Not going to work, is it? But he’s attempting it:
Rishi Sunak has claimed that to pay a 10% pay rise to all public sector employees will cost each household in the UK £1,000. This is what I call CRAp – which stands for a ‘completely rubbish approximation’ to the truth. Let me explain…
There are so many things wrong with what Sunak has said that it is hard to know where to start, but first of all it ignores the fact that about 5 million people work for the public sector. This payment would not cost them £1,000 a year.
Then it assumes that all 28 million UK households make the same contribution in tax towards this cost, but that is also not true. Some households do not pay income tax, for example. And the amount of tax paid varies widely, thankfully, because the best off do pay more.
And Sunak assumes that this payment will come out of tax. It might not. It could be paid for with borrowing or money creation, which is commonly called quantitative easing. It looks like he does not even know how government spending is actually funded.
If £28 billion is spent upon this thing here – wherever the money comes from, however, whoever – then that’s £28 billion that cannot be spent upon anything else. Therefore the cost of spending £28 billion is not spending £28 billion elsewhere. Or, as we can and should also put it, the cost of spending £28 billion is £28 billion.
If you try to do economics without opportunity cost then you’re not, in fact, doing economics. But then this man has only had three economic professorships in modern British academia so how was he supposed to know that?
But worst of all, this claim assumes that if £28 billion in extra wages is paid out this money just disappears, never to be seen again, and this assumption is so stupid it is laughable – except very few politicians seem to understand this.
Let me explain. Let’s start with the fact that if £28 billion is paid out then this will top up existing pay. It will all be taxable and subject to national insurance. Assume tax is 20%, employee NI 12% and employer NI is 13.8% and the full NI cost is included in the £28bn.
This is true of spending £28 billion elsewhere or otherwise. It’s even true of not doing the spending thorough government, private spending of £28 billion would lead to the same result. This does not, therefore, offset that opportunity cost.
Why then can’t politicians talk economic, management and straightforward human sense about these issues in that case? I really wish I knew. But I can offer a suggestion. Maybe they don’t know what they’re talking about. That’s why they talk CRAp.
It’s also possible that some of them know some economics.