Britain: slash and burn

The Tory-Liberal coalition government in the UK has announced the results of what it calls its Comprehensive Spending Review (CSR), namely the details where and how much it plans to  spend on various government departments from defence, transport, housing, family benefits through to health and education.  This CSR will see massive and unprecedented spending cuts.

It is a policy of slash and burn.  The government plans the largest cut in public sector spending in the UK since the second world war.  The coalition aims to reduce expenditure back from previous plans by £83bn over the next four years.  That’s £30bn more than the defeated New Labour government planned in the same period.  If implemented in full, it will reduce the share of public spending in the economy by 8% points of GDP from the current 51% and means a real reduction in spending of 7%.

Although there will be no reductions in real spending within the health service, which is ‘protected’, there will be swinging reductions in other key public services: housing, transport, justice, support for families, pensions and even education – indeed around a 35% reduction in real terms for some departments over four years.

For example, the already pitifully small funds to provide homes for the poorest in our community who cannot afford mortgages or ‘market rents’ are to be cut by 50%.  Even the ‘defence’ budget, usually sacrosanct for the right-wing Conservative party is to be reduced, although only by 8%.  Indeed, if you strip out the cost of debt interest and social transfers, then direct spending on proper public services will be cut in real terms for the next six years.  A UK government has never done that for more than two years in a row before.

We are told by the government, by the opposition Labour party, by the media and by the experts, that ‘there is no alternative’, or TINA, as that awful Tory slasher and burner, Margaret Thatcher, used to say when destroying Britain’s industrial base and promoting financial services back in the 1980s. The apologists for capitalism reckon that, without the public sector being slashed, the government will continue to run huge deficits on its budget and Britain’s ‘national debt’ (by which they mean the government debt , not the debt of households and private businesses) will rocket.  The owners of this debt, the banks and foreign investors, will eventually begin to lose confidence in the government and stop financing the deficit and there will be a crisis like that in Greece, forcing the government to go the IMF  under even worse conditions.  Also, servicing a large public debt (i.e paying interest and repayments on the government bonds sold to the banks and foreigners) will weigh down on profits and growth because the cost of servicing will just mount up. driving up taxes and interest rates.  

The fact that the apologists for capital like to ignore or play down is how the UK government got into this state in the first place – namely the financial collapse and deep slump of capitalism.  So the grotesque irrationality that is capitalism means that the majority of households in Britain will now see their public services slashed and their taxes rise in order to pay for the increased government spending and debt accumulated to bail out Britain’s banks (20% of GDP) and for the ensuing economic recession that the financial sector’s collapse caused (another 15-20% of GDP).

The crisis was no fault of public sector workers, but 500,000 are lose their jobs over the next four years, which also mean another 500,000 jobs will go in the private sector as government procurement falls back.  The rest of us will have to pay more taxes for less services.  Sure, the banks are to be taxed a bit more too.  But the £1bn a year that the government intends to collect from them is way less than the reductions in child benefits and pension payouts and increased VAT (or sales taxes) that are to be introduced in January.  Indeed, the cuts in welfare benefits will take £1000 away from the 7 million people.

Remember the biggest UK banks are in theory publicly-owned!  But they are being allowed to operate as commercial companies designed to make a profit, not provide a public service (see my post, Banking as a public service, 9 September 2010).  And there is one tax that is being cut: corporation tax.  Britain’s businesses are to pay less, while the rest of us pay much more.

But there is no alternative.  The public sector must be curbed and its debt burden stabilised or the private sector won’t reinvest their profits in creating new jobs and incomes – or so we are told.  As I said in an earlier post (Coalition cuts, 11 June 2010), “we are entering a world of ‘austerity’, at least for the majority, in order to allow prosperity for big business to resume.”

The task that the coalition government has set itself is to turn the largest government deficit (excluding interest payments) of any of the top seven developed economies into balance by end-2015. Even if that were the correct objective in the interests of all, which it isn’t, can they do it?  It’s not likely, because ‘balancing the books’ will require more than spending cuts and tax rises.  The British economy needs to grow to provide the incomes to pay the bill.  The coalition government assumes that the UK economy can grow at an average rate of 2.7% a year over the next four years from March 2011.  Without that growth, the government will be like Alice in Wonderland, just catching up to stay in the same place.

