While tax levels reach a historic highs and public spending soars, public sector workers are striking for more pay. Paul Ormerod argues that we’ve forgotton who pays for those salary increases
Taxes are higher than at any time since the Second World War. The UK’s overall tax burden now stands at 37 per cent of the total national income, according to last week’s report by the Institute of Fiscal Studies. The Conservatives will preside over the biggest tax-increasing parliament in living memory. Taxes on average have increased by £3,600 per household since 2019.
Yet even the massive amount of public spending taking place right now is insufficient for some. Workers throughout the public sector have either taken or continue to take strike action for more pay.
Some disputes have been settled. But train drivers – the rail industry is to all intents and purposes under public control – on at least £60,000 a year are demanding more. One way of course would be to get another job which pays more. Curiously, very few drivers seem to do this. Even more ludicrously, hospital consultants on an average of £130,000 believe they are underpaid.
All this has a flavour of the 1970s. Back then railway workers turned down a 27.5 per cent pay offer on the grounds that it was inadequate. Harold Wilson’s Labour government settled the strike with a 30 per cent offer.
Michael Foot, who went on to become a disastrous Leader of the Labour Party in the early 1980s, had spent his long parliamentary career as a hard-line left winger firmly on the backbenches. But as secretary of state for employment, this is how he explained the pay settlement to Parliament: “of course the cost of this settlement will have to be borne by increases in fares or by rearrangements in manpower”.
In other words, either rail passengers paid for it, or there would be “rearrangements in manpower”, job cuts in plain English.
This basic message does not seem to have got through to many. Your pay increase is either funded by dipping into someone else’s pocket, or there are cuts in your sector. More generally, the implications of the rise in energy prices in the wake of the conflict in the Ukraine have not really sunk in with the electorate.
Even though I am not that well-disposed to the Bank of England, I did sympathise with the chief economist, Huw Pill, earlier this year. Pill pointed out that the UK is a big importer of natural gas and its price had gone up a lot. As a consequence, the country as a whole is worse off. For this, he was widely and roundly abused.
The widespread view appears to be that someone else will pay for the levels of public sector pay and services that the electorate want. Increasingly, however, this mysterious “someone else” is becoming harder and harder to find.
It may well be possible to chisel out a little bit more here and there to generate tax revenues. Labour is proposing to put VAT on private school fees and to close some loopholes in the inheritance tax legislation. But these will amount to some £5 billion at most, less than 1 per cent of the amount which the government already spends.
Already just 1 per cent of taxpayers account for over 30 per cent of total income tax receipts. Further rises run the risk of diminishing their enterprise. We know that high tax rates deter innovation.
A high tax, low growth economy in which large numbers of people are permanenty dissatisfied is hardly a sustainable situation, regardless of which party is in power.
Paul Ormerod is an author and economist at Volterra Partners LLP and author of Against the Grain:Insights of an Economic Contrarian, published by the IEA in conjunction with City A.M.