Fantasy economics for a decaying economy

George Osborne

Britain is ‘walking tall again’ claimed the Conservative Chancellor, George Osborne, in opening what was a blatantly political Budget speech.1 It was aimed at blunting the Labour Party’s attack on the coalition government’s economic and social policies in the few weeks left before the 7 May general election. Britain, he said, ‘is growing, creating jobs and paying its way. We took difficult decisions in the teeth of opposition and it worked’. He taunted Labour throughout the speech: ‘The sun is starting to shine – and we are fixing the roof’; ‘Out of the red and into the black – Britain is back paying its way in the world’; and ‘Living standards on the rise. Britain on the rise … The Comeback Country’. The speech was littered with election slogans interspersed with carefully selected economic data. David Yaffe reports.

The most remarkable reversal of policy in this Budget from last December’s Autumn Statement (just over three months ago) was the decision to cut the planned budget surplus in 2019-20 from £23bn to £7bn. It was conjured up in an attempt to undermine Labour’s contention that the Conservatives were intent on reducing the state sector to levels last experienced in the 1930s. The new target will now see state spending as a percentage of GDP at the level of the year 2000, when Gordon Brown was Labour Chancellor.

Public debt under control?

Osborne claims that public debt is now under control. The deficit, he says, is half that which the coalition government inherited. This is the kind of half-truth that runs throughout his Budget statement. It will fall from £153bn in 2009-10 to a forecast £90.2bn in the current tax year. It is only down by half as a share of GDP, from 10% to 5%. The intention of the coalition government, however, was to ‘eliminate’ the deficit by the end of this parliament. In this it failed, despite the brutal austerity measures imposed on the vast majority of working people. It is only the sales of some £18bn of assets acquired during the banking crisis – a large number of mortgages that the government has owned since the bank bailouts and a new batch of Lloyds bank shares – that has allowed Osborne to opportunistically announce a fall in public debt as a share of GDP from 80.4% in 2014-15 to 80.2% in 2015-16. In the long run such sales will make no difference to the size of public debt, they are capital transactions, and the state will lose out from mortgage repayments and dividend income it would otherwise receive.

The deficit, Osborne moralises, is nevertheless still far too high and must come down. He plans massive spending cuts to reduce it. The deficit is to fall to 4% of GDP in 2015-16; then down to 2% the following year; and down again to 0.6% the year after that. In 2018-19, Britain will have a budget surplus of 0.2%; followed by a surplus of 0.3% in 2019-20. Public debt, on these plans, will fall from 80.4% of GDP in 2014-15 to 71.6% of GDP in 2019-20, a somewhat limited achievement, given the devastation and upheaval of the policies needed to achieve it.

These plans require the Chancellor in the new parliament to find additional spending cuts of around £30bn by 2017-18. Then it is intended to take off the brakes and deliver what the Office of Budget Responsibility (OBR) has called ‘the biggest increase in real spending for a decade in 2019-20’. Its chairman, Robert Chote, annoyed the Treasury on Budget day when he called this a ‘rollercoaster’ profile of public spending. The Conservative Party has eyes on the next but one general election. Osborne says he is ‘clear exactly how that £30bn can be achieved’. £13bn is to come from government department spending cuts, £12bn from welfare savings, and £5bn from clamping down on tax avoidance. The plans require a scale of spending cuts in 2016-17 and 2017-18 far greater than the coalition government has achieved so far. Given the damage the austerity policies have already caused to public services, these future plans are not politically and socially credible.

Labour’s public spending target of only reaching current account balance by 2019-20 gives it a fiscal leeway of about £32bn over the Conservatives. It can avoid cutting welfare and departmental spending as fast and as deep as the Conservatives. No party has so far spelled out how the vast majority of new spending cuts will be implemented or whether they would raise taxes. They want to avoid doing this until after the election. The division between departmental spending cuts, welfare cuts and increased borrowing over the next parliament is something the main pro-austerity parties – Conservatives, Labour and Lib Dems – are very reluctant to reveal. According to emails recently leaked to the BBC, taxing disability benefits, limiting child benefits to two children and restricting the carer’s allowance to those on universal credit are among the vicious measures being drawn up by Conservative officials to meet planned welfare cuts. The Conservative Party says that it is still to decide where the axe will fall.

Bribes for critical voters

The OBR believes that the government policy decisions in this Budget are unlikely to have any material effect on the economy. The rhetoric and sloganeering in the Budget speech are hardly convincing. That is why Osborne had to use what minimal resources were available to appeal to traditional Conservative supporters and wavering voters. A leaked Conservative £1m inheritance tax give-away was not in the Budget as it was blocked by the LibDems.

