The Budget: making the poor pay

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Each Labour budget tries to introduce a new and worthy theme. The promotion (spin) continually changes to give the impression of a planned progression. The first few years belonged to ‘prudence’ – neo-liberal spending cuts – but it had a purpose. Prudence was equipping Britain ‘to rise to the challenge of the new and fast changing global economy’ without promoting the ‘short term interests of the few’. Prudence was meeting the ‘ambitions of the British people’ by encouraging ‘enterprise and entrepreneurship’. Prudence was creating a ‘strong foundation of economic stability’ and laying the basis for ‘efficient public services’ and a future that promised ‘enterprise and fairness’. Now that future has apparently arrived. ‘Britain can in this parliament build a consensus to advance enterprise and fairness together’.1

The one per cent rise in national insurance payments for workers and employers alike, the extension of tax credits and the 43% real increase in spending on health over five years brought forth extravagant claims by critics and supporters of the government. Employers’ organisations criticised the budget as ‘an attack on jobs’ that would mean less investment for the future. The Financial Times announced that ‘Blair’s government has finally settled for something called social democracy’ (19 April 2002). John Edmonds, General Secretary of the GMB, said the budget was ‘a rare event in British politics… honest and courageous’ and Dave Prentice, General Secretary of Unison, said that it had given the NHS a ‘kiss of life’. In reality little had changed and the fundamental considerations underlying every Labour budget since 1997 remained in place. Labour has to ensure that the coalition of forces that brought Labour into office remains on board. It has to govern in the interests of banking and multinational capital – the neo-liberal agenda – yet keep the support of the professional, middle and upper working class.

Millions of traditional Labour supporters, alienated and disillusioned by the ever-present reality of decrepit and chaotic public services, government incompetence and sleaze, did not turn out to vote at the last general election. This disillusionment is spreading to wider sections of the middle class. Labour has to address these concerns if it is to prevent a revival of opposition parties and win another term of office – the real motivating force behind Labour – and that was what the promotion (spin) of this budget was designed to achieve.

Neo-liberal agenda
Brown made it clear that there would be no change in his neo-liberal economic agenda and said that the government ‘will never compromise our commitment to meet our fiscal rules and disciplines’. He proudly declared that his tightening of fiscal policy by 4.5% of national income (spending cuts and tax rises) since 1997 had enabled the government to repay £37bn of debt in the year to last April and reduce its net debt as a proportion of national income from 44% in 1997 to 30.4% today. This was ‘in contrast to 41% in the US, 53% in the euro area as a whole and 59% in Japan’. The consequences are decrepit public services and a crumbling public infrastructure, which are the everyday reality of Labour’s Britain – a point, unsurprisingly, missing from his budget.

The ‘tax and spend’ measures, which have so heartened Labour supporters and disturbed the critics, are small, well below 1% of GDP and a fifth of what Labour delivered between 1974 and 1976. Britain will still be the lowest taxed large economy in the European Union after the tax rises, with tax receipts expected to reach 40.5% of GDP in 2006-07, well below the 44% European Union average. Public spending will eventually reach 41% of GDP in 2003-04, the level that Labour inherited from the Tories in 1997 and well below the 45.3% of GDP when Labour left office in 1979. Last year public finances went into the red for the first time since 1997, a tiny 0.1% of GDP. Public borrowing will now rise, with a general government deficit of 1.5% of GDP expected in 2006-07. This, according to Gordon Brown, is in line with his ‘golden rule’ of fiscal discipline – only borrow to invest over the economic cycle. Public investment is planned to increase from 1.8% of GDP in 2003-04 to 2% in 2005-06. This will prove totally inadequate to deal with Britain’s decaying public infrastructure, being little more than a third of the 5.5% of GDP invested by the Labour government between 1974 and 1976.

A ‘kiss of life’ for the NHS?
The rapid deterioration of public services during Labour’s first term of office was affecting Labour’s middle class voters. Paying for private health care and education puts a serious strain on their budgets and an adequately funded and efficient public provision is fundamental to their needs. This budget concentrated on health. The coming spending review will handle education. Labour had already increased health spending by nearly a third after the first few ‘prudent’ years but it barely addressed the problem. In this budget, following the recommendations of the Wanless report, Labour announced a further £40bn extra funding over five years – an average annual increase by 7.4% in real terms from £65.4bn this year to £105.6bn in 2007-08. This would bring health spending to 9.4% of GDP, below the German level of over 10% but above the EU average. The government will set up a new bureaucracy of inspectorates to conduct ‘independent’ audits and inspections to ensure the money is well spent. This will create yet another layer of employment for middle class placemen and chancers avoiding the hard grind of targeted delivery of ‘value for money’ frontline services in hospitals, schools, colleges and other public services.

