The UK government has announced its 2012 budget for annual government spending and taxation. The budget is full of cheap shots designed to convince financial markets that the government is sticking to austerity and spending cuts while at the same time trying to provide profit-making opportunities for a very reluctant-to-invest corporate sector. The headline news was the decision to cut the top rate of personal income tax from 50p in the £ to 45% from April 2013, which is paid on any personal income over £150,000 a year. At the same time, the government is cutting corporation tax by 2% this year to 24% and further to get it to 22% by 2014, the lowest rate among the major economies.
The UK’s Conservative Chancellor, George Osborne, tells us that the 50p rate was a disincentive to entrepreneurs and to investment in the UK. Of course, this is baloney (see my post, It’s nauseating, 2 March 2012 on this issue). The government tells the people that they must tighten their belts and accept reduced public services and benefits and the slashing of wages in the public sector, along with higher taxes and social security payments. And yet the very rich earners, the top 1%, are to get a cut in their tax burden worht £42,00 a year for 114 British millionaires!
Osborne claimed that the 50p tax was raising only £100m a year. But this is rubbish on any reasonable investigation. Indeed he admitted that lowering the tax rate will mean a loss of £1bn a year in revenues. To balance that loss, along with some tax relief for moderate earners, the government plans to cut public spending even more than previously. Osborne claims that he will block various tax avoidance measures that the rich have been using and raise more money that way. But where have we heard that before?
The next cheap shot is the decision to take over the pension fund of the publicly-owned Post Office. The fund has £28bn in the kitty from past contributions by postal workers. Now these assets will be used to pay down government debt and reduce the annual budget deficit. But according to the government’s own figures, the contingent liabilities on this fund are £10bn greater than the assets – namely the future payments to pensioners that will have to be met. And if valued properly, the liabilities would probably be well over £20bn more. In effect, the government is stealing the Post Office pension fund assets now to make its public finances look better and leaving taxpayers to cover future payouts. Spend now, pay later – hardly the model of austerity. The other side of this move is that now the Post Office chiefs are clear of the pension liabilities (it’s now the problem of the taxpayer) making the Post Office look an attractive privatisation. The unions may think that the state taking over their pension scheme is good news, but if it leads to privatisation, with the new company introducing a poorer pension scheme, they may rue the day.
Privatisation and boosting profitability for the private sector are clearly the motivations behind all these cheap shots. Britain’s National Health Service is one of the most efficient and universal in the world. It’s the world fifth largest employer with 1.7 million staff. This government has seen fit to reorganise it such a way that the control of funds will now drift into the hands of private consultants who are supposedly helping doctors to disburse funds for patients. This will allow private companies to take over an increasing range of services from NHS direct labour. Outsourcing to the private sector is the name of the game already in Britain’s courts, the police, job centres, schools and health. The private companies and equity firms are licking their lips at the profit opportunities. It means poorer services with less democratic accountability as previous privatisations have proved.
Privatisation in the UK used to be presented as an opportunity for the ordinary person to buy a share in public services. But now the idea of ‘shareholder democracy’ has been dispensed with. There is no attempt to hide the idea that privatisation is designed to boost private profit at the expense of public services with the mythical justification that bringing in competition is ‘more efficient’. Tell that to railway users in Britain. Or take the water industry, privatised by the Thatcher government in 1989. This is what David Hall, an expert in the subject had to say in April 2008:, “In cash terms, the average annual bill for water and sewerage rose from £120 per year in 1989 – the year of privatisation – to £294 in 2006, an increase of 245% in 17 years. In real terms, it represents a rise of 39% over and above the general rate of inflation. A breakdown of the component elements in the water bills shows that operating costs have remained roughly constant in real terms: the increase in customers’ bills is almost entirely due to the various elements associated with the capital – capital charges, interest, and profits – which have nearly doubled, in real terms, over this period.” So the huge increase in price was all due to paying shareholders a profit and bond holders interest. Hall estimates that if the water industry (built by public funds) had stayed in the public sector, UK household bills for water and sewerage would be 12% lower than they are.
