Wednesday, 29 December 2010

Labour Must Oppose Tory Local Government Cuts

By Michael Burke

The Tory-led Coalition has announced its plans for funding of local government over the next 4 years. Tony Travers, LSE professor specialising in local government, described them as ‘apocalyptic’. Local government has already been in the firing line, shouldering £1.8bn of the first £6.1bn of cuts in the government’s ‘emergency’ measures announced shortly after taking office.

Now, in line with Comprehensive Spending Review, total spending on local government will fall to £24.1bn in 2014/15 from £29.8bn in the last year of the Labour government. This represents a fall of 31% in real terms (using the official forecasts of 13% inflation over the years Financial Year (FY) 2010-2015 from the Office of Budget Responsibility).

A comprehensive survey by the Chartered Institute of Public Finance & Accountancy prior to the latest announcement shows that councils expected cuts of 20% or more in a range of areas, from capital investment (where 44% of councils expected cuts of at least that magnitude), to both economic regeneration and community safety (28%) environmental health (14%), and despite 1.75m households on council waiting lists, housing is expected to be cut by 20% or more in some local authorities (8% of the total). There were even 3% of councils which expect children’s social care to be cut by 20% (4% of councils expecting that for adult social care). From the 40% of councils who responded to the survey, it was estimated that 73,500 jobs would be lost in the first year alone.

The cuts are closely targeted at the poorest, Labour-voting areas . In the South-East, Hackney, Newham and Tower Hamlets will each experience 8.9% cuts in the next Financial Year (FY), while Essex has just 1.3% cuts. Manchester, Rochdale, Knowsley, Liverpool -St Helens, Doncaster and South Tyneside are among the 36 local authorities that take the maximum cut of 8.9%. Meanwhile Dorset gets a 0.25% increase in funding and Windsor and Maidenhead, Poole, West Sussex, Wokingham, Richmond upon Thames and Buckinghamshire all get cuts of less than 1%.

But these represent only total revenue cuts. Once other income streams, such as Council Tax and other charges are taken into account the government proportion of those budgets has fallen by up to 17%, in some cases in the first year alone. In addition, it now includes a number of social care responsibilities formerly carried out by the NHS.

Within local authority areas, the poor are hardest hit. Not only are they obliged to use a greater number of the services now being axed, but will also be hit by the freeze on Council Tax. The Council Tax is a moderately progressive tax, mainly due to the waivers and exemption on the very poorest. Freezing the rate while slashing services will benefit the rich at the expense of the poor.

Political Attack

There is no accident that this ferocious attack singles out councils. In the first instance it can appear as if the cuts are not Tory cuts, as they will be carried out by a variety of political parties including Labour in office. Secondly, these councils can themselves sow confusion as to who is responsible - if they seek to justify or defend the cuts. Wherever that is the case, Labour councillors will be acting as stooges and mouthpieces for the most ferocious assault on the local welfare state since its effective establishment in 1945. The ‘localism’ of creating a dozen new Mayors is entirely fake as many will be appointed at first, and all increasingly operate under the dictat of central government.

At the very least, Labour elected representatives should continually explain that the source of the cuts is the Tory-led Coalition. In addition, where they are in office, every practical step should be taken to oppose the cuts, to minimise the effects on the poor and to ensure the preservation of services, jobs and non-managerial pay. In addition, a host of revenue-raising measures can be pursued - where these have the effect of helping to reverse the government’s transfer of incomes from the poor to the rich.

It is unlikely that any illegal budgets will be set. Without significant strike action by either local government workers or others, councillors can easily be picked off under current legislation. But that does not alter the obligation to work closely with local trade unions, especially as their members are often best placed to identify genuine waste and savings which harm neither services nor non-managerial jobs. Of course, all protests by either unions or local residents against the cuts should be supported. A government which claimed concessions were made to students after two militant demonstrations can be forced to make more substantial concessions by much larger, militant protest.