This £40bn extra funding over five years will still not be sufficient to address the years of decline in the NHS. NHS trusts estimate that they will need a 6.6% a year increase alone to stand still, to deal with pay awards, extra staffing, rising pharmaceutical prices and new technologies. There will be a shortfall of 25,000 doctors over the next 20 years despite increases in medical training. So the annual 7.4% rise will not go very far. In addition with some 42 Private Finance Initiative (PFI) hospitals planned – 23 already signed – and many other projects within the NHS handed over to expensive PFI investment, some £5bn a year will need to be paid in PFI fees from current budgets to fund these projects. Finally, the setting up of independent foundation hospitals, the introduction of a US style payments system with money following patients, the encouragement of more and more private providers will undermine the co-operative pooling of resources between hospitals, rapidly creating a two-tier system already experienced in education. Hardly a ‘kiss of life’ for the NHS.

Making the poor pay
Improving public services following years of neglect by both Tory and Labour governments would require reversing the tax give-aways to corporations and the middle and upper classes over the last 23 years. This Labour government will not do this because of its neo-liberal economic agenda and its need to keep the middle and upper classes on board. That is why Labour has consistently cut the taxes of corporations and shareholders, a process that continued in this budget, on the spurious grounds that it promotes enterprise. That is why it made a commitment not to raise the standard or upper rate of income tax. But raise taxes it must if more funds are to be found for public services.

Having severely limited its options, Labour raised employee and employer national insurance contributions (NIC) by 1% on all incomes above the £4,615 threshold, so reinforcing a system that already takes proportionally more in tax from lower income households. People on about twice the average income and above pay a much lower proportion of their income in NICs than those on lower incomes. This is because on any addition to wages above £30,940, only 1% NICs will be paid (before this budget it was zero) instead of the standard 11%. Adding to the inequality is the fact that no NICs, including the additional 1%, are paid on unearned income from investments and shares. Finally, the freezing of the personal tax allowance at £4,615 for 2003-04 will force even more low paid workers into the tax net.

Labour has countered the rise in NICs for some working class and even middle class families with children, in which at least one adult works, through its reactionary and ideologically driven tax credits. These are means-tested benefits, incredibly difficult to understand, involving tedious application forms and a bureaucratic nightmare to administer. So far, around a third of those eligible have failed to apply for existing tax credits, saving the government some £1bn. Child tax credits (CTC), an amalgamation of the earlier working families and child tax credits, will affect over one third of working households, around 5.2m families.

It will even apply to families with children with household incomes up to £58,000, and £66,000 in the first year of a child’s life, although only families with incomes below £13,000 will receive the maximum child tax credit. These tax credits represent the return of joint taxation assess-ment some 10 years after it was abolished.

In addition there is a working tax credit (WTC) paid on a sliding scale to families with or without children earning up to £14,000 a year – the maximum amount being paid to those earning up to £5,000. The latter is essentially a subsidy to employers who pay poverty wages and an incentive to workers to stay in such jobs. Not that those workers now have any choice. In this budget Labour announced that in 20 pilot areas the long-term unemployed would be forced to take minimum wage jobs or lose their benefits. Work for a pittance or face sanctions. In 1999 Labour raised the maximum period of benefit loss from four weeks to six months. 19,344 people had their benefits cut in 2000-01 (latest figures). The situation can only get worse.

These tax credits2 embody the distinction between the ‘deserving’ and ‘undeserving’ poor at the heart of Labour’s reactionary ideology. Millions of poor people of working age who do not work will not benefit from the tax credits. As a result inequality will continue to grow with state benefits rigidly tied by Labour to price rises and not the faster growing earnings.

Despite nine years of economic growth Labour has not reduced inequality in Britain at all. If anything it has grown since 1997, as the top 40% of the income distribution increased their share of total income from 66% to 67%. Latest figures show that 13.7m people still lived in poverty (in households having below half the average income) in 2000-01, 24% of the population, only 400,000 less than 1996-97 and 400,000 more than in the 1994-95 and 1995-96 under the last Tory government. Labour has failed in its target of lifting 1.2m children out of poverty. There were still 4.1m children, 32% of all children, living in poverty in 2000-01, a fall of only 400,000 on 1996-97 and a rise of 100,000 on 1994-95. An appalling record from a reactionary government.

David Yaffe


1. From Gordon Brown’s budget speech 17 April 2002 online at www.hm-treasury.gov.uk for this and all quotes from the speech. Earlier quotes are taken from previous budget speeches, see Fight Racism! Fight Imperialism! 160 April/May 2001 for references.
2. In addition there is a separate pensioner tax credit announced in the last budget. It was introduced to avoid giving pensioners an adequate basic pension tied to the growth of earnings.

FRFI 167 June / July 2002

 

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