Sometimes, it's the little things that get up your wick. The Sunday Business Post produced one of those little calculations to suggest how expensive it is, how draining on our pockets it is, to increase public sector pay:
'Each 1 per cent rise in the public pay bill costs the government almost €200 million.'
Geez, that sounds like a lot. As Bart Simpson might have put it, 'The taxpayer is getting hosed.' But before we start roaming the streets, looking for public servants to roll, let's look a little deeper into these numbers.
According to the 2008 Estimates, a 1 per cent increase would total a gross cost of €193.9 million. Now that equals less than 0.3 per cent of the Government's entire budget. Or about 0.1 per cent of our total wealth. Or put another way, for an average industrial earner it would equal about 11 cents a day. Now no one wants to throw out 11 cents a day but if you're badly in debt, 11 cents ain't going to do much.
But all that, of course, is just gross, or top-line. Now I know that public sector unions are supposed to be uber-powerful, but unless I missed a meeting, I'm pretty sure that they haven't been able to exempt their members from income tax. In other words, what the Exchequer pays out, it takes back. And it takes back at the marginal rate. For example, for a top-rate taxpayer this clawback would amount to 43 per cent (including Health Levy but not including any pension/social insurance contribution).
Can we estimate this claw-back? Only in very rough terms. Let's assume that 60% of public sector workers are taxed at the standard rate with the remainder at the top rate (of course, there are some public servants who are paid so little that they would be exempt from tax - like a large proportion of private sector workers). On that basis, the Exchequer would would claw back €59 million. So the Post's claim of a 1 per cent increase in public sectors = €2000 million is slightly off, about a third off. The cost, after tax, to the Exchequer would be about €134 million. But there's more.
What about VAT? I'm sure public sector workers pay VAT on goods and services. If so, it probably averages anywhere from 3 to 5 per cent of disposable income. So knock a few more million off that. But there's more again.
What is the loss to the economy in terms of reduction in demand? Workers with less money in their pockets spend less; less money for owners of businesses; less economic activity - the very thing we are trying desperately to combat in recessionary times. Its hard to put a number on it, but there is multiplier effect throughout the economy.
Suddenly that €200 million is coming out at a lot, lot less. It's now probably equivalent to six or seven cents a day in the pockets of the average industrial worker. If you believe that freezing public sector wages is going to get the Exchequer finances back in order, then I have this tonic that will cure anything that ails you.
Of course, this few cents per day argument is not about Exchequer finances. Private sector workers should be aware: if you tolerate this to public sector workers, then you you're paycheck will be next.
And the recession will just get deeper. And the freeze will get colder.
I was also disappointed with their editorial last Sunday. I only say I wish we were moving toward a Swedish style social democracy.
Sweden has not only consistently scored higher than Ireland in world economic competitiveness league tables, but it's GDP for 2008 is expected to be above 3% and the public finances are running a surplus.
Why write such a lazy editorial?!?
Posted by: Aidan OSullivan | July 15, 2008 at 09:59 AM
Yes the editorial was complete rubbish wasn't it. Despite its completely different politics the SBP is my favourite Sunday paper but lazy ignorant stuff about how taxes can never ever be increased without damaging the economy (flatly contradicted by the empirical record) is dissapointing if not surprising.
More broadly, I know we're supposed to live in a post-Keynesian age but I still find it kind of shocking how little push back there is against the drumbeat of calls for spending cuts and wage freezes (i.e. real cuts). That this risks badly and unnecessarily exacerbating the downturn is surely not a radical or unorthodox claim, yet there doesn't seem to be much debate about it. The only explanation I can come up with is that people are fighting the last recession, i.e. applying the anti-borrowing lessons learnt in the 1980s to a quite different situation.
It's not surprising that once the need for austerity is accepted public spending and wages are the targets (rather than tax increases), but I don't understand why even informed right of centre voices (e.g. economists) are so enthusiastic for austerity in the first place.
Posted by: James | July 16, 2008 at 12:53 AM
Aidan, James - couldn't agree with you more. This is all about the triumph of ideology over serious thought. In such cases, I believe we should be forensic in our arguments. For instance, the SBP claims that tax increases would inhibit 'enterprise'. Maybe the SBP could explain exactly how slashing the tax rate on inheritances and increasing the thresholds (effectively cutting tax on unearned income) prmoted enterprise and increasing such taxes would stifle the entrepeneurial spirit. They would look pretty silly defending that, and it would give us an opportunity to campaign against all such tax subsidies to unearned and unproductive income.
Or we could just swat them like the flies that they are. Either way is good.
Posted by: Michael Taft | July 16, 2008 at 04:10 PM