And there is the latest cheap shot in the budget: the proposal that new roads in traffic-congested Britain should be owned by the private sector who can then charge the taxpayer for their use. The Conservatives propose that private companies would build roads in return for 60-year leases on them, for which they charge the taxpayer ‘tolls’ for their use. Rather than the government issue bonds to raise the money (at currently very low rates of interest) and then build the roads through public investment, the government is keeping the debt off its books but putting the taxpayer at the mercy of private companies to charge them for 60 years.
Behind all these cheap shots is the real issue: economic growth. All the best laid plans of mice and George Osborne (see my post, The best laid plans of mice and George Osborne, 29 November 2011) will go awry if the UK economy cannot grow enough. And the reality is that the economy has been struggling. This is the weakest recovery out of an economic slump since 1918 (see my post, The weakest recovery since 1918, 18 October 2011).
The Economist magazine has constructed a measure of the ‘lost time’ in economic fundamentals that the Great Recession has caused major economies. Its Proust index measures the decline in GDP, consumption, stock market and house prices, wages and employment. It found that Greece has been put back 12 years while the UK has been set back eight years, higher than the seven years for the distressed Eurozone economies of Ireland, Spain, Italy and Portugal. By the way, the US was even more damaged, having lost ten years!
This time last year, the government forecast that UK real GDP would rise 2.5% in 2102. The latest forecast by the Office for Budget Responsibility (OBR) is that the UK will grow just 0.8% this year and only narrowly avoid a technical recession of two consecutive quarters of contraction. For 2013 , the forecast is just 2%.
This poor growth means that the fiscal targets on the budget and on debt will be difficult to meet despite all the cheap shots. The credit ratings agency Fitch has already put the UK on a warning that it may downgrade its sovereign debt because its “structural budget deficit is second only in size to the US” and its debt is too high. Any sign that the UK cannot keep to its draconian fiscal austerity targets and a downgrade will follow, driving up the cost of capital for the government.
Unemployment is still rising – the recent pickup in private sector jobs was mainly in temporary employment. And living standards for the average household are still contracting. Inflation is still well above the Bank of England’s target rate of 2%. According to the Centre for Economics and Business research, real disposable income will fall by over 1% this year and again in 2013, so that by the end of 2013 real living standards for the average household will be 5.7% lower than before the Great Recession began in 2007.
Faster economic growth is possible. It requires a banking system able and willing to lend at reasonable interest rates to allow small businesses to invest and expand. And it requires major investment in communications, the environment, transport and otehr infrastructure projects to lay the basis for a better economy. The London Olympics won’t be enough. Interestingly, research by Experian for the BBC found that, contrary to the mainstream economic myth that Britain’s regions were unable to grow and were too dependent on employment in public services, there were a high proportion of small businesses in computing, finance and creative industries the poorer regions of the country, with the North East in the lead. But these businesses couldn’t grow because they could not get financing from the banks (although the two biggest are partly publicly-owned) and they could not issue bonds like the big companies.
The British prime minister David Cameron made a big play last week of the need to renew Britain’s infrastructure. to develop the rail network, power stations and broadband. But Cameron saw only one way to do this: attract the private sector to invest at a profit. Cameron raised the “Victorian spirit” of the mid-19th century as an example of private sector-led investment in roads, rail and transport. He forgot that the government then also played vital role in introducing education for all and public funding for sewers and local services. Cameron wants to build a new generation of ‘garden cities’, a new phase of nuclear power stations, more housing (Britain has a chronically low level of private housing additions), 4G telephony and a super broadband highway. But apparently, this can only come from private sector investment through schemes like tax-free economic zones.
Cameron may have to wait a long time. He is looking to corporate pension funds to invest. But, as we have pointed out before, at the moment, the UK business sector is on an investment strike. It has been piling up cash to the tune of £700bn, or 6% of GDP. But business investment in the British domestic economy is now just 8% of GDP, half the rate of the 1990s and 25% below pre-crisis levels.
As a result, the productivity of labour in Britain has been the worst of all the major capitalist economies since the recovery started.
What better case is there for public sector-led investment, financed by publicly-owned banks and bond issuance, alongside higher taxation of the top 1% and the closing of the tax gap (where big business avoids paying what is should)?