THE PRESS WEDNESDAY, MAY 13, 1981. Taxes and wages

Press, 13 May 1981, Page 20

THE PRESS WEDNESDAY, MAY 13, 1981. Taxes and wages

The causes of inflation are complex, many and disputed. But there can be little dispute that wage increases — whether they chase or anticipate rises in prices — contribute to inflation. Governments of all Western countries, since inflation got its teeth into their economies, have sought to find ways to curb wage increases in the interests of lowering the rate of inflation. INone have been successful in formulating a wages policy which • both holds wage increases back and is acceptable to workers and their unions. Against this background one must view the latest apparent disagreement between the Government and the Federation of Labour over the “wage-tax” bargain, which has been under discussion for many months. The striking of such a bargain, requiring workers to accept lesser wage increases in return for a reduction in tax rates, would help both to curb inflation and to hold or reduce the numbers of unemployed. Every taxpayer knows that the level of personal income tax makes a great difference to the amount of money workers actually receive. Individual wageearners would certainly benefit if the real purchasing power of their take-home pay were boosted by both tax cuts and a reduction in the rate of inflation. The Government’s reasoning is that if wage increases are held, the rate of inflation will fall, to the benefit of wage-earners as well as everyone else in the community, because wages are a major internal cost. The correlation between tax cuts, consequently smaller wage increases and a drop in the rate of inflation may not be quite as direct as is sometimes made out. The increase in demand resulting from a sufficiently significant tax cut will itself spur inflation on, possibly to the point of offsetting the effect of lower wage costs on the rate of inflation. Cuts will have to be made in Government spending if inflation is to be held in check. If the Government’s heart if set on containing inflation, it cannot let if deficit increase, for the Government defic. itself can be one of the main pressures o the economy that increases inflation. Th full, anti-inflationary effects of lower wagincreases resulting from tax cuts will be felt only if the Government simultaneously reduces its spending so that the deficit does not rise. The F.O.L. apparently fears that if Government spending is cut, welfare services will suffer and detrimental effects be felt by workers, especially lower-paid workers.

- ■' The F.O.L. appears to have been aware of these and other fish-hooks in a simple wage-tax bargain when, at its conference ,last week, it rejected the idea of simply restraint in wage increases in : return for a tax cut. The opposition to the bargain was not so much outright as conditional — conditional on assurances about how the Government will deal with the decline in Government income, and on assurances that' cuts in rates of personal taxation will not be made without the Government looking seriously at reform of the entire tax system.

The conference was perfectly clear in expressing concern about the amount of tax extracted from individual taxpayers rather than from companies. It sent the Government a strong message that it was not interested in cuts in rates of personal taxation without attention being given to what it considers to be inequities and

anomalies in the tax structure. It will not be enough for the Government simply to dismiss the F.O.L.’s linking of personal tax cuts to rates of company taxation as merely class posturing. The argument must be followed through. One consideration must be the effect on industry of any changes — up or down — in company taxation.

Having what he sees as extraneous issues drawn into what he clearly hoped would be a simple bargain on tax rates and wage increases is clearly disagreeable to ’ the Prime Minister. A quick bargain with the F.O.L. of tax cuts in return for restraint in wage demands would have allowed Mr Muldoon to give the appearance of doing something about inflation — even of having a wages policy — which would have stood him in good stead in November. Quite apart frqm the fact that the F.O.L. cannot be expected to grant Mr Muldoon such a considerable electoral favour, the slog against inflation is going to have to be longer and harder than such a simple exchange of tax cuts for wage restraints.

Mr Muldoon, of course, is as aware of this as anyone and it is probable that the Government’s discussions with the F.O.L. have been far more thorough and complex than he or the F.O.L. have made known. They would almost certainly range over what would happen to indirect taxation as well. Equally, Mr Muldoon should have known that what is said or decided on in an open conference is as much for public consumption as a considered and unchangeable statement of a position. Instead of declaring that he was astonished and disturbed by the F.O.L.’s reluctance to give away wage increases for tax cuts just like that, Mr Muldoon could more usefully have noted that the federation’s decisions on wages, taxation, and economic policy generally evinced a willingness to accept steps intended to curb inflation, provided that the unions could be assured that the interests of their members and of wageearners generally would be adequately safeguarded. A wages policy which will <elp to curb inflation and which will have nion support is not, if the F.O.L. is to be aken at its word, an impossibility; but here will have to be more to this policy than an attempt to sell tax cuts in lieu of wage increases and little more to the unions.

There is still a chance that differences on the specific issue of linking rates of taxation to the sizes of wage increases between the Government and the F.O.L. could be ironed out later this month so that the Government can proceed to cut taxes with some assurance that the unions will moderate their wage demands. The timing of the next. Budget and the next round of wage bargaining will be critical. If the differences are not resolved, the Government should perhaps risk unilateral action — cutting taxes and then defying the unions not to take the cuts into account when the next round of wage bargaining begins. This would put the Government in the politically strong position of being able to depict the unions as the wreckers of the fight against inflation should they pursue large wage increases regardless. The economic risks of a unilateral tax cut are not so great that swift action by the Government, probably by way of indirect taxation, could not repair any damage that might be done if wage claims got out of hand.