A rise in the tax-free allowance in 2016-7 and 2017-18 for both basic and higher rate (40%) taxpayers will benefit better-off voters but will do nothing for low earners and most part-time workers with earnings below the basic tax free allowance of £10,600. Further gains for some 17 million savers, including pensioners with substantial savings, were given in the form of a £1,000 tax-free allowance for basic rate taxpayers and £500 for higher rate (40%) taxpayers. Many will benefit from the change in rules for ISAs (tax-free savings accounts) from the autumn when savers will be able to withdraw and replace money held in their ISA without eroding the annual subscription limit, which in 2015-16 will be £15,240. All these measures are designed to appeal to traditional Conservative voters.

First-time buyers will get up to £3,000 to help them get on the housing ladder through a Help-to-Buy ISA. It represents a 25% subsidy to first-time buyers. A maximum initial deposit of £1,000 can be made with a maximum monthly contribution of £200. It will take four and a half years to build up £15,000, or a 10% deposit on an average-priced British home. This latest housing subsidy can only fuel further increases in house prices and could make it even more difficult for first-time buyers to afford a house by the time they have saved an adequate deposit. Good propaganda but it makes little economic sense. Cutting the deficit plays second fiddle to winning the election.

There were additional measures designed to use funds targeted by the Labour Party for policies it had already announced, such as the cut in student tuition fees and financing social care, should it win the election. The lifetime pension allowance is to be reduced from April 2016 from £1.25m to £1m, saving around £600m. The bank levy is to be increased from 0.156% to 0.21% of Banks’ balance sheets from 1 April 2015. This will raise an extra £900m a year and be used by the Conservatives to finance their own tax giveaways.

Budgeting to win an election

Most of the Budget attempted to emphasise what the Conservatives regard as their important achievements, which would be undone if other parties were to defeat them. In doing this Osborne constantly overplays his hand. Osborne claims that by the end of 2015 ‘living standards will be higher than when we came to office’. That all depends on how you measure them. Osborne chooses to use Real Household Disposable Income per capita. On this measure, however, it will only be true at the end of 2015 and only with a 3.1% increase in living standards this year. The Resolution Foundation argues that this measure is flawed as it includes items that are not usually considered as income ‘such as imputed rents, as well as incomes of universities and trade unions’. Its own analysis suggests that average household incomes remain 4% below their pre-downturn peak and still some way below their 2010 level. The Institute for Fiscal Studies (IFS) said living standards are still more than 2% below the 2009-10 level (The Guardian 19 March 2015). Finally Ed Balls, Labour’s Shadow Chancellor, says that on the usual measure, the ONS household income survey, households are now on average £1,127 worse off than in 2010 (Financial Times 19 March 2015) .

Osborne smugly informs us that with 2.6% growth, Britain grew faster than any other major advanced economy in the world last year. ‘That is 50% faster than Germany, three times faster than the eurozone – and seven times faster than France.’ But there was no mention of the fact that the level of GDP is nearly 5% lower today than the OBR’s initial forecast in 2010, or that Britain’s growth in the last quarter of 2014 was behind that of Germany and Spain. The OBR says that the modest upgrade in its forecast for growth announced in the Budget has nothing to do with the government’s economic management or falling oil prices, but was due to higher than expected immigration.

Osborne proclaims that Britain has the highest rate of employment in its history and there are a record number of people in work. He fails to tell us that 4.6 million people are self-employed, accounting for 15% of those in work, the highest figure for 40 years. Millions of workers are in insecure jobs. Two-thirds of those who found work are taking jobs for less than the living wage.

As has been argued in previous issues of FRFI, Britain’s sham recovery has been driven by debt-fuelled consumer spending and inflated house prices. Claims of ‘rebalancing’ the British economy, away from consumption towards exports and investment, have no substance. The economy is still around a sixth smaller than what it would have been if pre-crisis trends had been sustained. The employment performance has come at the expense of a collapse of productivity growth. The UK’s real GDP per head is 32% below that of the US and well below that of Germany and France. The average British worker produces less in five days than the French worker produces in four. Unsurprisingly the word ‘productivity’ found no place in the Budget speech.

This Budget, says Osborne, ‘takes another step to move Britain from a country built on debt, to a country built on savings and investment’. This is fantasy. In the third quarter of 2014, Britain’s balance of payments deficit reached a record level of £27bn or 6% of GDP. Net trade, according to the OBR, will make no positive contribution to growth in any of the next five years. The ratio of household debt to household income is expected to reach a record level of 171% by 2019, higher than the pre-crisis peak of 168% in 2008. Infrastructure investment has fallen 8.5% since 2010, and capital spending, which includes new projects and maintenance, has shrunk by a third since the coalition came to power in 2010. Business investment fell in the last three months of 2014. Finally, public sector investment has halved as a share of GDP since 2008-09. What Britain is in fact facing is a permanent low-pay, low productivity and debt-fuelled economic ‘recovery’.2 These are the characteristics of a decaying capitalism. Whichever party wins the election, they are not going to change this.

1 All quotes, unless otherwise indicated, are from the Budget speech.

2 A lot of information in this article is taken from the Financial Times Budget 2015 on 19 March 2015 and The Guardian Budget Special on the same date.

Fight Racism! Fight Imperialism! 244 April/May 2015

 

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