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  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

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

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.

£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

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

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/ taxresearch.org.uk/

What can I do?  If you work in the public sector, join UNISON: unison.org.uk/join unison.org.uk/join  Sign up to our Million Voices for Public Services campaign: unison.org.uk/million unison.org.uk/million  Write to your MP – find your MP at: theyworkforyou.com 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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