The key to the struggle is achieving the maximum unity around opposition to all damaging cuts, to services, jobs or pay. And ensuring lasting political damage is inflicted on those responsible- the Tory-led Coalition and its policy of stealing from the poor to give to the rich- Robin Hood in reverse.

Cuts Will Deepen Recession – Latest Chapter of British Misrule in Ireland

By Michael Burke

There is a sharp contrast between the moderate recovery in the British economy, which is now entering its second year, and the continued contraction of the economy in ‘Northern Ireland’. Current British government policy and the entire structural relationship with Britain continue to exacerbate those negative trends.

There is no timely official data for the economy in the North that corresponds with the official data for Britain. But the Ulster Bank, a division of RBS, produces monthly PMI surveys for the Northern economy . Surveys of activity by purchasing managers are an internationally reliable method of gauging activity in the private sector. The Ulster Bank output PMI in the North fell again in November 2010, at its fastest rate since April 2009. As the chart below shows, the private sector of the economy has been contracting continuously since the beginning of 2008. Surveys of new business orders and employment have fared even worse.

Chart 1

This extended recession in the North is now 12 quarters old, compared to six quarters for the British economy. It is not only now still turning down, but has also been far more severe, as shown in Chart 2.

Chart 2

Government Response

Owen Patterson, the Tory Northern Ireland Secretary recently made the empty boast that: ‘The [government] Spending Review builds on the measures we took in May and in the Budget in June and will ensure that this country is set firmly on the path to sustainable economic recovery and financial solvency’.

Whichever country he was referring to, the British colony in the North of Ireland was not one of them. With the private sector mired in a much worse recession than in Britain, the Tories’ answer is to cut government spending too. Even worse, the attack on living standards is greater than almost anywhere else. The IFS has conducted research into the ‘regional’ impact of the cuts to benefits and tax changes arising from the Labour Budget of March 2010, as well as the Tory Budget of June 2010 and the Comprehensive Spending Review. It finds only London is more badly hit than the North of Ireland.

Chart 3. Geographical Impact of Tax and Benefit Changes 2010-2015

In addition, the poorest sections of the community within the North of Ireland will be hardest hit. As the IFS chart below shows, the poorest are much harder hit by the policy changes than the rich. In addition, in both cases, the Institute for Fiscal Studies (IFS) does not include the impact of changes in services, which of course hit both the poor, and poorer geographical areas harder. In total the effects are much worse than these aspects of taxes and benefits highlighted by the IFS.

Chart 4. Impact of Tax and Benefit Changes 2010-2015 by Income Group In North of Ireland

The British government is deepening the economic crisis in the North of Ireland, and its attack is focused on the poorest sections of the population.

The Fightback

The Scottish and Welsh Assemblies have already agreed their budgets with Westminster. This is not the case in the North of Ireland as Sinn Fein has opposed the imposition of £4bn in cuts. The Unionist parties and the SDLP were initially willing to accept the cuts. But Sinn Fein’s opposition has forced a repositioning. The campaign has focused on £18bn of investment promised for the North in the St Andrew’s Agreement, which has not been delivered. Sinn Fein has also attempted to build support directly for raising revenues to protect services and support investment, including an ongoing campaign for the repatriation of tax and spending powers which is increasingly popular and supported to some extent by Unionist parties.

It is widely expected that there will be an early general election in the South of Ireland in the first few months of 2011. A key task will be pressing any new Dublin government to insist that the British government meet its £18bn investment commitments, as these were made under international Treaty obligations between two governments. Along with local revenue-raising measures, even a phased introduction of the £18bn would have a powerful antidote effect to the private sector recession and government attacks on living standards.

Even so, this increased investment could do little more than off-set the cyclical effect of the recession and the government attacks. Comparative studies have shown the much lower effectiveness of investment in the North of Ireland than in the South.