Is a 2.7% growth rate realistic given that UK growth in 2010 will be no more than 1.5% and next year only 2% or so?  It does not look like it.   So the government will probably come back to hit households again for even more.  Indeed, on my calculations, to achieve the coalition government’s targets on the deficit and debt of the public sector, they will need to slash another £40bn off spending.

What has the Labour opposition said about all this?  When they were in government, ‘New Labour’ planned a similar slash and burn plan, it was just a little less deep and bit slower in implementation.  For example, Alan Johnson, Labour’s new shadow chancellor, correctly tells us that cutting government investment in infrastructure at a time when the private sector is investing nothing (see my post, Capitalism still on its knees, 15 October 2010) is shocking.  A 1% of GDP fall in public investment could take out 1% in national income, according to the independent Office of Budget Responsibility.   The coalition plans to cut government investment by 33% in real terms over the next four years.  But then New Labour planned to cut it by 31%.  That’s the only difference.  Johnson now wants only a 17% cut.

And he is also in favour of slashing back disability benefit, which over the years has been used by older, long-term unemployed workers unable to get jobs to survive.  Stopping people getting benefits for being ‘disabled’ when they could work may seem right, but where are the jobs and the proper levels of legitimate social benefits to compensate?

Johnson also supports the government’s plan to index public sector pensions for inflation through the lower CPI index rather than the higher RPI index.  That will mean a cut in the real value of pensions in the public sector by 15% over the life of a current pension.  Apparently that is okay for Johnson as long as it does not mean that pensions increases do not fall behind average earnings.  But that’s what will happen: in the last decade, CPI inflation has risen just 19%, while earnings have risen double that.

The key question is jobs.  Under the coalition’s plans, public sector employment is to fall by around half a million, plus another 500,000 lost in those parts of the private sector that depend on government spending.  Can the profit-motivated private sector replace these and more?

Well, back in the 1990s, between Q3’91 and Q4’98 (namely over seven years, not four), the UK’s public sector employment levels fell by 827,000, a drop of 14%.  This time, the government plans a fall of about 500,000, or about 8%, although it is likely to be more.  Back in the 1990s, the private sector, however, created over 2 million jobs by way of compensation and the unemployment rate fell.  Indeed, the private sector has added 360,000 jobs in 2010.  But in the 1990s, the UK economy was growing at 3.5% a year, something that will be just a dream this time.  Also, much of the rise in private sector employment was just a switch of  jobs from the public sector due to privatisation under Thatcher.

While we have a capitalist system, the objective of government is to expand the private sector through increased profitability.  The public sector is a cost to profitability that must be continually cut back where it is ‘unnecessary’.  The media continues to rail at the ‘bloated size’ of the public sector as a result.  Indeed, it wishes to build up antagonism to public sector workers.  As the mouthpiece journal of the City of London, City AM, put it,  “That is how capitalism works; the public sector is now being confronted with a much harsher and precarious reality that the rest of us have had to face all of our lives.”

Apparently, capitalism is a ‘harsh and precarious reality’, not a great generator of wealth and happiness!  Anyway, it’s time that public sector workers suffered like the rest of us (that does not include the top executives of the banks and the FTSE-100 companies, of course).

Mervyn King, the governor of the Bank of England, tells us that the British people are now in a ‘sober decade’ after years of ‘excess’ and we are all going to have to save more and spend less.  We have all had it too good and due to our ‘excesses’, we brought capitalism to its knees and now we must pay so that it can get up again.  One million workers are about to pay with their jobs, million of others through falling real incomes, higher taxes and worse public services.

2 Responses to “Britain: slash and burn”

  1. nadim Says:

    a very good piece, I think

  2. Joy Says:

    Always refreshing to read ‘Michael’s’ view point.

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