Does this make economic sense?

Does this make economic sense?

24 May 2010 George Osborne announced £6bn of budget cuts to this years’ budget. Overnight local councils lost over £1bn in grants from

central government. Sadly, some people have already lost their jobs. In the Spending Review on 20 October 2010 George

Osborne announced a real terms cut of 28 per cent in the Formula Grant to local councils in England by 2014/15.

Consider Gloria She worked for the council

and was paid £20,000 pa gross Gloria is one of the workers who has now

lost her job because George Osborne cut council grants on 24 May 2010.

Gloria’s council lost the grant that funds her job. The government benefits because she is working. Let’s look at the cost to the government of making her

redundant. She is a single parent with one child She pays £4,160 a year in rent (£80 a week) Her Council Tax is £700 a year

Gloria0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

3500.00

4000.00

4500.00

Employee NI

Income Tax£

Gloria pays £4,276 in Income Tax and National Insurance to the government

Gloria0.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

7000.00

Employer NI

Employee NI

Income Tax£

Gloria’s employer also pays £1,828 in Employers National Insurance so the government gets £6,104 from Gloria and her employer

Consider Gloria Gloria gets Child Benefit

– £1,056 a year And she gets Child Tax Credit

– another £2,161 After paying her rent (£4,160) and Council Tax

(£700) she has £14,081 left to spend Assume that she pays 15% of that in VAT,

petrol duty, alcohol duty, car tax etc – that is another £2,112 that is paid to the government

Overall the government gets £4,999 from Gloria.

Gloria

-4000

-2000

0

2000

4000

6000

8000

10000

Child Tax CreditChild BenefitVAT etcEmployer NIEmployee NIIncome Tax

£

£4,276 Income Tax and NI

Gross Pay £20,000

Council Tax £700

£3,216 Child Benefit and Child Tax Credit

Employers NI £1,828

VAT etc £2,112

HM Treasury Town Hall

£4,160 in rent

Therefore net income to central government Income tax

£2,705 Nat Ins

£1,571 Spending taxes (VAT, petrol duty etc)

£2,112 Employer’s Nat Insurance contribution

£1,828 Less money paid in tax credits

-£2,161 Less money paid in child benefit -

£1,056 Net income to central government

£4,999

What happens when Gloria is made redundant?We are in recession and she can’t find a job so the government has to pay her various benefits.

Let’s take a look at the costs……..

Gloria is out of work She gets Job Seekers Allowance (£64.30/week) -

£3,344/year She gets housing benefit to pay her rent

£4,160/year She gets council tax benefit £700/year She still gets child benefit £20.30/week -

£1,055.60/year She gets a Child Tax Credit of £2,851

Gloria0

2000

4000

6000

8000

10000

12000

14000

Housing BenefitCouncil Tax Be-nefitChild Tax CreditChild BenefitJSA

£

The Government pays Gloria £12,110 in various benefits

But the government still gets some money from Gloria……..

Her housing benefit is paid to the landlord and her council tax benefit is paid to the council so she has £7,250 left for herself and her child to live on

Assume that she pays 15 per cent of that in VAT, petrol duty, alcohol duty, car tax etc – so £1,087 is paid to the Government)

Check therefore net cost to government

Job seeker’s allowance £3,344

Child tax credits £2,851

Child benefit £1,056

Housing benefit £4,160

Council tax benefit £ 700

Less income from VAT etc -£1,087 Net cost to government £11,022

Gloria

-12000

-10000

-8000

-6000

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-2000

0

2000

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UnemployedEmployed

£

Instead of receiving £4,999 the government pays out £11,022

The government has cut the grant to the council The council cuts its budget and makes Gloria

redundant The government no longer gets £4,999 from

Gloria Instead it pays £11,022 to support Gloria and her

child The government might save £20,000 by cutting

£20,000 in grant to the council but the government loses £16,021 in the process

But it does not stop there….

£4,160 in Housing Benefit

£700 in Council tax benefit

£7,250 in JSA, Child benefit + child tax credit

£1,087 in VAT and other taxes

HM Treasury Town Hall

The impact of sacking Gloria Now Gloria is unemployed she does not spend as much as

she used to That means less demand in the private sector Less demand means private sector job cuts too The government then loses taxes from the private sector

workers made redundant and has to pay them benefits too Economists say that every 100 jobs lost in the public sector

leads to another 41 jobs lost in the private sector Making Gloria redundant makes no economic sense, does

it?

Presentation informed by blog written by tax accountant Richard Murphy.

For more info on Richard’s work go to his website: taxresearch.org.uk/

What can I do? If you work in the public sector, join UNISON:

unison.org.uk/join

Sign up to our Million Voices for Public Services campaign: unison.org.uk/million

Write to your MP – find your MP at: theyworkforyou.com

Picture of Gloria taken by Laura Brechtbert used under a Creative Commons license.The use of picture does not imply Laura Brechtbert endorses this presentation

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