British economy running on empty
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- Created: Friday, 10 May 2024 14:15
- Written by James Martin
In his Spring Budget Chancellor Jeremy Hunt chose to bribe, as best he could, the enormous number of discontented voters threatening to get rid of the government in this year’s general election. His room for manoeuvre is restricted by a stagnant economy, large state debts, and deficits in Britain’s foreign trade account and its negative long-term international capital movements. Growth in the domestic product (GDP) has been near zero since early 2022 with little margin for electoral giveaways. The question for the Chancellor was how to win back votes. So, against all institutional advice, in a political ruse, he announced further cuts to National Insurance Contributions (NICs) on top of those announced in November.
In reality NIC cuts mean correspondingly deeper austerity in public services. From 6 April, NICs are reduced from 10% to 8% for employees, and 8% to 6% for the growing number of desperately self-employed. In the process Hunt declared his wish to abolish NICs, deceptively labelling it a ‘double tax’, in fact a tax originally created to meet the demands of the working class for an NHS and better pensions. His aim reflects the long-term pressure by capitalism to remove every trace of state compromise between capital and labour and to throw every expense facing the working class directly onto the family – epitomised and anticipated by Margaret Thatcher’s brutalism: ‘Who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people and people look to themselves first’. This is part of the continuing cold-blooded strategy to force pension provision into the private sector, and destroy public health care. Businesses would then keep more of the surplus value extracted from the working class, while workers would live shorter, sicker lives.
The NIC reductions, affecting 27 million employees, were key to the reduction of the government’s net income in 2024-25 by about £9bn. Freezing fuel duty loses a potential £1bn tax income. The tax cuts were in part funded by putting up air-passenger duty for business travel, in a nervous nod to environmental concerns, and the adoption of Labour’s promise to extend the windfall tax on oil and gas companies, upsetting energy minister Andrew Bowie. Hunt stuck with plans for an overall 1% real-terms increase in day-to-day departmental spending from 2025-26. However, government departments such as local government, transport and higher education still face real-terms cuts of about 2.3% per year. Despite tax reductions worth about £14bn for 2024-25, small by recent standards, the ratio of total taxes to GDP is expected to reach its highest since 1948 in 2028-29. This engineers deflation. In sum, overall state spending will not change in real terms for the rest of the decade, and its distribution will be at the expense of public services.
Hunt’s NIC ‘give-aways’ take up most of the Treasury’s so-called fiscal ‘headroom’. The ‘headroom’ is the current budget surplus needed to meet Hunt’s ‘fiscal rule’, the reduction of state debt as a proportion of the GDP over the next five years. This ‘headroom’ is now one of the narrowest budget margins, some £8.9bn this financial year, compared to past averages of about £26bn. Hunt is playing an electoral game, with the near certain result that a new government will have to tax more in 2025-26 or impose even greater spending cuts.
With economic growth stymied, a further collapse of the NHS and Local Authority budgets is certain unless taxes and/or state borrowing are raised. As The Economist noted (25 March 2024) ‘Current spending plans imply implausibly sharp cuts to police, the courts and local government by 2028-29’. A surge of discontent will be inevitable. These include both judges preventing presentation of defence evidence in courts by climate protesters and their severe sentencing. Following the failure of the trades unions’ willingness and capacity to resist the passing of the Trade Union Act 2016, the government ruthlessly pushed ahead with the Police, Crime, Sentencing and Courts Act 2022, the Strikes: Minimum Service Level Act 2023, The Public Order Act 2023 and the Criminal Justice Bill 2024. That the courts are now backlogged due to budget cuts, is of quite secondary consequence, since the bourgeois courts regularly deny justice by delaying it.
Unpopular as a Minister of Health (2012-18), Hunt hypocritically pleaded family affection for the NHS, then announced that it (with other ministries) would receive only a 1% increase ‘in real terms’ next year, an increase well below what is needed to meet the growing backlog of cases from a poorer, sicker and older working class. Hunt then trumpeted the Office of Budget Responsibility’s (OBR) prediction of 1.9% growth in GDP for 2025-6, which in fact would mean an average ‘GDP per person’ only at pre-pandemic levels – with optimistic predictions of 2% growth for 2026-7. To camouflage the continuing break-up of the NHS, Hunt extolled the benefits of Artificial Intelligence, and how this would save us many inconveniences at some future date, supposedly raising labour productivity by 1.9% a year. No doubt this would allow further reduction of NICs and promote the further insidious privatisation of internal NHS services. In any case the £3.4bn NHS technology investment announced must be paid by the next government.
NICs again
The economy relapsed into recession last July. The limited room for a Budget giveaway led all observers to warn against it. Hunt calculates that the net tax cuts announced in the Budget will be retrieved by an estimated £27bn of tax rises to come from last year’s announcements, with an additional £19bn coming in later because of the effect of frozen tax thresholds. Still, the estimated final reduction in the tax to GDP ratio in 2028-29, the final year of Hunt’s forecast, is only a tiny drop, from 93.2% to 92.9%.
