I don’t understand economics. I didn’t major in it, I didn’t study it at university; I am a layman of the most basic degree when it comes to how economies work. What I and most of the British public do understand, however, is how much we take home in our weekly or monthly paycheck.
The Government is talking about massive spending cuts in the public sector. That includes salary freezes and increasing the amount paid into public sector pension funds. This includes me, as a local government employee, nurses, police, teachers, fire departments and civil servants in government departments in Whitehall.
Let’s look at pension contributions. The amount you pay is linked to the amount you earn. According to the Telegraph a “mid-ranking” nurse earns around £20,000 and with a 5% pension contribution pays around £1,000 per year. If the Government raises the amount public sector workers must contribute to 7.5% that nurse would then pay £1,500 per year.
In an effort to curb local authority spending the Government has announced a freeze on council tax. Councils receive their funds from central government and the rest they raise in council tax. Local authorities would normally raise council tax rates to make up for less money from the Government but now they are being encouraged not to do this. The logic is – and it is logical – that without the extra money from council tax local authorities will have to watch their spending because they won’t have enough money from either source.
There are also suggestions that VAT may rise from the current 17.5% to 19.5% meaning certain goods will be more expensive. Food does not have VAT but items such as clothing (not children’s), electronics, cars or takeaway food does.
The overall moral of this story is the Government say that everyone in the country, including them, needs to ‘tighten their belts’ and watch their spending. While this is understandable when trying to plug a budget deficit it is not necessarily the correct strategy when you already have an economy in trouble.
The term ‘double-dip recession’ has been bandied about quite a bit. Basically, this whole belt-tightening strategy is likely to hit the lower wage earners the hardest. Recessions are noted for higher unemployment and bankruptcies and lower household incomes. They are generally associated with a drop in spending. A double-dip means just when it looks as though the economy is recovering, it dips back into recession.
The public sector worker is making less money because the salary has been frozen and more money is being taken from that frozen salary for pension contributions. Combine that with higher tax on the goods we’re supposed to be spending on and you get a person struggling to make ends meet. You get someone who might go bankrupt. Let’s also throw into the mix the possibility of unemployment for that person. If public spending is slashed, potentially, less people are needed to provide the reduced services. This leads to more unemployment and the whole vicious cycle continues. And the private sector will continue to suffer if the public don’t want to, or can’t, spend money. The deficit may decrease but the economy will suffer further.
Again, I am not an economist. Most of this is from other places and is my take on what I’ve heard or read. The point is that I disagree with the Government’s strategy. Especially as I am a public sector worker, I may end up being hit hard with these ‘austerity measures’ and I am not happy. As I am not an economist I don’t have a strategy for the country. While I agree there should be some cuts in spending in an effort to stop the deficit from growing, potentially forcing millions of people into further economic hardship is not the answer. I can only hope that I am proven wrong in this belief. Time will tell.
Sources:
Telegraph Council Tax and Pensions