ith increasing unemployment and deepening economic gloom George Osborne claimed that his budget will stimulate economic growth. But he forgot the first basic lesson. If a patient is anaemic and struggling, you do not withdraw sustenance. Instead, you nurture and support it. The recent budget is obsessed with cutting public debt and is not seeing the wider picture.
On debt reduction, history is not on the government's side. In 1948, the UK national debt was a round 238% of GDP. The founding of the welfare state and the associated economic activity was the key to reducing it. The debt remained above 100% of GDP until 1962. In 1979, the national debt it was 44% of GDP and the Thatcherite social engineering and hatred of anything public reduced it to 26% in 1991. Soon businesses were complaining because of the cuts in public expenditure they could not make profits. By 1997, when the Conservatives left office, the debt was around 42% of the GDP. With huge support for banks, the debt in early 2011 was around 60% of GDP. So the economy can't be stimulated by debt cuts alone.
The real key is to rebuild the economy, wean it off the speculative activities of the financial sector and increase ordinary people's purchasing power. Instead, the opposite is happening and purchasing power is being removed from ordinary people. With inflation running at the rate of 4-5% p.a. real wages are falling and many people's wages are frozen. Company profits have been increased by reneging on the pensions agreements struck with employees. Companies and rich elites are avoiding taxes of around £100 billion a year, instead they are being shifted to labour, consumption and savings. The 2.5% rise in VAT is the latest evidence of this strategy. The rate of national insurance contributions was increased by 1% on the April 6th 2011 .
Disposable income is further sapped by the price of food, transport, fuel, water, gas and electricity; all rising at rates much higher than inflation. The average UK family's disposable income is expected to decline by £910 compared to 2009. The household saving ratio has sunk to 1.7% of total resources, lower than the average of 7.6% recorded between 1970 and 2008. With around 15% of the high street shops already empty, the prospects of an economic recovery are that much harder. Ordinary people just do not have the resources to reflate the economy.
Middle classes are hit hard. For 2011-12, the 40% income tax rate will kick-in at £35,001 (after tax-free personal allowance of £7,475), instead of £37,401 for the year before. This will result in another 750,000 people becoming higher rate taxpayers. The 50% rate will start at an income of £150,000 the same as before.
It is not just the family budget that is hit hard. In the final year of the Labour administration the yearly tax-free support to enable the over 60s to meet winter heating bills was £250 and £400 for the over 80s. After the ConDem budget, for 2011-12 heating help will be reduced to £200 and £300 respectively for the two age groups. The elderly have already seen their investment income eroded by a deliberate policy of low interest rates. Despite the illusion that the state pension will be index-linked to preserve its real value, the government has announced that it will be linked to the Consumer Price Index (CPI) rather than Retail Price Index (RPI), which is lower and does not recognise the costs faced by senior citizens.
Reform of taxation
Whilst there has been little hesitation in hurting the ordinary and vulnerable persons, there is reluctance to take money from the rich. The government has announced a consultation on the reform of taxation of UK resident non-domiciled individuals from April 2012. The proposal is to consider increasing the existing £30,000 annual charge to £50,000 for non-domiciled individuals who have been UK resident for 12 or more tax years and who wish to retain access to the remittance basis of taxation. This means that if they keep their cash outside the UK they still won't pay the rates of income tax applicable to ordinary mortals even though they will use the social infrastructure to make gains.
The government‘s economic strategy assumes that we can return to pre-banking crisis days of high personal debt. The Office for Budget Responsibility (OBR) has assumed that UK household debt will rise from £1.62 trillion last year to £2.13 trillion in 2015. This is a rise from 160% of income to 175%. The economic logic is that as the government raises taxes and cuts social security rights, people will maintain their living standards by borrowing and thus the aggregate economic demand will be maintained. These are economics of the madhouse and they assume that credit will be freely available.
The biggest winners from the budget are corporations, they fund political parties. Instead of citizens and the ballot-box, corporations now discipline governments by threatening to move their headquarters from the UK . Companies such as Boots and WPP have upped sticks and relocated their headquarters to tax havens and reduced their corporate taxes in the UK . Of course, they continue to make profits in the UK . The way to deal with these schizophrenic corporations is to ensure that they pay full corporation tax on the profits in the UK . The government has instead bowed to the corporate lobby and reduced the corporation tax rate to 26% from April 2011, and it will be reduced by 1% a year thereafter to 23% in 2014. In 1982, the corporation tax rate was 52%, reduced to 30% in 2007.
The massive reduction in corporation tax rate is based on the assumption of trickle-down economics and private sector job creation. There is little evidence to support any of these assumptions. The richest 10% of the population are more than 100 times as wealthy as the poorest 10%. After taking out the value of private dwellings, the wealthiest 1% own 34% of the wealth and the wealthiest 50% own 99% of wealth, leaving crumbs for the bottom 50% of the population. Workers' share of the GDP has been systematically reduced. In 1976, wages and salaries paid to employees accounted for some 65.1% of the GDP and dropped to 52.6% in 1996. After the introduction of the minimum wage and improvements in the public sector it now barely stands at 55%, a staggering reduction of 10% in just over 30 years.
A trickle-down economy?
There is no sign of trickle-down, ordinary people have been forced to rely on debt to keep going.
Prior to the banking crisis, the UK corporate sector enjoyed the highest ever rates of profitability. Yet this did not result in anything approaching full-employment. Government statistics show that between 1997 and 2007 nearly 2.24 million new jobs were created, of these only around one million could be regarded as private sector jobs. The remainder were either created directly by the state or relied upon state support. In London and the South, the state and state-supported jobs accounted for 38-44% of the employment growth, in the Midlands , North, Wales and Scotland it provided 73%, 64%, 55% and 68% of the new jobs. In former industrial heartlands, such as the West Midlands , virtually no new private sector jobs were created. It is difficult to discern any job creating strategy in the ConDem budget, or the evidence that lower corporate taxes directly result in the creation of new jobs.
The budget offers no comfort to the 2.5 million unemployed or anyone interested in building a sustainable economy. Tackling inequalities and maldistribution of wealth are necessary pre-requisites to getting us out of the economic crisis. Ordinary people spend more of their income on food, clothes, transport and other essentials and thus create a higher multiplier effect compared to the concentration of wealth in relatively fewer hands. But there is no redistribution or any concern about reducing inequalities in the budget. The old-fashioned austerity drives that discipline workers, sets public sector workers against taxpayers and transfers wealth upwards into fewer hands are the ingredients of deep economic and social crisis.
The crisis offers an opportunity for the development of radical economic policies that redistribute wealth. For example, by exempting minimum wage from all taxes and bringing the state pension, currently a measly 20% of the average wage, in to line with the European Union where it is around 57% of average earnings. The economy needs to be rebalanced by encouraging manufacturing and greener industries. This can be funded by curbing tax avoidance and broadening the tax base – for example by introducing a land value tax. Corporations should be democratised so that fat cats can't keep on helping themselves. For example, at banks employees, depositors and borrowers should vote on executive pay. It is extremely unlikely that ordinary bank staff earning £17,000 a year; and savers getting measly interest on their savings will give massive bonuses to their directors. Is the Labour leadership ready for radical alternatives?