To the resounding cheers of the expensively-attired New Labour clones, Gordon Brown, adopting the air of a Victorian mill owner, declared his budget to be a ‘prudent’ one: ‘prudence for a purpose – to meet the people’s priorities’.1 But which people? A closer examination of the budget shows that those who really benefit are New Labour’s people, representatives of banking and multinational capital, the middle classes and the privileged sections of the working class that formed the coalition of forces that brought New Labour to power. The small inducements given to sections of the poor working class were indeed ‘prudence for a purpose’ – to force the growing numbers of poor working class people into the workforce as cheap and ‘flexible’ labour.2
More prudent than the Tories
Brown’s ‘unshakeable commitment to prudent monetary and fiscal rules’ has already led to a ‘fiscal tightening’ of £17bn, a reduction of public borrowing of more than 2% of national income since Labour came into office. Labour’s spending this year is even undershooting the target inherited from the Tory government for 1997/8 by £1.5bn. This process of ‘fiscal tightening’ will continue and the government plans to run a budget surplus from the year 2000 onwards, determined to pay back nearly one quarter of the national debt. This is the sharpest reduction in borrowing since the disastrous Tory budget of 1981. It is happening because it serves the interests of the City bankers and multinational company representatives at the heart of Labour’s coalition.
All this is occurring with a National Health Service in desperate financial straits: 40% of NHS Trusts were on the verge of bankruptcy 15 months ago, and waiting lists are already up 108,000 from those inherited from the Tories. Brown boasted that his prudent management has allowed him to add an extra £500m to the NHS budget next year. This is totally inadequate. Spending in real terms will rise by only 2.3% in 1998/9, not even matching the annual rise of 2.7% since the NHS was created and well below the 3% growth needed for the service to simply stand still, let alone restore some of the real cuts under the Tories. In every day language this means that tens of thousands of people suffer pain or needlessly die due to lack of adequate resources for the NHS.
In addition, Labour’s fiscal ‘prudence’ extends to education, housing, transport and local authority expenditure, forcing millions of working class people to confront deteriorating services in every walk of their lives. Labour’s priorities are clearly not the people’s but the bankers’ and corporate managers’ now involved in every aspect of government. Barclays Bank, through its chief executive Martin Taylor, is a major influence on Labour’s tax and benefits policies; British Petroleum, through its chair Lord Simon, on its trade policies; PolyGram, through its chief executive Stuart Till, on its policies towards the film industry and a multi-millionaire beneficiary of an offshore trust, Paymaster General Geoffrey Robinson, on its policies against tax avoidance. More recently another banker, David Edmonds, director of NatWest Bank, was named the new Director General of Telecommunications (Oftel) and Sir Colin Marshall, chair of British Airways, as the chair of a task force investigating green taxes to cut down energy use by industry. Prime Minister Blair himself has now taken to representing Rupert Murdoch’s global interests with the Italian government.
Labour lays claim to having found that much-sought-after third way, ‘free from the old ideas of state control and laissez faire’. Its new ambition will encourage ‘enterprise and entrepreneurship’, as well as ‘enterprise and fairness’ to meet ‘the ambitions of the British people’. The budget demonstrates what this really means.
The party of business
To ‘help businesses to invest and grow’, Labour reduced corporation tax by a further 1p, to 30p for larger firms and 20p for small businesses, a saving to business of £1.5bn each year. Last year’s Labour budget had already reduced it by 2p. Britain, boasted Brown, now has ‘the lowest main rate of corporation tax of any major industrialised country. The lowest in the history of corporation tax in Britain’. He committed Labour to a main rate of corporation tax of 30p or less for ‘the rest of this parliament’. Capital Gains Tax will fall progressively from 40% to 24% for non-business assets held for ten years, and to 10% in the case of part ownership of businesses – ‘the lowest rate ever achieved’.
Barclay’s Martin Taylor was behind the biggest reform of National Insurance Contributions (NICs) for 20 years. It will cost £1.4bn a year from April 1999. The changes make it cost-effective for businesses to take on greater numbers of low-paid workers by raising the starting point of NICs for employers in April 1999 to that of income tax – from £64 to £81 a week, abolishing the ‘entry fee’, that is payment on the first £81. In addition, the present rising steps in employer’s NICs will be replaced by one rate of 12.2%. The starting point for workers’ contributions will remain unchanged at £64, with the ‘entry fee’ abolished from April 1999. Some time later it will be raised to the starting point of income tax. The cost of hiring a worker on half the average wage will fall by more than £250 a year. This will open the way for a relatively low minimum wage of £3.50 an hour. These changes will lead businesses to replace high-waged workers by lower-waged ones. To ensure this is possible it will be necessary to have a readily-available supply of cheap labour, a reserve army of labour which can be forced into low-paid jobs. Unsurprisingly, there has been no reform of the cut-off point at which the well-paid cease to pay further contributions. This leads on to the tax and benefit changes.
