No, we really don't want to win the bidding war for GM Europe. One of those battles it's far better to lose.

And the Chrysler and GM bankruptcies are creating problems for all other unionised firms as well.

And finally, something to cheer you up. Laughing babies.

Dealing with climate change

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A new report out telling us all that we've been very naughty boys and that as it is we that stunk the planet up then it's us that has to pay to deal with it.

A fair point of course, that those responsible for damage should pay to repair or alleviate that damage. Further:

Second, 99% of the casualties linked to climate change occur in developing countries. Worst hit are the world's poorest groups. While climate change will increasingly affect wealthy countries, the brunt of the impact is being borne by the poor, whose plight simply receives less attention.

Entirely true of course, but this is hardly specific to climate change. It is always the world's poorest groups who are worst hit, the poor who bear the brunt of the impact. Because, well, does it really need to be said?, they are poor.

For that is the very meaning of the word poor, that people do not have excess resources, they don't have any margin between what they need to stay alive today and what they've got available to them today. So if disaster does strike then they are indeed going to carry  heavy cost: unlike us rich people who have spare resources in reserve.

Where I part company with this statement of the obvious is in what the distinguished panel of writers suggest we do next. We need to stop climate change so as to protect the poor. Me, I'm not so sure about that. I am rather convinced that it would be easier to stop people being poor so that they could, like us, deal with the necessary adaptations. However, allow me in my magnaminity to concede that I might be wrong on this. Perhaps reducing poverty will only help, not solve, this problem.

Very well, but it is, as we are told, a problem of such massiveness that every little bit helps, correct? And what do we know would reduce such poverty? A reduction in our own trade barriers would help would it not?

Excellent, so how about a small agreement here. I'll agree that this impact of climate change upon the poor really is a serious problem, one we should do anything to alleviate, when those telling me this start proposing that we abolish our trade barriers against those products made by poor people in poor countries.

Mob rules

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It seems that Mr Finklestein, over at The Times, has been unsettled by the current feelings of animosity being shown by everyone towards MPs. He claims that he can't join in with the heckling of MPs, and is unable to comprehend how we can be fomented into a baying mob by some common-or-garden theft. Especially when it's balanced up against all the so-called 'good' work our humble MPs do for us. Or compared to the suffering of those in Zimbabwe or Darfur.

Why are we angry? A natural reaction to seeing a wrong committed is the hope that  the transgressor is punished in some way; hopefully so that they do not undertake a similar action on another occasion. In the case of the MPs we, the taxpayers, have quite simply been stolen from, lied to and are sure that justice will be stopped from taking it's natural course. We are all feeling cheated and also impotent.

In any organization there is a desire to construct a collective identity that reflects the moral worth of the assembled individuals. In this case tarring all MPs with the same brush is fair. After all they wrote the rules by which they are now being judged, and they also had multiple opportunities to punish those who were abusing the expenses system. But alas they were all 'on the take' in one way or another, the organization itself was morally bankrupt, and it seems that it had an effective hold over any new entrants.

The taxpayers feelings have coalesced around the issue of the breech of the bond of trust that we hold with politicians. Trust  is something that we can and should always show in each other, unless, of course,  someone transgresses against us. In this instance we have all had our trust broken as the baying mob shows.