Thursday, 26 April 2012

Redistributing ... to the rich

Andrew Fisher, LEAP co-ordinator looks beyond the fluff to discover the real issues in the Budget. (This article first appears in the May 2012 edition of Labour Briefing)

Pasty tax, charity tax, granny tax and even caravan tax – if you live too much of your life on planet Twitter then you’d be forgiven for thinking these were the main issues in the Budget.

I admit, as someone who doesn’t tan I was initially perturbed about #pastytax until I realised it referred to Cornish pastries rather than a lack of cutaneous pigmentation.

But the real stories of the Budget – involving the big billions – were about the more commonly known income and corporation taxes. Osborne gave corporate Britain another cash giveaway: taking corporation tax down from 26% to 24%, and committing in his statement to reduce it further to 22%, with the aspiration of reducing corporation tax even further.

"So that by 2014, Britain will have a 22% rate of corporation tax ... And a rate that puts our country within sight of a 20% rate of business tax that would align basic rate income tax, the small companies rate and the corporation tax rate."

This largesse to big business will cost the Exchequer an extra £3.76bn in the period covered by the spending review. This is on top of the £25bn in tax breaks for business announced in 2010 which included Osborne's commitment to cut corporation tax from 28% to 24% over four years.

Now Osborne will cut taxes for big business to 22% over the same period. It is not as if the previous government had been loading the tax burden on business either. Under the New Labour, corporation tax fell from 33% to 28% – which LEAP estimated cost the exchequer £50bn over 13 years.

So how does Osborne's new corporation tax rate compare with other countries? He was kind enough to tell us in the Budget:

"A headline rate that is not just lower than our competitors, but dramatically lower. 18% lower than the US. 16% lower than Japan. 12% below France and 8% below Germany. An advertisement for investment and jobs in Britain."

 So more like ... Ireland? And by coincidence that is a country that Osborne deeply admires. It was Osborne who said in 2006, "Ireland stands as a shining example of the art of the possible in long-term economic policymaking". The problem isn’t that Osborne said that in 2006, but that he still believes it now!

Ireland has been through an even more adverse austerity shock doctrine than Britain, and has slipped back into recession this year. Slashing corporation tax simply undercuts the tax base and hinders recovery.

But it does something else – it redistributes wealth. Lower corporation tax means larger net profits, so instead these larger profits go to large shareholders in dividends and directors in bonuses.

Those same directors will be laughing all the way home from their banks thanks to Osborne slashing the top rate of tax from 50 to 45 per cent. That will cost £3bn per year, which will stay in the pockets of the richest 1% in the country.

This was the issue that Ed Miliband led on when he rose in the House of Commons to challenge the Chancellor’s Budget. It was an uncharacteristically forceful performance, coruscating Osborne for cutting taxes for his Cabinet mates and their chums, while doling out austerity for the 99%.

Of course, Ed Miliband went from that to photo opps in Greggs, and jumped on every bandwagon (or should that be caravan?) going. Now he leads the charge against cutting tax reliefs for wealthy philanthropists – from class warrior to woolly liberal in two weeks. It is a snapshot of his leadership – vacillating, inconsistent and ultimately inconsequential.

So back to the Budget. The lost corporation and income tax revenue requires other taxes to rise to make up the void and/or public spending is cut.

In a throwaway remark, Osborne casually added that to balance the books “we would need to make savings in welfare of £10 billion by 2016”. This is on top of the £20 billion in welfare cuts already set out and being implemented with much misery and resistance.

What was unique about this comment, was that when you delved into the Budget Red Book (the lengthy tome that accompanies that parliamentary pantomime) there was no detail. In fact all you could find is that the precise figure is £10.5bn and neither Treasury nor social security ministers could say where a penny of these new cuts would fall.

The Budget highlighted that we have an incompetent government waging class war let off the hook by a pallid (some might say pasty) opposition.

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Monday, 23 April 2012

Squeezing ordinary people's finances always leads to disaster

Prem Sikka

The UK economy is flatlining, unemployment is rising and around 13.2 million people live below the poverty line. The prospects of building a sustainable economy remain distant. The common factor behind these grim statistics is that the purchasing power of ordinary people has been severely eroded and without adequate resources people cannot buy goods and services produced by businesses.

The UK gross domestic product (GDP) has increased from the 1976 figure of £621bn to around £1.5tn, but the share going to employees in the form of wages and salaries has declined. In 1976, the amount of wages and salaries paid to UK employees, expressed as a percentage of GDP, stood at 65.1%. By the end of 2011, it was around 54% (see table D of the Quarterly National Accounts). This rate of decline is unmatched in any other developed economy. With many people now facing wage freezes and loss of pension rights, the employees' share of national wealth is set to fall below 50% of GDP.

The above figures are not the whole story, because a disproportionately large slice of the shrinking cake has been taken by wealthy elites. A study by the Resolution Foundation noted that in 1977, for every £100 of GDP, employees in the bottom half of the earnings distribution received £16. But by 2010 it had fallen to £12, and after taking out bonuses their share declined to just £10. In contrast, the top 10% of earners increased their share from £12 per £100 of GDP to £14, and after taking account of bonuses, it rose to £16.

In principle, the state can boost the spending power of low and middle-income households through redistribution, but that possibility is constrained by the erosion of tax revenues. In 1981-82, tax revenues expressed as a percentage of GDP stood at 45.5%, but by 2011-12 they had declined to 37.8%.

So where has the national wealth gone? Well, it has been transferred from employees and the state to corporations and their controllers. In the mid-70s the average rate of profitability before interest and tax at current replacement cost stood at 3.9%. Now, despite one of the deepest recessions, it is still averaging around 11-12%.

