Budget 2016 - Bullish Chancellor blown off course

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There is usually little connection between Tory Chancellor George Osborne’s exaggerated claims for his management of the British economy and the stark, grim reality. His eighth Budget was no exception. He started by telling us that the economy was set to grow faster than any other major advanced economy in the world; was delivering the highest employment in our history; and the public sector deficit was down by two thirds, falling each year, and on course for a surplus. The British economy, he asserted, is stronger and growing because the government confronted our country’s problems, didn’t seek short-term fixes and pursued a long-term economic plan. As he delivered his Budget speech on 16 March these claims began to unravel – the flaws were evident even before he finished talking. David Yaffe reports.

In this Budget, says Osborne, we choose the ‘long term’ and put the ‘next generation’ first. These expressions occur 18 times in his speech! Cheap and empty rhetoric used to conceal unresolved problems. While in his Autumn Statement (see FRFI 248), less than four months before this Budget, he told us that ‘our long-term economic plan is working’, barely a month and a half later the emphasis had dramatically changed. On 7 January he told business leaders in Cardiff: ‘Anyone who thinks it’s mission accomplished with the British economy is making a grave mistake.’ His excuse: ‘Last year was the worst for global growth since the crash and this year opens with a dangerous cocktail of new threats from around the world.’ He repeated this warning in his Budget speech. ‘I must tell the House that we face such a challenge now’ of turbulent financial markets, low productivity growth across the west and a weak global economy. He insisted that the government must continue along the path it has followed over the last five years to deliver its long-term economic plan. That, he said requires ‘sound public finances to deliver security’, and ‘lower taxes on business and enterprise to create jobs’. Pursuing that end was almost his undoing.

Immediate political considerations had to be taken into account in drawing up this Budget. The Conservative Party is fundamentally split on the issue of Britain’s relation to Europe. Prime Minister, David Cameron, had demanded a non-controversial Budget that didn’t inflame Tory MPs or voters before the 23 June referendum on Europe, which an ally of Cameron called ‘the only game in town’. Given the real state of the British economy a non-controversial Budget proved to be impossible.

Osborne was forced to hold back from pension tax relief reform, which would have raised significant revenues, at least until after the EU referendum, because it would hit higher rate taxpayers and potential Tory voters. But he couldn’t resist irritating eurosceptic MPs when telling Parliament that not only are the forecasts by the Office for Budget Responsibility (OBR) today predicated on Britain remaining in the European Union, but also that the OBR had said that: ‘There appears to be a greater consensus that a vote to leave would result in a period of potentially disruptive uncertainty while the precise details of the UK’s new relationship with the EU were negotiated.’

From windfall to ‘black hole’

OBR forecasts for the economy cannot be relied on. They are nearly always too optimistic and allow Osborne to exaggerate his ‘achievements’ in managing public finances and cutting the public sector deficit. In last November’s Autumn Statement the OBR conjured up a £27bn windfall available to the Chancellor for the next five years as a result of an over-optimistic assessment of the state of the British economy. This allowed the government to make a major U-turn on the very contentious cuts to working tax credits made in the July 2015 post-election Budget and which had been rejected by the House of Lords (see FRFI 248).

For this Budget the OBR is predicting that public finances will be £56bn weaker than expected over the next five years, more than reversing the £27bn windfall that the OBR had forecast less than four months earlier. The OBR has cut its GDP forecasts for the British economy by an average of 0.3 percentage points in each of the next five years. It has also cut the long-term growth potential of the economy, with negative consequences for living standards and public finances. At the root of the problem is the low productivity of the British economy. International comparisons of productivity for 2014 showed that Britain’s GDP per hour worked was lower than that of Germany by 36 percentage points, lower than the US and France by 30 and 31 percentage points and lower than the rest of the G7 countries by 18 percentage points – the widest gap since records began in 1991. The fact, unacknowledged by the Chancellor, is that his so-called ‘jobs miracle’ has come at the cost of dismal labour productivity and associated weak wage growth. Osborne is facing a fundamental structural crisis of British capitalism which the unending austerity at the core of his so-called ‘economic plan’ has significantly exacerbated.

The OBR has reduced its forecast rate of growth in labour productivity (output per hour) by 0.2 percentage points a year. Cumulated over five years this represents a serious downward revision to the level of potential output by 2020. The OBR expects UK productivity levels to be 6.2% lower in 2020 than it forecast in June 2010 and 2.5% lower than it forecast in 2014. Even these new forecasts appear too optimistic. The 1971-2007 average growth of productivity was 2.2% a year. The 2008-2015 average has been a dismal 0.3% a year. The latest OBR forecast is that productivity will rise from 0.8% this year to 2% by 2019, close to pre-crisis norms. This seems very optimistic. Small changes in productivity have a large impact on the growth of output. If, for example, productivity growth was 1% each year until 2020, potential output in 2020 would be 4% lower than the OBR now expects. That would leave the Chancellor not with his planned budget surplus but with a large fiscal deficit (Martin Wolf, Financial Times 18 March 2016).

