Corporation tax vs. public sector pay cap

July 04, 2017 3:36 PM

As debate over the public sector pay cap - not only concerning whether, but how to lift it - hots up, the chancellor, Phillip Hammond, is reportedly under pressure to cancel planned corporation tax cuts from within his own party.

Nobody begrudges hard-working public sector staff a well-earned pay rise - but the case for fiscal prudence has not evaporated simply because the Conservatives lost a few seats at the recent election.

Indeed, as public sector pay is set nationally, we have ended up with workers in some regions being comparatively overpaid relatively to those in other regions. Until politicians resolve to allow more flexibility by ending national pay bargaining we will continue to see these disparities.

Nearly a quarter of all public spending goes towards public sector pay. The annual cost of raising the 1 per cent pay cap (in line with inflation) would be £4.1 billion in 2019-20.

The fact remains, however, that despite significant cuts to the main rate or corporation tax, revenues have not collapsed.

A few figures: between 1982 and 2012, slashing corporation tax rates in half yielded a greater percentage of GDP. Between 2010-11 and 2016-17, an 8 pp cut in corporation tax (to 20 per cent) increased onshore tax receipts by 44 per cent to nearly £50 billion. The less money the government confiscates from businesses, the more they have to invest. As the Financial Times suggests, “business sees (cuts) as an advertisement that Britain is open for business.” 

Source: OBR, Economic and Fiscal Outlook – March 2017 and Public Sector Finances Databank March 2017

All too often, politicians fail to understand that businesses can’t actually pay tax. Corporation tax is always ultimately paid by shareholders, consumers or employees in the form of lower returns, higher prices, lower pay or a combination of the three. Indeed, studies show that 3/5ths of the brunt of corporation tax falls on workers - decreasing the wages they could otherwise be paid.

Increasing corporation tax to remove the public sector pay ceiling is a classic example of taking with one hand and giving with the the other - namely, unfairly increasing the burden on private sector workers and ordinary working people, in order to pay public sector staff more. 

Polling, both prior to and after the election, shows that lifting the public sector pay cap is not a priority for voters. Of course, there is absolutely a case for ensuring that hard-working people get paid what they deserve - but at a time when fiscal caution is essential, it is unfair to ask taxpayers to take another hit in order to pay even more to public sector workers.

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