By Michael Burke
Most media coverage of the Budget is predictably sycophantic and wrong. An
objective assessment is that the amount of fiscal tightening planned in this
Budget is exactly the same as outlined in the June 2010 Budget. The June 2010
Budget planned tightening of £40bn, but £3bn of this was the projected fall in
interest payments. Total austerity measures were £37 billion. This time George
Osborne has announced total fiscal tightening of £37 billion, with further
details to be added in future Budgets.
Therefore the same result should be expected. The British economy is now 14%
larger in nominal terms than it was in 2010, but the international economy is
growing more slowly. Circumstances are not exactly the same then and now, but
the impact of £37 billion in austerity will be broadly the same. If these plans
are implemented growth is likely to slow as it did previously.
At that time in 2010 the economy was growing at a 2.2% annual rate. The
imposition of austerity measures slowed that to just 0.7% in 2012 and the
economy only narrowly avoided a rare ‘double-dip’ recession[i]. The
stronger growth in 2013 and 2014 arose because there were no new austerity
measures in the run-up to the General Election.
In that same 2010 Budget Osborne claimed the public sector net borrowing
would fall to £37bn in 2014/15, or 2.1% of GDP. The outturn was actually £80
billion and 4.4% of GDP.[ii] In fact the deficit was on a rising trend in 2012
to £111 billion from £92 billion in 2011 as the economy slumped. It only started
to fall once new austerity measures were halted and the economy could recover.
Austerity did not cut the deficit. Growth did.
Austerity transfer of incomes
Austerity is the transfer of incomes from poor to rich and from workers to
big business. Social protections (so-called welfare) are cut in order to drive
workers to accept ever-lower pay. If people with disabilities can barely
subsist, if the sick have subsistence incomes cut, if women have lower pay,
increased burdens from worse public services and greater responsibilities as
carers, this is regarded only as collateral damage, if at all.
In the £37 billion in combined tax increases and spending cuts over this
Parliament, only £17 billion of that is specified in the latest Budget. Very
large departmental cuts will be announced in the Autumn Statement and future
Budgets, totalling £20bn. £12 billion of that £17 billion will come from cuts to
social security protection, and another £5 billion is said to come from
clampdown on tax evasion.
The claim that any of this has as its primary aim deficit reduction is belied
by the cut in Corporation Tax to 18%. Even before this cut, businesses paid a
token amount of total taxation. In the current year corporate tax receipts are
expected to be £42 billion. This compares to a total £331 billion paid in income
tax, VAT and council tax.
There is also a host of benefits to companies and the rich including more
measures on Help to Buy, and rent a room relief to add fuel to the house price
bubble. The Inheritance Tax threshold is raised to £½ million per person, up to
£1 million per family on homes. Shareholders can receive £5,000 in dividend
payments tax-free. Along with other changes, rich savers can now receive £17,500
a year tax-free. There is an increase in tax-free personal allowances and the
main beneficiaries of all such measures are high taxpayers.
For the poorest, there are only ‘welfare cuts’. After 2017 there will be no
additional tax credits, Universal Credit or housing benefit for families with
more than two kids. New applications to Employment Support Allowance will be
curbed, which is for people who are not fit to work. A string of further cuts to
entitlements will only emerge slowly. The Financial Times has already shown that
to tax credits will hit ethnic minority communities hardest.
Osborne also announced a National Living Wage amid much excitement from the
Tory press and the BBC. It is entirely fake. The current National Minimum Wage
is not enforced and the TUC estimates 350,000 workers are paid below it,
alongside an army of people in forced ‘self-employment’. The actual Living Wage
is estimated objectively, and includes the tax credits that Osborne has slashed.
Insultingly, the main beneficiaries of the Tory plan are actually businesses,
who have had Corporation Tax and employers’ National Insurance Contributions cut
by a greater amount to ‘pay for’ it.
Public sector pay rises will be capped at 1%. This is below the level of
inflation projected by the Office for Budget Responsibility in every year from
2016 through to 2020. This is another large real cut in public sector pay. The
target is not solely public sector workers, as there is what is known as a ‘demonstration
effect’ where depressing public sector pay also holds back private sector
pay. This seems to have operated strongly for most of the last parliament.
Politically, it is a deeply reactionary Budget. There is a real-terms
increase in military budget every year and a commitment to spending 2% of GDP.
