Monthly Archives: August 2014

The ‘Shrinking Pot’? Pay, Tax & Public Misconceptions

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The UK is a particularly unequal country – by some measures it is the fourth most unequal in the developed world. And we’re the second lowest pay economy of the advanced economies. To put that in perspective, only one in five people working in Scotland today earn between £25,000 and £35,000 a year. Three out of five working Scots earn less than £25,000 a year and half earn less than £21,000. One in three working Scots earn less than £14,000 a year. If you earn £43,000 you are doing better (mainly much better) than nine out of ten working Scots. We have a chronic low-pay, unequal economy.

In terms of tax, this is incredibly inefficient. As we shall see later, the annual cost of using tax credits to subsidise people earning the minimum wage of £6.31 an hour up to the living wage of £7.65 an hour is quarter of a billion pounds alone. We spend an incredible amount of national wealth subsidising low-pay employment. Meanwhile, because so few people are in well-paid employment, only a minority of people in work pay more in tax than they receive in tax credits, benefits and services. Low-pay economies put enormous pressure on public finances. 

From the Common Weal book, p.27-28

 

Public spending is fundamentally misunderstood – and cynically misrepresented. If most people are not earning enough to pay much tax – and worse, earning so little that quarter of  a billion goes on tax credits to keep them just above the poverty line – then the public purse does of course come under huge pressure.

The answer is not to push through further cuts to public expenditure, but to implement higher wages and lower unemployment, so that people can pay tax!  That’s how a domestic economy works!  The analogy used by the Common Weal to emphasise this cyclical nature of the economy is that of a heart pumping blood around the body – not trickling it down from the top.  The trickle-down misconception is unfortunately very common – progressive reforms are often met with cries of “But where will the money come from!??”.  As if there were only a few shrinking pots of state expenditure.  This is how people see government spending, by and large.  This view, unsurprisingly, creates anxiety and fear about public spending and welfare.  “The money’s running out!  The recession! Tighten your belts! Shelve those naïve ideals of social spending, free childcare, accept privatisation, because hey, there’s just nothing left.”

© Jeremy Schultz, Flickr

The problem is that in a ‘pocket-money parliament’, without full control over fiscal policy, it is to an extent just a pot of money getting allocated to certain areas of public spending.  This pot is the Barnett formula, the money doled out to Holyrood from the Treasury, which despite (another) popular misconception, does not exceed the amount of tax raised in Scotland, but vice versa (and I wonder what’ll happen to Scotland’s budget if we vote no, eh).  The SNP were heavily criticised for not having already introduced free childcare whilst they’ve been in government.  But the whole point is that the policy would be paid for using the tax revenues generated through women being able to enter the labour market – it’s cyclical. If these revenues flow to the Treasury and do not come back, there will clearly be a problem sustaining the policy.

That’s why such policies as free childcare and other progressive reforms are not about tweaking and adjusting bits of spending and taxation.  Instead you need to take a holistic view of the economy, recognising that income inequality and low tax revenues (serious problems for the UK) are intrinsically linked, and must be addressed together.

This is about moving away from the ‘sticking plaster’ approach which has characterised attempts to deal with Scotland’s problems for so long.  A transformational approach is needed, moving towards an economy characterised by high (and sustainable) investment and productivity, and high-paying jobs; boosting tax revenues, income equality and overall well-being.  As Robin McAlpine is fond of pointing out, wealth and value come from work, rather than these mythical ‘wealth creators’ who we’re supposed to cherish above all.

Essentially the economy is meant to be a system for social provision.  Work and taxation – creating value, distributing resources, building and ensuring prosperity and equality and growth.  Is this what is happening in our economy?  Very clearly not.  The Common Weal proposals note that instead of social provision, the current system is geared towards social extraction.  Public wealth and value is extracted into private hands on a massive scale; our economy is characterised by vast numbers of low-pay, low-skill jobs, and monopoly multinational ownership.  Few can benefit from this situation, and it is extremely unsustainable, creating spiralling inequality, poverty and a crumbling tax base.  We only need to look across the North sea for societies which do not use this model; it’s not utopian or naïve to outline exactly what needs to change, but practical and necessary.

 

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