The seeds of the disastrous position were primarily sown by the policies pursued in the 1980s and 90s. Mass unemployment and government-led attacks on trade unions severely eroded the ability of employees to maintain their share of national wealth. The current UK trade union density of 26.6% of employees is considerably less than 69.2% for Finland, 68.4% for Sweden, 66.6% for Denmark and 54.4% for Norway. Unlike Scandinavian countries, UK employees and unions are not permitted to elect directors and are excluded from corporate governance arrangements, therefore they have not been in a position to protect workers' share of national wealth.

The comparative demise of manufacturing has resulted in the disappearance of reasonably well-paid skilled and semi-skilled jobs. These have been replaced by less well-paid service-sector jobs. Privatisation and outsourcing of work has contributed to low wages.

Successive governments have appeased corporations and wealthy elites through tax cuts. The rate of corporation tax has declined from 52% of taxable profits in 1982 and will reach the lowest ever rate of 22% in April 2014. The top marginal rate of income tax has declined from 83%, plus a surcharge of 15% on investment income, in 1978-79, to 45%. Rather than effectively tackling organised tax avoidance, successive governments have shifted taxes to labour, consumption and savings, as evidenced by higher national insurance contributions, higher VAT and the failure of tax-free personal allowances and income tax bands to keep pace with inflation. The result is that households in the bottom 20% of income bracket pay 35.5% of their gross income in direct and indirect taxes, compared to 33.7% for the top 20% of households.

The massive transfer of wealth is camouflaged by government rhetoric on the need to rebuild the economy and control inflation. Here are some reflections from Sir Alan Budd, a key economic adviser to the Thatcher administration: "My worry is … that there may have been people making the actual policy decisions … who never believed for a moment that this was the correct way to bring down inflation. They did, however, see that it would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes – if you like, that what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed the capitalists to make high profits ever since."

In his analysis of the 1929 Wall Street crash and the ensuing economic depression, liberal economist JK Galbraith identified "bad distribution of income" as the biggest cause of the crisis. Yet history is repeating itself. It is hard to discern any government policies that are designed to increase the employee share of GDP.

Despite the banking crash, the government's not-so-bright idea for economic recovery is that by 2015 ordinary people will somehow increase their personal borrowing by another 50% from £1.5tn to £2.12tn. Clearly, no lessons have been learned from history.

Wednesday, 4 April 2012

Quantitative Easing isn’t working

There is an economic crisis, yet those who advocate quantitative easing as a solution have misunderstood both the nature and the magnitude of it. This blog has consistently criticised Osborne's austerity programme and his evidence free belief that the public sector has been ‘crowding out’ the private sector.

Now I want to look at the Bank of England’s monetary policy: quantitative easing.

Quantitative easing (QE) is often referred to as ‘printing money’. In fact it is more accurately described as giving banks cheap credit (see BBC guide to QE). The use of QE is based on the assumption that our economic system is in crisis due to a lack of available credit (a credit crunch) and a lack of lending.

The same intellectual malaise is evident in the ‘soft Keynesians’ who advocated bailing out the banking system, but now reject an economic stimulus. Their unspoken slogan is ‘save the banks, fuck the people’.

These people failed to foresee the crisis, and now fail to offer viable solutions for resolving it – in fact (if one assumes their policies are advocated rationally) they seek to make it permanent by institutionalising declining real pay and hoping the private sector will magic some jobs soon (crowding out theory)

There are several collective nouns for this group: Chancellors, Treasury ministers, leading economists or business leaders.

Today the economy does not suffer from a lack of credit. It suffers from a lack of demand. Unemployment, underemployment and wage constraint have all produced a situation in which living standards are falling.

Separately, the government has massively cut its capital spending, sucking further billions out of the economy.

Vincent Cable whinges that the banks are not lending to small businesses yet why would they in a climate of falling demand, and wider financial uncertainty? Regular pay is increasing at only 1.1% per year, outstripped by inflation at over three times the rate. It is no surprise that retail sales volumes fell 0.8% in February 2012 (incorporating a 1.5% decline for non-food items).

Some, to make the case that QE is necessary, have pointed to statistics showing that the number of small business loans rejected by the banks has quadrupled since the crisis. This ignores two very salient factors:

  1. Businesses are now making more loan applications to cover (what they hope are temporary) shortfalls, rather than to invest
  2. Banks, whose reckless lending practices played a major role in causing the crisis, are now more rightly more cautious
  3. The same business plan in 2006/07 at a time of high employment and rising real wages was a lot more attractive to invest in than it is in 2012/13

The real need for the UK economy is not more credit, but more demand –and that means putting more not less money in people’s pockets. It would mean doing the exact opposite of what George Osborne is doing – redistributing £30bn from benefits and tax credits into the pockets of businesses via tax breaks. It would mean ending pay constraint and reversing the VAT hike (a tax on consumption). This could be funded by reinstituting the 50% rate and closing down on the loopholes used by the super-rich and big business to avoid their obligations.

Meanwhile the Bank of England’s now £325bn quantitative easing programme has clearly not been used to extend credit to meet any growing demand. Instead, the banks have used the extra liquidity to speculate in derivatives markets and to invest in safer foreign markets.

This is not to say quantitative easing is always a bad policy. It’s not, but in the current climate it has long outlived its utility. Part of the problem is the limited policy options open to the outsourced (independent) Bank of England and the lack of any coherent strategy from HM Treasury.

Instead of botched austerity, we need investment based around a new industrial policy to create jobs in sectors that meet people’s urgent needs, including housing, energy, and transport.