This stands in contrast to the NHS, education budgets and so on. The Tory claim
is that these are ‘protected’ when in fact they are frozen. As there is still
inflation and the population is growing, this ‘protection’ amounts to large real
per capita cuts. At the same time, Osborne signalled a large shift towards road
building and continued the move away from renewable energy. It is the opposite
of Green budget.
There will be a strongly regressive regional effect. Areas where there is a
higher level of social protections payments, poorer areas and those with a
higher proportion of public sector jobs will all be hit harder. The City of
London and the South East outside London will be the beneficiaries. Scotland and
Wales are threatened with the Tory version of fiscal devolution; taking
responsibility for Tory cuts and the power only to make further cuts. The Irish
are not even trusted that far. The intention is to try to impose the Tory
version of the Stormont House Agreement, which is not what was agreed. The Tory
version is a raft of cuts which would further entrench the British mismanagement
of the Irish economy.
There are alternatives
The experience of 2013 and 2014 compared to the previous years of the last
Government shows that growth is the key to reducing the deficit, not austerity.
As the economy slowed in 2012 the deficit rose from £92 billion to £111 billion.
When austerity was halted, the economy experienced a mild recovery and the
deficit fell to £88 billion.
Austerity doesn’t close the deficit; growth does. The government should be
investing in developing the economy and in public services for growth, which
would reduce the deficit. Rather than cutting taxes, business levies should be
increased in order to finance the necessary investment in renewable energy, rail
transport and ports, housing, infrastructure and education. Instead, public
sector net investment will be cut every year in this parliament. The projected
level of £30.4 billion in FY 2019/20 will be just 1.3% of GDP, compared to 3.5%
The government’s campaign against ‘welfare’ is based on a falsehood. We are
not living beyond our means, as the average
household contributes £463 a year more into government coffers than it
receives in benefits and services (even including the NHS, education, free
school meals, bus passes for the elderly and so on).[iii]
We also learn that ‘corporate
welfare’ amounts to £93bn a year, which is greater than the £88 billion of
the deficit[iv]. This could be cut, rather than social protection
entitlements to the most vulnerable.
The tax system is hugely regressive. It could be reformed to allow those best
able to pay the burden of the crisis to do so. Tax breaks on pensions for those
earning over £150,000 could be eliminated.
The top tax rate of 50p could be
restored at the same level. The 10% rate on Capital Gains Tax should be
increased to the basic rate income tax, to ‘make work pay’. Corporate tax relief
on both losses carried forward to future years and back to previous years is
unique to Britain. Most countries allow one or the other, but not both, and one
should be scrapped. ‘Non-domicile’ tax status applies to 115,000 residents, who
are overwhelmingly the super-rich, oligarchs, etc. Their status should be ended,
not just tinkered with as Osborne has done, so that if they want to live and
work here they should pay taxes at the normal rate. These funds could be used to
finance public investment, along with levies on business.
There is also hugely wasteful spending. Defence spending is the only area
where spending is fixed as a proportion of GDP, and has no economic benefit.
Trident will also cost £100bn over its lifetime, which is a non-independent
nuclear deterrent and could only be used in a worldwide nuclear conflagration.
There are a myriad of alternatives. What is required is the political will to
elaborate and champion them. The attack on ‘welfare’ comes first because there
so little opposition to these cuts, certainly none from the Labour front bench.
Yet all Chancellors are political and this one intensely so. The pace of
austerity has been slowed compared to the March Budget (which successfully
induced Labour to sign up to wholly unrealistic spending plans). The small tax
increases in the latest Budget do not fall on workers or the poor. This reflects
Tory political weakness, as they felt unable to. This government has less
support than Thatcher while it is trying to carry out a more radical programme.
Opposition to austerity both inside and outside parliament can change Tory
plans. They already changed once after all, in 2012. The Tories have radically
reactionary plans, but they can be prevented from implementing them.
World Bank, GDP data http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG
ONS, Public sector finances, May 2015 Tables PSA1 & PSA5A http://www.ons.gov.uk/ons/dcp171778_407371.pdf
ONS, The effects of taxes and benefits and household incomes in FY 2014 http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-375072
Guardian, 7 July The £93bn handshake http://www.theguardian.com/politics/2015/jul/07/corporate-welfare-a-93bn-handshake