UK finance minister George Osborne presented his first budget since the Conservatives won the UK general election last May. Most readers of my blog who are not British may not find this interesting. But in some ways it is. That’s because the UK budget reveals the economic and ideological beliefs of a pro-capitalist government as it looks out towards the end of this decade.
This was a blatant big business budget. Taxes are being cut for capital, while they are being raised for labour. Taxes rates for corporations, already the lowest among the G7 economies, are to be cut further; companies will be able to invest up to £250,000 a year and set it off against tax; and special levies on banks are being reduced. And those who own expensive properties and have significant financial wealth are having inheritance tax reduced. Next year will see the largest privatisation proceeds of state assets (state equity in public banks sold at a loss) in a single year ever, over £10 billion higher in real terms than the previous record in 1987-89.
These corporate tax reductions according to Tax Research are worth £28bn over five years, along with a large reduction in local council tax for companies (George Osborne’s £27.8 billion give away to business). And this is at a time when hidden subsidies, direct grants and tax breaks to big business already amount to £93bn a year, or £3,500 per UK household, according to a new report by Kevin Farnsworth of York University. This shows that British governments spend more on grants and loans to big business than they raise in corporate profit taxes. And direct grants to business (big ones) are larger than the planned cuts in welfare
And we are not even talking about tax avoidance and evasion on an industrial scale.
On the other hand, Osborne aims to cut ‘welfare’ benefits by £12bn over the next five years in order stop ‘scroungers’ and force people into work. But the reality is that most of these benefits go to people who are already in work but earn so little that they need state aid to survive in order to pay their rent, utility bills and bring up their children. Yet tax credits for the ‘working poor’ are being cut savagely; and a range of tax increases are being made on insurance premiums, cars etc. All this hits the less well-paid. Working-age benefits are to be frozen for four years. Allowances for rents in social housing are to be reduced by 1% a year over next four years, while the government plans to sell off such housing. The last vestiges of student grants are to be scrapped in favour of loans.
Public sector employment will be reduced further and a pay limit of 1% a year for public sector workers will be imposed for the next four years. Given that inflation is expected to rise at 2% a year, that will mean millions of public sector workers will have experienced a sharp drop in living standards for over ten years.
The announcement of what Osborne called a compulsory national living wage of £7.20 an hour rising to over £9 an hour by 2020, or a rise of 6% a year, is supposedly to compensate for the loss of income caused by the welfare cuts on working poor. But it applies only to over 25s. If you are starting work at 18 years, you don’t get paid this ‘living wage’ for seven years! So millions will take a hit. For example, according to the independent Office for Budget Responsibility, after taking into account the new living wage and the cuts in tax credits and other benefits, an out of work couple with children, living outside London, will lose 28% of their income!
The budget thus achieves a clear shift of incomes from labour to capital, the aim of any pro-capitalist government, namely to boost profitability. The Conservative government reckons that by doing so the British capitalist economy can achieve sustained economic growth through rising business investment and productivity, freed from the burden of taxes and a ‘bloated’ public sector through ‘balanced budgets’. “We are giving businesses the lower taxes they need to grow with confidence. Britain is open for business.” Osborne.
But can it? Osborne boasted that the UK economy was the fastest growing of the top seven capitalist economies in 2014 at 2.8% real GDP growth. And that the UK economy was now larger than before the 2008 Great Recession began (at last). Business investment was rising, employment was up hugely, with an influx of immigrants mainly from southern Europe and real wages were now rising as inflation drops to zero.
No doubt these developments helped to convince enough in the general election that things were improving (see my post, https://thenextrecession.wordpress.com/2015/04/30/economic-well-being-and-the-uk-election/). But this story hides the reality that the UK has had one of slowest recoveries of all the major economies since the end of Great Recession in 2009; that real wages for the average household fell further and for longer than at any time since the Great Depression of the 1930s. British households are still £500 a year in real terms worse off than before the financial crisis in 2008. Real GDP may have surpassed the 2008 peak but net national income per head has not.
Budget deficits and public debt run up, as a result of bailing out the banks and from the Great Recession, remain near post-war highs. Osborne’s government is still running a budget deficit of 4.2% of GDP, much higher than that of Greece and the public sector debt to GDP ratio has doubled since 2008 and will still be rising this year. Given the poor export performance of British industry, the UK economy runs the biggest ‘twin deficit’ (current and budget accounts) in the G7.
But the key question is productivity. Sustained economic growth depends on two factors: more employment and higher productivity per worker. Up to now, it is the former that has delivered growth since 2010 in the UK. Osborne recognises though that there will be a limit to this employment growth. Eventually a tight labour market could induce rising wages and labour costs and then increased productivity will be necessary to maintain profitability and growth. And UK productivity up to now has been truly awful.
The latest official figures last week showed productivity, measured as output per hour, picked up in the opening months of this year. But the remarkable absence of productivity growth in the seven years since 2007, has left output per hour 15% below where it would have been if pre-crisis trends had continued.
So Osborne wants to raise productivity and this is to be done by incentives to big business to invest. He also plans to try and increase the skills of the workforce through more apprenticeships, but levying the very companies that are supposed to agree to higher minimum wages and invest given lower corporate taxes.
And when we analyse the rise in business investment since 2010, we find that most of the increase has been in ‘real estate’ purchases and there has been no rise at all in hi-tech investment. As Chris Dillow has pointed out (http://stumblingandmumbling.typepad.com/), for every pound UK banks lend to manufacturers, they lend almost £36 to home-buyers: £35.3bn vs £1264.8bn in 2014.
So far, UK businesses have invested not in productive capital that could boost productivity and sustain economic growth and rising living standards but in speculative non-productive capital. Profitability has improved as a result, although it is still below levels before the crisis.
Can Osborne’s corporate handouts, to be paid for by a reduction in the living standards of the working poor and the vulnerable, work to put British capitalism on the road to sustained health? The evidence is not there so far.