Prudence for the poor
Labour’s last budget produced the finance for the ‘New Deal’ Welfare to Work programme with its four options open to young people on benefits. To ‘unreasonably’ refuse such options will mean a cut in benefits. This laid down the groundwork for forcing young people on benefits into the labour market as a cheap labour force.3 This budget reinforces this programme with small inducements to those with children to accept jobs paying poverty wages. The carrot to follow the stick.
The Working Families Tax Credit (WFTC) will replace Family Credit at an additional cost of £1.5bn a year. It is effectively a subsidy to employers to allow them to pay poverty wages and an incentive to workers to stay in such jobs. It consists of a basic credit of £48.80 for those working at least 16 hours a week, with additions for children depending on age, and a supplement for working more than 30 hours. The income level above which benefits will be withdrawn will be raised from £79 to £90 a week, and the rate at which benefits will be withdrawn will be reduced from 70p on every extra pound earned to 55p. This, however, increases to 95p for those also claiming housing and council tax benefit. It will begin in October 1999 and can be paid directly to the mother as now or through the pay packet from April 2000.
To encourage parents with children to accept jobs paying poverty wages, Labour will introduce a childcare tax credit for low-paid families. It will cover up to 70% of the costs of childcare for children under 11, with a maximum of £100 a week for the first child and £150 a week for two or more children. Costing £1bn, it can only be introduced in April 2000 because of the lack of registered childcare places. At present only one childcare place exists for every nine children under the age of eight. As a result of these changes, private childcare facilities, staffed by barely-trained, low-paid childminders, will undoubtedly mushroom as the government tries to solve the very real problem of childcare, on the cheap.
The political fallout from the vicious reduction of lone parent family benefits in last year’s budget has forced a much larger than usual increase in child benefit of £2.50 a week from April 1999 for the oldest child. This will be financed mainly from a reduction of the married couples tax relief from 15% – 10%. In addition, means tested benefits for all children under 11 will be raised by £2.50 from November this year. What all this shows is that the removal of the lone parent supplements was a nasty cost-cutting exercise which has not been and will not be fully restored.
Brown makes great play of the fact that, as a result of his measures, families with two children and with one adult working full-time will have a guaranteed income of £180 a week. And the same working family will not pay any income tax until they earn over 50% of average earnings, or around £220 a week. What he fails to point out is that families who receive 50% or below average household earnings are living under the official poverty line.
But alleviating poverty is not his intention. The worst off as a result of Brown’s budget are those who, for one reason or other, continue to live on state benefits which are fixed in real terms: pensioners already living on the lowest state pension in Europe; substantial numbers of the long-term sick and disabled; many lone parents with young children and, of course, the unemployed who, despite harassment and victimisation from the ‘New Deal’ policemen, simply cannot find work. The small amounts spent on alleviating poverty for families in all this tinkering show this too. Overall those households without children lose about £1,050m, those with gain £930m, and those in the top half of the income scale lose £800m, while the bottom half gains £680m.
Brown is concerned primarily to cut the costs of benefits by forcing the working class poor into accepting low-paid work. He puts this very bluntly: ‘And because in future work will pay, those with an offer of work can have no excuse for staying at home on benefits.’ Barclay’s Martin Taylor presses this point home when he makes clear that in order to claim out-of-work benefits ‘both partners in a childless couple should be required to present themselves for work.’ (Financial Times 18 March 1998)
Aid for the middle and upper classes
‘Middle England can feel pleasure that low income families are getting help without the pain of footing the bill’, was how the Financial Times (21/22 March 1998) assessed the political impact of the budget. Brown was effusive in reassuring the middle classes. ‘We will not raise the basic or top rate of income tax…not just for one year, but for the parliament.’ The middle class subsidy of £10bn each year through tax incentives on pensions, PEPs and TESSAs will continue. Brown reversed the last budget’s decision on the new individual savings accounts and will allow the 700,000 savers with more than £50,000 invested in PEPs and TESSAs to continue to receive tax-free benefits. As a result some £770m is expected to be invested in PEPs before the end of the tax year. Finally all legal means for the well-off to avoid inheritance tax remain in place, with the threshold for paying the tax raised by £8,000, from £215,000 to £223,000. Little wonder only 17,500 estates a year contribute to this tax. Brown cannot afford to alienate the middle and upper classes as he disciplines and cajoles the poor working class off state welfare into the workforce as a cheap labour force to serve the interests of capital.
With manufacturing industry already in a recession, Labour is well aware that, as the British economy deteriorates, all its tinkering with incentives to work could be of little consequence as Welfare to Work is swept aside on a tide of growing unemployment. When this occurs, and the poor working class begins to fight back, Labour needs to ensure that the coalition of forces that elected it to power still remains on its side and intact. That was the real intent behind both this Labour budget and the last.
Notes
- Quotes referring to Labour policy, unless stated otherwise, are from Brown’s budget speech.
- See FRFI’s analysis of Labour’s first budget in FRFI 138 August/September 1997 where the principles behind Labour’s economic programme are discussed in more detail.
- Ibid.
FRFI 142 April / May 1998