From the late 1980s onwards, similar levels of EU investment in both parts of Ireland have produced hugely different outcomes. This is because the North is not at all integrated into the world economy. Participation in the global economy through the international division of labour raises the effectiveness of investment. “Northern Ireland’s” status as a colony of Britain cuts it off from the rest of the world economically- exporting little and importing less.

In this conjuncture, opposition to the cuts and campaigning for increased investment is entirely correct. Otherwise, the Tory-led government would be allowed to degrade the economy of the North of Ireland at a far greater rate even than in Britain. But strategically, the only route towards prosperity for the whole population of the North of Ireland is by breaking the link with Britain.

Wednesday, 22 December 2010

Airport chaos shows what happens when you privatise monopolies

The Guardian's 'Comment is Free' carries an excellent article by Neil Clark examining the connection between the privatisation of Britain's airports and the chaos at London's Heathrow and other airports faced with the bad winter weather. We reproduce extracts below and readers are urged to read the whole article.

There is, however, one important point in addition to those made by Neil Clark. Airports are a classic case of privatisation of monopolies or quasi-monopolies. In most cities or regions there is only one airport, even in a very large city such as London, where there is more than one airport, Heathrow is entirely dominant, and, because of the times involved in long flights, there are for a large number of journeys no practical alternative to going by air.

There is nothing whatever in economic theory that indicates that a private sector monopoly will do anything other than deliver an overpriced service - which can be either good quality service provided at an excessively high price, a low quality service delivered at an average price, or a low quality service provided at a high price. The privatisation of airports shows this reality vividly.

Due to the necessary dynamics of private sector monopolies, a monopoly needs to be taken into the public sector where it can be subject to public control. Even then, of course, there will be a tough fight to deal with bureaucracy and temptations to monopolistic behaviour by the management etc but at least serious tools exist to deal with the situation via public accountability. A private sector monopoly, as Neil Clark illustrates, is merely a formula for price gouging and low quality services.

A large amount of infrastructure is in the monopoly category, and that is why Neil Clark is entirely correct in showing why much infrastructure needs to be publicly owned.

Neil Clark writes:
"... The privatisation of the state-owned British Airport Authority (BAA), we were told, would ensure that "better services are provided for all airline passengers".

"I wonder if the Earl of Caithness [the Minister for Introducing the measure] (or even Margaret Thatcher herself), would have the courage to pop down to Hounslow and tell that to the tens of thousands of holidaymakers stranded at the BAA-owned Heathrow airport for the past three days. Even before this week's events, our privatised airports, with their shortage of public seating, their lack of reasonably priced food and drink outlets, and their depressing, unfriendly atmosphere, were an international disgrace.

"But their spectacular failure to adequately deal with recent snowfalls has surely exposed to all but the most fanatical free marketeers, the enormous price we pay for having our infrastructure in private ownership.

"Writing in the Guardian in 2007, the designer Sir Terence Conran told a story that illustrates perfectly the difference between the ethos of a publicly owned infrastructure company and a privately owned one.

"Conran revealed that when he was working on the design of the state-owned Heathrow Terminal 1 and the North Terminal of Gatwick airport in the 1960s, he was pressed to make sure that he provided "lots of seating" for the public. Conran contrasted... the much more commercial attitude of BAA today, where "every square inch must be turned over to retail space".

"the privately owned BAA is seemingly guided by just one concern: maximising profits for its Spanish-owned parent company, Ferrovial. That means out with public seating areas, and in with forcing people to pay to sit down in rip-off cafes and restaurants. And it also means, as we saw this week, not ordering anywhere near enough snow ploughs to keep the runways open in the case of extreme weather. BAA is on course to post record profits of over £1bn this year – yet only spent £500,000 on materials and equipment to help clear the runways...

