The failure of the Conservatives to win a clear majority in the General Election has reopened the debate about austerity. This has been especially true in regard to public sector wages as those working in schools and hospitals have felt squeezed over the last few years. In total 5.1 million people work in the public sector, excluding nationalised industries, of whom 1.6 million are in the NHS and 1.5 million in education. They have had either a pay freeze or a 1% increase since 2011/12 and the pay gap between the public and private sector is 13% pre-adjustments or 3% afterwards for 2016/17, both of these are below the financial crisis peaks when private sector wages fell and are in line with long-term averages.
This implies that to avoid difficulties in recruitment and retention the pay restraint cannot last forever but that does not make it easy to pay for. The annual gap between tax receipts and public spending is back down to around 3% of national income, but that is a maximum not a minimum, while the total national debt is over 80% of national income. These levels do not indicate any significant room for extra borrowing. Tax receipts are already scheduled to rise to their highest level since the 1960s, forecast to reach their 1969/70 peak by 2020. There is, therefore, little room to take more of people’s money and it is worth noting that the top 1% of earners pay 27% of all income tax, the top 10% 58% so extracting more will be difficult.
This presents a dilemma for any government, pressure to increase spending is high but there is no easy money to be found. The answer must be to grow the economy. This is the aim of all governments but requires good policy making. First of all the lesson of corporation tax must be learned, as the rate fell so revenue has risen. This is a reminder that the Laffer curve works, lower rates can raise more money. Equally important is that the system needs simplifying so people can easily understand what they are expected to paid and distortions are minimised. Too often governments introduce tax schemes to encourage certain activity without thinking through the unintended consequences. Simpler, lower taxes boosting economic growth and allowing for more public services is not a counsel of perfection but is something that has worked before.
Brexit is also a great opportunity for growth. The restraints on trade that are in the Customs Union and the Single Market must be excised. Tariffs are imposed on countries outside the EU not to protect British firms but continental European ones at a cost to the British economy and consumer, these must go. Regulations need review as well, this is not to make society more dangerous but to remove rules that have been introduced to favour European industries over our own, Sir James Dyson has made this case powerfully in regard to vacuum cleaners, and as Grenfell Tower has so shockingly shown good safety regulations and the sheer volume of regulations are not the same thing.
Prosperity comes from free markets and the EU is a rigged market while taxation assumes the Government spends your money better than you can do it for yourself. To grow the economy we can make better choices and the opportunity to do so arises with Brexit and the evidence from corporation tax.