Hunt has gambled on the persistence of inflation, even at lower rates, to take more tax, as frozen income tax thresholds catch more workers in higher marginal tax brackets, as they demand money wage increases to rebuild real consumption. This ‘fiscal drag’ hits hardest the bottom half of earners in the country, those earning £26,000 or less a year. However, as more workers in the top half of the working population also enter the 40% threshold, some attempt had to be made to keep the political loyalty of the labour aristocracy. Thus, the threshold to pay back child benefit will be raised to £60,000 annual earnings, increasing to full repayments at £80,000. Similarly, alcohol and fuel duty remain unchanged, and the VAT threshold for small businesses raised to ease the effect of inflation.
Average wages are about 4% lower (March 2024) than they were in 2019. In fact, wages were the same in 2023 as in 2006, just before the great financial crisis. If the government retains office after the election, Hunt imagines total spending on public services would rise by 1% a year in real terms, which given Britain’s growing and ageing population, means no improvement at all per person.
The complaints against the Prime Minister Rishi Sunak’s wife’s tax avoidance, retaining her non-domicile tax privileges whilst living in luxurious comfort in Britain, led the government to revenge itself on the critics. ‘Non-doms’ who currently pay tax on only what they remit to Britain, will now have to pay no tax at all for four years after arriving. Hunt brazenly approved this ‘more generous’ regime.
This bribe fits the desperate need to encourage global billionaires to place more capital in Britain as it has shifted definitively to being a net debtor nation. It is vital to attract and keep foreign investment to maintain capital accumulation within Britain, if exports of capital to more profitable destinations are to be maintained. The enormous damage done to the economy by Brexit and the weakening of the London Stock Exchange as companies have left for New York or Amsterdam, had prompted Hunt to extend the ISA schemes to investments in UK equity. Now £5,000 a year per person is allowed, on top of existing allowances, to prop up the enfeebled Stock Exchange system, in which over half of the stocks are now owned by non UK residents. Given the realities of the problem, this step has been dismissed by the financial press as completely inadequate.
Local government
Within a month of the November Autumn statement, the government had already been forced to agree to release £600m of emergency funding for councils in financial jeopardy, but by choosing to reduce NICs Hunt has now guaranteed the further collapse of local services across England. The existing dilemma facing the political class will not go away: either pay off individuals, promoting self-interest to win votes, or pay to meet broader social needs – antagonistic to party ideology – to win votes. Plumping for the former, public sector capital spending will be frozen in cash terms for 2024-5. The Chancellor’s plans mean no increase in such spending per head until 2030.
Half the local authorities in England are at the point of insolvency. To prevent immediate collapse permission for increases in council taxes of 4.99% for 2024-25 was given in December, along with a 10% to 15% increase for six councils which had already declared insolvency. Local authorities will still be faced with handing over more public property to private owners, as well as cutting local services.
IMF warnings
In January, Hunt was warned off tax cuts by the IMF and the financial press. The British economy, despite the belief of the most deranged section of the Tory party, is in no state to offer cuts in tax. Servicing the national debt now costs 3-4% of GDP, against 1-2% before the pandemic. Businesses are demanding more central spending to repair social infrastructure, not less. The cuts now made are aimed at bribing voters. Shamelessly, Labour officials have said that the party could not see anything in the Budget that it would oppose, backing the NIC cuts, rather than demand spending to save Local Authorities and the NHS. In fact, Labour is almost certain to have to make more cuts to pay for Hunt’s reductions if it wins the election. Starmer’s immediate response to the Budget statement was threateningly to state that ‘the UK’ deserves a government ‘ready to take tough decisions’.
The Ukraine war and the renewed aggressive posture of British imperialism require the government to raise defence spending from about 2% to 2.5% of GDP. Taxes are now over 36% of the GDP, the highest since 1949. The OBR has supposed that this figure will rise to 37.1% in 2028-29. The Economist newspaper responded bluntly ‘The [government’s] policy seems affordable only because of projections for future public spending that look less like a plan than a fantasy’. (6 March). The Financial Times wrote that Hunt ‘has had to stretch economic reality’ to present a budget ‘that cuts taxes…[and]…meets his fiscal rule’. (7 March)
The real issue is not the fantasies entertained by the Chancellor, but rather that the British ruling class must press on in its campaign to further impoverish and divide the working class, butter up the middle classes, attract foreign investment and reinforce its international sources of income. This is an increasingly bitter battle, full of contradictory pressures, which can be resolved only when the entire social structure is transformed by the working class, in its own interests, by its own political party.
James Martin
FIGHT RACISM! FIGHT IMPERIALISM! 299 April/May 2024
