Friday, 9 April 2010

Is this going to be the most economically illiterate election ever?

I don't often write about national politics as there are already enough blogs out there doing that - however the levels of economic illiteracy being shown by both politicians and media is staggering.

National Insurance is made up of two components: one part is paid directly by employees (11% of your salary) and one part is paid by your employer (currently 12.8% of your salary). Accordingly if you are paid £100 a week by your employer - the actual cost per week of employing you for the employer is really £112.80 as the employer also needs to pay a NI contribution on your behalf to the HMRC. This doesn't matter so much in small companies, but in large companies  which employ hundreds or thousands of employees (i.e. the kind which are currently writing letters in support of not raising the employers contribution to NI) a 1 percentage point increase can add up to a heck of a lot. There is no room to question that this is a tax on employment - it patently is.

Labour then attack the Tories by saying it is impossible to cut £6 billion (the amount of 'lost revenue' from not putting up the employer's contribution to NI by 1% point) from the government's budget without affecting frontline services. This year the Government is budgeting to spend £655 billion. £6 billion is therefore 0.9% of this total. Its ridiculous to say that you can't reduce this budget by less than one percent without endangering frontline jobs.

Labour then say you can't afford to take £6 billion out of the economy at a time like this. Firstly it is not being 'taken out of the economy' - its actually just not being taxed out of the productive side of the economy and eaten up by government. The money remains in the hands of companies who can use it to boost their profits and thus potentially hire more employees, spend it on developing new products, etc. etc. Secondly, the UK's GDP in 2010 is estimated to be about £1,200 billion. The so called £6 billion 'cut' is only 0.5% of that total. Even if that sum was to be magically 'taken out of the economy' (which it isn't) it wouldn't make any difference.

How this can actually be a 'debate' mystifies me.

And check out this quote from Robert Peston, the BBC's so-called Business Editor:

"the Conservatives would also argue that the private sector is more efficient at generating the revenues and wealth that pay for public services than the public sector."

The Conservatives would 'argue' that because its the truth. Only the private sector actually 'creates wealth' which is then taxed by the government to provide public services. Its not a question of which sector is more 'efficient' at doing it as the public sector does not create any wealth.
UPDATE: This post deserves to be read in full to put the Labour and Conservative proposed cuts into perspective.


doctorhuw said...

Great post Druid. There is of course a punchline. The cream of the joke is that National Insurance disproportionately affects the country's largest employer - the NHS! Or, to be exact, if it goes ahead they will have to cut 40,000 nurses to pay for it!

Now remind me about who's cutting the public sector payroll again!

The Druid of Anglesey said...

Doctorhuw - good point, though I'm afraid the joke would be on us as no doubt this government would simply borrow more to spare their blushes.

Anonymous said...

Well said Druid, I do not know where these people get these strange ideas from. Although I guess that none of them have ever been involved in real jobs.