It's revealing that one major airport in Britain that does manage to keep its passengers happy is one which is in full public ownership. Manchester airport, owned by local councils, was crowned best regional UK airport earlier this year and currently holds four out of the five major travel awards in the airport industry."
via www.guardian.co.uk

Thursday, 16 December 2010

Cutting EMA (Education Maintenance Allowance) Will Widen the Deficit

By Michael Burke

The Institute for Fiscal Studies (IFS) has issued a devastating critique of the Tory-dominated coalition’s decision to abolish the Education Maintenance Allowance (EMA), the grant of up to £30 per week to help 16-19 year olds from poorer families stay in further education. This decision was devised n Conservative Central Office, with David Cameron refusing to give any assurances that the EMA would be kept as far back as November.

The IFS had already examined the impact of the pilot studies for the EMA, which showed a significant increase in further education participation among students from poorer families - and that the response was disproportionately higher still among women and students from black and ethnic minority communities.

On average, participation rates increased from 65% to 69% of 16 year olds and from 54% to 61% for 17 year olds, the latter representing an increase of almost 13% in total participation. In terms of education quality, UCAS points increased on average by four points for all students where EMA was first piloted.

This educational improvement reduces the incidence of unemployment and increases incomes over a working lifetime. SEB has previously highlighted OECD analysis which shows the very large benefits to public finances arising from higher educational attainment.

The take-up of EMA has steadily risen from 430,000 in 2005 to 576,000 in 2009, by which time 67% of those surveyed said they would not have continued with their course without EMA and with 61% going on to further education because of it.

In the last Financial Year the government spent £530mn on EMA. The investment returns to public finances are such that the taxes from less than 1.4% of those eligible are required to complete higher education (university or equivalent) to pay for the entire scheme. Alternatively, at current rates, all EMA recipients would need to be spared an average of less than 3 months on jobseekers’ allowance alone throughout their entire working life to pay for the scheme. Government finances also benefit from all those in between whose higher pay yields higher income and consumption taxes. Clearly, greater investment in EMA would help to reduce the deficit.

This is all known to the government - much of the information is quoted from a House of Commons Briefing 1. Government policy is not about deficit-reduction at all. The reduction in education participation will hit the poor, women and black and ethnic minority communities the hardest. However, its effect will to enlarge a surplus pool of labour, forced to take lower-paid jobs. Employers will be able to access bright but untrained workers for much lower rates of pay. It is this that Marx called the ‘reserve army of labour’ whose function is to depress wages and thereby boost profits.

The aim of government policy is not to restore government finances at all, but to increase the rate of profit.

Sources

1. House of Commons Library, EMA Statistics, (SNSG/5778), 14 December 2010

Investment in Education Would Cut the Deficit

By Michael Burke

The mobilisation by students and their supporters in recent weeks has begun to transform the political situation in Britain. Confusion, passivity and fear are being gradually replaced with indignation, solidarity and mobilisation. In addition, the protests have begun to lay bare the actual thrust of government policy, exposing the truth behind the rhetoric of the Tory-dominated Coalition.

The springboard for the Tory-led coalition attack on students and their families is the Browne Report, commissioned by the previous Labour government. Given Browne’s record at the head of BP, it is hardly surprising that the outcome should be fully of shoddy shortcuts, hugely damaging to people’s lives and to wider society.

In the Foreword to his Report, Browne states that the competitive edge of the English higher education system is being challenged by other countries who are increasing their investment in Higher Education Institutions and who are educating more people to a higher standard. All this is true, as we discuss below. However, publication of the Browne Report has been the platform from which the current government has launched a policy that involves the removal of the bulk of the £3.9bn block grant for teaching in higher education. It will be replaced by a system of private funding via significantly increased fees and a marketisation of the bulk of the higher education system.

All of this is cast in the framework of the ‘sustainability’ of government finances- implicitly the current or prior systems were ‘unsustainable’. The former consensus that education was a public good, providing both benefits to society as well as the individual has disintegrated under the under the acid assertion that we have no money.

This is despite the fact that the budget deficit is already falling, following the modest spending measures of the 2009 Labour Budget. This is shown in Table 1 below which shows tax revenues have risen sharply in the first 7 months of the current Financial Year due economic expansion created by the last Labour government’s 2009 budget.

