The British prime minister David Cameron told his party conference attendees that the main aim of his government if re-elected next May is to cut the personal tax burden of upper middle income earners. He claimed he wanted reduce personal income tax for 30m people, while keeping the burden of tax for businesses, particularly big business, at the lowest rate (20% of declared profits) in the G-20 economies.
The first thing to note is that this pledge is really a con, even for those that will benefit from the tax cuts. The aim is to raise the amount of money people earn before they pay income tax from £10,000 a year now to £12,500 and to increase the level at which workers start paying the 40p rate of income tax to £50,000. But this won’t happen overnight, as soon as Cameron is back in office next year. It will only fully implemented by 2020, at the end of the next term of parliament. So the gain in income from the tax cut will be tiny compared to any further gains or losses from wage increases or falls. That remains the best way people can improve their living standards, not tax cuts.
And there are 8m people in the UK who live on welfare benefits: they gain nothing from any tax cuts. Indeed, they will lose heavily because these cuts are to be paid for by cutting their benefits. And while the very low paid will eventually gain a little from the tax cut, there is to be no change in the social security rates that they must pay, so the burden of deductions will remain heavily biased against them.
Ben Richards at the Social Market Foundation reckons that Cameron’s tax cuts are worth over £2k for most of top 10% earners, £500 for middle 50%, nothing for lowest earners. The bulk of the benefits would be skewed towards those in the top quarter of earners.
The Institute for Fiscal Studies, a think tank, estimated that 69% of the cost of increasing the personal allowance to £12,500 would come from cutting the taxes of workers in the top half of the income distribution. So it’s an illusion created by Cameron that ‘hard-working middle England’ would gain from his tax cut proposals. The median salary in the UK is about £27,000. So even those who earn £45,000, (some 60% more than the average) will benefit only slightly from raising the 40% tax rate threshold (currently at £42,000) to £50,000 by 2020. The average wage earner will not benefit at all from this measure, only the highest earners.
But, most important, how is even this limited largesse to be paid for? Cameron said it would not be paid for by increased government borrowing. So it could only come from extra cuts in government spending. The government already plans to cut £25bn off government spending by 2018 to ‘balance the budget’. As Cameron put it in his speech: “We want to cut more of your taxes. But we can only do that if we keep on cutting the deficit . . . Tax cuts need to be paid for.”
Most estimates put the Cameron tax pledge as costing the government budget about an extra £7bn a year by 2020, when the tax cuts are fully implemented. Given that he claims the government will increase real spending on the National Health Service at the same time, the budget can only be balanced by reducing even more (probably by 25-30%) in real terms the amount spent on public services (education included) and welfare benefits. Austerity is here to stay – indeed it will be replaced by an even more concerted effort to reduce the role of government in providing basic services for the British people.
Tax cuts, more government spending and a balanced budget (assuming you want one) could only be achieved if the British economy suddenly leapt forward and real GDP growth stayed at over 3% a year up to 2020, allowing real incomes for average households to rise accordingly through extra employment with rising wage levels. But there is no prospect of that. Even the most optimistic forecasts for average economic growth for Britain to the end of the decade are about 2.0-2.5% a year.
Even that is very unlikely. The current ‘boom’ in the UK economy is unsustainable. To achieve 3%-plus growth every year would require a sustained rise in the productivity of labour. And that can only be achieved by either making British workers do longer hours at no extra pay (to boost profitability) and/or by increased investment in new technology, probably at the expense of fewer jobs.
The reality is, however, that UK productivity growth is non-existent. UK labour productivity as measured by output per hour was unchanged in the second quarter of 2014 compared with the previous quarter and 0.3% lower than a year earlier.
At the same time, rising employment has only come through part-time jobs and self-employed work. This is very low productivity work. And it does not pay well. Average weekly earnings are diving.
Almost all the increase in employment since the recession has been among the more highly skilled groups. Recent figures showed a slight fall in the number of employed full-time jobs for the second month running. There are still fewer people in full-time employment than there were in 2008. There are still fewer medium and low skill employee jobs than there were six years ago. So no wonder there has been the longest decline in wages for half a century. It looks even worse if you include the self-employed (see graph).
Since the recession, pay has fallen by about 12%. The Resolution Foundation think-tank said 1.2 million British workers are on the legal minimum, compared with 600,000 when it was introduced in 1999. And the number of employees earning within 5p of the hourly rate has reached its highest level. The official minimum wage is no higher in real terms than it was almost a decade ago.
This brings us back to Cameron’s tax cuts. Income tax, VAT and National Insurance are three of the government’s biggest sources of revenue. But a low wage economy will mean lower tax receipts on income and lower VAT returns from spending. For example, in the last few quarters, when the UK economy was supposedly growing at over 3% a year, tax revenues rose only 2%, compared to the official forecast of 5%.
Big business is paying even less tax (even assuming they have declared all their profits!) but income tax receipts are way short; only VAT is delivering. The problem is that the increased numbers of self-employed are just not earning enough to pay more tax.
With weak tax revenues, Cameron’s pledge to cut income taxes further will make it even more difficult for the government to balance its books than it forecasts. The Conservative tax cut is really a promise to boost real incomes for the richer sections of the British people at the expense of the living standards of the poorer sections. Surprise!