Tax Cuts or Increased Public Service Pay

The Tory press is getting its knickers in a twist about Starmer listening to public sector pay review boards about pay.

The Conservative solution to everything appears to be tax cuts; the argument runs that they stimulate the economy by pumping more money into it; however, let's analyse the strategy versus increasing public sector pay.

Tax cuts can stimulate the economy by increasing disposable income, leading to higher consumer spending and investment. However, when tax cuts disproportionately benefit the wealthy, who tend to save rather than spend, the immediate stimulative effect is reduced. Tax cuts targeted at lower and middle-income earners tend to have a more immediate and direct impact on economic growth because these groups are more likely to spend the additional income. While tax cuts might eventually increase tax revenue if they spur significant economic growth, this outcome is uncertain and may not fully offset the initial reduction in government revenue. The immediate effect is to reduce tax revenue and public services are the casualty if the stimulus doesn't work. 

Wage increases, particularly for lower and middle-income earners, are more likely to stimulate the economy through increased consumption, as these groups tend to spend a larger portion of their income on the tings that actually drive the economy. This leads to higher demand for goods and services, boosting economic activity - and tax revenue. When wage increases are targeted at public sector workers, the benefits may be more regionally focused but still provide a significant economic stimulus, leading to higher tax receipts through both income and consumption-related taxes.

Given the options, increasing public sector pay is undoubtedly the less risky option with the additional benefit that tax receipts are immediately increased, with knock-on benefits to public services themselves, as well as the wider economy.

When one considers that tax cuts benefit the wealthy more than the poor, it's not surprising that the Conservatives continually argue the tax cut strategy - they're the party of the wealthy and consider the poor as a necessary pool of cheap labour. It's quite simple when you actually think about it.

Using the inflation argument to counter wage increases is futile - tax cuts also stimulate disposable income and thus pose as great a risk. Wage increases do not always stimulate inflation because they can be offset by productivity gains (you can't link tax cuts to productivity), absorbed by businesses through lower profit margins, constrained by global competition, or neutralised by weak consumer demand. Additionally, central banks can use monetary policy to prevent wage increases from leading to inflation, ensuring that higher wages don't automatically translate into higher prices.

A 1% increase in pay is immediately felt, whereas a 1% reduction in tax is hardly noticeable. There's a psychological difference, despite the pay increase likely being less than the tax cut when it comes to take-home pay.