Table 1

10 12 16 EducationAlign Center

As a result, the previous Financial Year deficit of £155bn is much lower in the present year, on course for a deficit of approximately £140bn, compared to a Treasury forecast in December last year of £178bn.1

Failing Competitiveness

Browne is right to raise the issue of falling competitiveness. In Marxist terms a key factor in total productivity is the skill of labour. One aggregate measure of that currently is the proportion of the population participating in higher education. In the chart below, the outcome for what the OECD designates ‘Type A’ higher education (equivalent to British university, non-vocational degrees) are shown. Britain’s position has slipped to below the average for the OECD as whole.2 Further, despite the previous government’s commitment to a 50% graduation rate, the graduation rate stagnated between 2000 and 2007.

Chart 1

10 12 61 Chart 1


In contrast, almost a dozen other countries have seen their graduation rates rise appreciably. The debate on sources of funding and competitiveness should also be informed by the fact that the most marketised system of education exists in the United States, where stagnating graduation rates have seen it slip towards the lower end of education league tables over a 12-year period.

The number of people with university degrees or other tertiary qualifications has risen on average in OECD countries by 4.5% each year between 1998 and 2006. In Ireland, Poland, Portugal, Spain, and Turkey, the increase has been 7% per year or more. Of these, Portugal has the highest contribution of private funding for tertiary education at 33%, the lowest Ireland with 15%. This compares to the US, where two-thirds of funding for higher education comes for private sources (in Britain, before the latest policy is implemented, the proportion was 36%).

Browne has correctly indentified a key failing- the relative failure of British funding for higher education. But the policy adopted will only exacerbate that failing.

Returns On Investment in Education

The above facts highlight the central fallacy of a policy based on the privatisation of education spending; that the high returns to the private sector from investment in education inevitably leads to an increase in private sector investment.

Much of the debate in Britain implicitly hinges on this assumption. It is certainly true that there are high returns to the individual (the private sector) from a higher education. In the OECD as a whole the private direct costs of a higher education and foregone earnings are $46,873 for a male and $45,808 for a female (2006 data, based on US$ PPPs) . The returns to the individual are on average $192,372 for a male and $137,340 for a female. These returns include higher net (after-tax) earnings as well as the monetary value of lower incidence of unemployment. The net returns are (the present value of) $145,849 for a male and $91,532 for a female. In Britain (in the same US$ PPP terms), the net returns to the individual are $207,655 for men and $152,858 for women.

Equality Is Part of the Solution

These gender discrepancies are themselves a function of the discrimination against women, who suffer both lower pay and are expected to act in the role of carer for both children and the elderly. The OECD does not provide, but we can be sure, that similar discrepancies exist because of the parallel discrimination against black and minority ethnic communities in relation to both pay and higher unemployment.

It is for this reason that it is claimed the individual should pay more for a higher education, as they clearly benefit from it. However, the claim that the privatisation of funding for higher education will increase the rate of investment is not supported by international evidence, cited above. It also ignores other factors especially the deterrent effect of raising the cost of education. The returns are also policy driven – dependent on the government’s willingness to capture a fair proportion of those private returns through a progressive tax system.

Further, a significant dent in the deficit could be achieved by a policy that would cost the government nothing- equal pay and job equality for women, and the same for black and ethnic minority communities. The government’s share of that significant increase in incomes through taxation would benefit the whole of society.

Public Returns On Investment

But the debate has largely ignored the returns to the public sector from investment in higher education. These are just as substantial.