Budget 20161

Two of the three self-imposed fiscal rules guiding the Chancellor’s economic plan were broken before Osborne fully laid out his new Budget measures. First, the welfare cap – the total amount that the government can spend on certain social benefits – was breached after the U-turn on cuts to working tax credits in the Autumn Statement. Second, his pledge to reduce public debt as a percentage of GDP each year came unstuck with the OBR’s reduced growth forecasts and increased borrowing over the next five years. He could not now break his final pledge to have a budget surplus by the end of this Parliament without totally losing his already shaky political credibility. Accepting his improbable assumption that tax avoidance measures would raise some £12bn over the life of this Parliament and taking into account £3.5bn additional unspecified cuts to public services, the prognosis was unpromising. The borrowing forecast had been revised up from £49.9bn to £55.5bn for 2016-17 and for every other year until 2019 when Osborne conjures up a scarcely believable £10.4bn budget surplus for 2019-20.

He achieved this by moving capital spending forward to the next three years, taking projected spending out of 2019-20, and shifting one-off corporation tax receipts of £6.3bn back so that they fall into that year. With such actions a £21.4bn deficit in 2018-19 is transformed into an improbable £10.4bn surplus in 2019-20. ‘It felt like watching a bloke on the pavement with an upturned milk crate doing a three-card trick’ said one commentator on Osborne’s performance (Anne Perkins, The Guardian 17 March 2016).

Central to Osborne’s ‘economic plan’ is a £12bn cut to the welfare bill. The U-turn on tax credits had left a £4.4bn hole in his Budget and so the intolerable cuts to disability benefits of more than £4bn over the next five years became central to his overall calculations. This was almost to be his undoing in the context of a Budget offering considerable giveaways to businesses, investors and higher paid earners.

Corporation tax is to fall from 20% to 17% by 2020. The threshold for small business rate relief was raised from £6,000 to £15,000 from April 2017, taking 630,000 companies out of paying business rates and costing £7bn over the next five years. Capital gains tax, paid on the profits from asset sales, was reduced from 18% to 10% for basic rate tax payers and from 28% to 20% for higher rate taxpayers. There are to be two new tax-free allowances for trading and property income for so-called ‘micro-entrepreneurs’ each worth £1,000 a year.

The tax-free allowance for basic rate taxpayers was raised to £11,500 from next year and the higher rate threshold was raised to £45,000. These measures will mainly benefit higher paid workers. 43% of workers do not earn enough to pay any income tax (IFS) and around 80% of the gains will go to the top 50% of households with nearly half going to the top 20% (Resolution Foundation).

Duties on fuel, beer, cider and Scotch whisky were frozen again, with Osborne heeding the warnings from restive Tory MPs that they would fight any increase. In a nod to the ‘next generation’ Osborne introduced a ‘sugar levy’ on the drinks industry, starting in April 2018, to fund school sports. He also announced a new lifetime ISA for the under-40s. Savers who put in up to £4,000 a year will receive a 25% bonus. The bonus is paid until the age of 50. It can be used to buy property (under £450,000) or as a pension fund. Clearly this is something for the more privileged ‘next generation’.

Unexpected fallout

On 18 March Iain Duncan Smith, the Secretary of State for Work and Pensions, resigned over the proposed disability benefit cuts. This man, who throughout his years in government has carried out a relentless attack on the poor (see pages 1 and 2), ruining the lives of thousands of working class people, resigned because he thought the cuts to disability payments in the Budget were ‘a compromise too far’. What did he mean by this? Duncan Smith said that while the disability cuts ‘are defensible in narrow terms, given the continuing deficit, they are not defensible in the way they were placed within a Budget that benefits higher earning taxpayers’. He believed that the cuts demanded by Osborne were ‘distinctly political rather than in the national economic interest’. In saying this he calls into question the doctrine of austerity that has been central to Osborne’s ‘economic plan’ and, therefore, the Chancellor’s credibility and reputation in ‘managing’ the British economy.

Hours before Duncan Smith’s resignation Cameron was aware of a potential Conservative backbench rebellion over the cuts to Personal Independence Payments for disabled people of some £3,500 per person a year. Downing Street said it ‘remained committed’ to the changes but soon the Treasury halted the plans ‘saying it was not an integral part of the Budget’ (The Guardian 19 March 2016). A few days later Stephen Crabb, the new Work and Pensions Secretary, cancelled the planned £1.3bn a year disability cuts, and said that the government was not currently proposing further welfare savings.

Osborne came to the House of Commons on 22 March fighting to save his job. He admitted making ‘mistakes’ in attempting to cut disability payments but insisted ‘without sound public finances there is no justice’. He confirmed there were no further plans to cut welfare. Yet he insisted he would meet his commitment to make £12bn welfare savings.

This was hardly the non-controversial Budget Cameron had demanded. The so-called ‘economic plan’ has unravelled and with it Osborne’s credibility. Britain is left with the grim reality: an unbalanced, low-pay, low productivity, debt-fuelled economic ‘recovery’ from the 2008-09 financial crisis. Figures just released for the final quarter of 2015 show Britain’s current account deficit was at a post-war high, reaching £32.7bn or 7% of GDP, demonstrating the economy’s ever greater reliance on inflows of foreign capital. These are not the characteristics of a ‘stronger and growing’ economy, as Osborne so shamelessly claims, but of a parasitic and decaying capitalism.2

Fight Racism! Fight Imperialism! 250 April/May 2016

1. A lot of information in this article uses material from the Financial Times and The Guardian Budget commentaries 17 and 18 March 2016.

2. See David Yaffe ‘British economy: a weak link in the imperialist chain’ in FRFI 248 December 2015/January 2016 at http://tinyurl.com/homqlw7 on our website.