Government Expenditure



By Barry Edwards


Welcome to the first post on the new site taking over from the Txtreme Business Forum which hosted the Weekly Comment since January 2013. The Barry Edwards and Associates blog is now fully functional and will be commenting on a wide range of subjects as before although there will be more contributors writing papers and posting regularly to engage discussion from those of you who wish to comment. We hope you find the content thought provoking and look forward to your participation in the years to come as the site evolves and develops to become one of the most active blogs.

Government Expenditure

This week, one of the main topics was civil servant and state employee pay increases which the government decided to maintain at the current 1% for this year. The message is very clear that while the budget deficit is still very large, austerity prevails. Despite the election suggesting that the public are fed up with austerity, the Conservatives are determined to continue with cutting expenditure and risking the anger of its own employees.

Richard Murphy on his blog Tax Research UK has written a very interesting article about this subject which basically states that in reality any pay increases for state employees pays for itself eventually with the tax paid on any amount granted by government. It is 2 pages of script and well worth reading: if you click on the link below you can read the article;

If you do not have time to read his article, below is a brief summary;

“The first issue being ignored is the fact that tax is paid on these pay rises. Therefore government is paying itself. Since on average we pay 39% in tax overall that means that at most only 61% of these pay rises need to be paid for because the rest is paid by the recipients in extra tax.”

“The second practical issue is that once the first recipient of this pay rise has paid their tax they will then spend the vast majority of what they have left over. And those recipients then pay tax. And this extra tax then goes back to the government and so on.”

“The third practical factor that is being ignored is that paying more to people who have earned it has a wider impact on the economy. It boosts confidence. It increases spending. And both stimulate markets that are, let’s be honest, pretty much in the doldrums right now.”

Why this is not mentioned by commentators and politicians is beyond Richard Murphy and me. It is a simple logical financial fact that is totally ignored. The intricacies of government expenditure are a fascinating subject and the way it works is not what most people assume. He explains a little about that further on in the article.

Clearly, this simple point applies not only to pay increases but also to government infrastructure investment. This is why the Labour Party proposed massive investment in their manifesto but for some reason did not expand on the tax generation aspect. People liked the idea of the concept put forward but if they had explained how it actually pays for itself, the Labour Party may have received a lot more votes. The principle of their manifesto was very sound but poorly presented which had the effect of making it look irresponsible and too costly for current government budgets.

Regular readers of the weekly comment may remember that we have put forward an alternative method of solving this problem which does not involve a big increase in government debt or tax increases. We have proposed that the Bank of England should establish a “Collateral Guarantee System” (CGS) – a method of utilising the assets on its balance sheet, acquired by quantitative easing, through the issuance of guarantees for the purpose of financing infrastructure and approved commercial projects that would not otherwise achieve support or are limited by government budget commitments. You can read the paper if you click on CGS in the right hand column of this page under ‘Reports and Papers’.

The major political points about this proposal are that since it is collateralised by government bonds the guarantees would not be recorded as government debt and the tax revenue generated would return the budget to surplus much sooner than forecast. In my view, it is a win-win solution which would be very popular with the electorate and boost growth in the economy for everyone’s benefit. Of course, state employees would get their pay increases and the country would get the massive infrastructure investment that is desperately needed. Your comments would be gratefully received.

That’s all for this week, more observations next week.