For the OECD as a whole the average public cost of a tertiary education (male) is $32,949 and $31,830 (female) including both direct educational costs and foregone tax revenues while the student is in education. But the gross returns to the public sector, in the form of taxes, social contributions and lower unemployment benefits are $119,353 and $84,266 respectively. The net returns are $86,404 and $52,436 respectively. (The net benefits are lower than gross benefits minus costs, as the OECD applies a 5% annual interest rate discount over the period of the returns). For Britain, this net present value of investment in higher education for men is $95,318 and for women is $82,289. Put another way every £1bn invested in higher education yields £3.36bn in a return to government finances, so providing a net present return of £2.34bn.

It is for this reason that the OECD headlined the publication of Education at a Glance 2010, ‘Governments should expand tertiary education to boost jobs and tax revenues .’ This may be summed up as investment, not cuts for higher education.

This is shown in the chart below - where the blue line represents the public cost in investment in higher education, and the grey line the public returns. The data alongside is the net present value of that investment in US$ PPP terms.

Chart 2

10 12 16 Chart 2


Even these may be severe underestimates, as they only take account of income-related taxes and disregard the taxes derived from the consumption or savings of those higher incomes, which, depending on the tax regime, may be nearly as high again.3

Education & Deficit-Reduction

The public sector finances benefit to a very significant degree from the investment in higher education. The rate of return on that investment is a 220% for males and 252% for females.

This gender disparity is accounted for by the unequal participation of men and women in the workforce as well the inequality of pay for those who do. Where the employment rate of graduate women is higher than that of men - France, Portugal and Turkey both the net and gross returns to the public sector are higher for females than for males. Therefore the public sector has a direct material interest in increasing both the employment and relative pay of women in the workforce. The same argument applies to black and ethnic minority communities- equal pay and access to jobs would lower the deficit.

Increasing both access to and income equalities from higher education will also generally benefit the public sector finances. These can be achieved by increasing numbers in higher education as well as in ensuring the fully progressive nature of the taxation system.

The current level of investment in Britain in education is below the OECD average of 6% of GDP. The Tory-led government’s plan is to cut education spending (current and capital budgets) from £57.1bn4 in 2009/10 to £57.3bn in 2014/155, a cut in real terms of over 12% based on their own inflation forecasts. Given rising school rolls and the aspiration of increased access to higher education, real spending per pupil will decline by at least 18%.

This real cut will deepen to approximately £7bn by 2014/15. The accrued lower return to government finances based on the (probably underestimated) OECD data above will be just under £16.4bn.

By the same token, increasing public sector investment in higher education will increase the public sector returns on that investment commensurately. Increased investment is an economic necessity. The OECD devotes a rising proportion of GDP to education investment, now reaching 6%. Yet British investment in education has not reached that level since a brief period in the 1970s and is now set to fall further.

Chart 3

10 12 16 Chart 3


It is clear that there is a benefit to public finances from investment in education, just as there is a negative impact from cutting investment. The logical conclusion is therefore to increase investment to address long-term structural economic requirements but also as part of a growth-oriented programme of deficit-reduction.

It should be equally clear that the Tory-led government is not focused on deficit-reduction at all. There is already talk of cutting taxes, as well as the continuation of sweetheart deals for companies like Vodafone, who can negotiate away the bulk of their true tax liabilities. Instead, education policy, is about transferring wealth from the poorest 90% to the richest 10% of society. This is fully in line with the strategic aim of this government – which is redistribution of income from the poorest sections of society to the richest sections of society from the poorest.

Sources

1. £152bn in the 12 months to October, from a peak of £160bn in March, and compared to a Treasury forecast (December Pre-Budget Report) of £178bn for the current FY, UK Treasury, public finances, 18 November 2010.

2. All OECD data from OECD, Education at a Glance. 2010 unless otherwise stated.

3. In 2007, income and social security taxes accounted for 34% of the total tax take, whereas consumption and property taxes accounted for 36%, OECD, Tax Database, http://www.oecd.org/document/60/0,3343,en_2649_34533_1942460_1_1_1_1,00.html.

4. Treasury, June 2010 Budget Redbook, Table 2.2.

5. Treasury, Comprehensive Spending Review, Tables A5 & A6.