|SocialismToday Socialist Party magazine|
Brown’s budget & the British economy
MEDIA ANALYSTS heaped praise on Chancellor Gordon Brown following his eighth budget statement to parliament on 17 March. ‘A remarkable achievement’, declared the Daily Mirror. He ‘confounded them all’, was the verdict of the Financial Times.
Brown’s ‘achievement’ lay in producing a budget that was greeted with relief in the boardrooms of the top companies. Corporation tax will remain at the level (30%) that New Labour reduced it to soon after being elected. At the same time, civil service workers are being asked to pay for increased health and education spending, by suffering massive job losses, cuts and relocation.
Before budget day, there was speculation that something might be done about the billions of pounds of tax that companies avoid paying each year through various scams concocted by their advisors. Some estimates put this ‘avoidance’ as high as £30bn a year – equivalent to the entire amount of corporation tax presently collected. But Brown stopped well short of a serious attempt to collect this money and merely introduced a few measures aimed at specific abuses. In future, financial advisors will be required to report tax avoidance schemes to the Inland Revenue. The government can then eventually shut schemes down, but by the time they have investigated them, the companies involved will have already withheld huge amounts with no danger of reprisals.
While big business is celebrating, many small businesses face being driven to the wall by the reversal of a measure New Labour introduced in 2002. At that time, Gordon Brown decided to encourage entrepreneurs by effectively allowing them to have the first £10,000 of their profit tax-free. He was then horrified when hundreds of thousands of self-employed and small business people took advantage of this measure, so hastily did a u-turn on it in this budget.
On the vital issue of public spending, Brown declared that the rate of growth in overall spending will be halved during the next three years – from just under 5% per year in ‘real terms’ to 2.5%. But within this parameter, health spending will increase at a rate of 7% per year and the education budget at 4.5%. This inevitably means that when July’s three-year spending review is carried out, spending increases in most other departments will be less than a meagre 2.5%. Brown earmarked defence, the Home Office, transport and housing for ‘real terms’ increases (ie increases above the rate of inflation). So increases at less than the inflation rate – in reality, cuts – are intended for other crucial areas of spending.
Even the increases for health and education, however, are nowhere near enough to transform those services. This is even more the case when taking into account that they are part and parcel of plans for more public-private sector deals, which will in themselves worsen services and store up greater financial crises. Much of the increase in education is destined for the building of privately sponsored ‘academies’ which will be outside the control of local authorities. Spending on the NHS will go along with greater use of the private health sector with its record of more expensive and less safe health care.
With their eye on a general election within 15 months, New Labour’s leaders believe that voters will applaud their generosity towards these services. But ordinary people see only too well the effects of long-term under-funding in health and education and will see the limitations of these measures. In an ICM poll last year, only 27% of people believed education had improved since New Labour was elected in 1997 and only 19% thought that the NHS had improved. Neither will the votes of pensioners be bought by the crass bribe in the budget of a one-off payment of £100 for all households that include someone aged 70 or over. This amount won’t even cover this year’s increase in the council tax in many areas.
Despite the anti-working class nature of New Labour’s budgets, the alternative offered by the Tories is even less appealing, including as they do a promised £35bn a year slash in public spending.
The biggest budget shock was that £20bn of ‘savings’ are to be made by axing over 42,000 civil service jobs and moving a further 20,000 jobs out of London and the South East. This is intended to lay the basis for lower, regional pay rates. The planned job losses include 30,000 of the 130,000 workers in the Department of Works and Pensions (DWP), 10,500 from merging the Inland Revenue with Customs and Excise, and 1,460 from the Department of Education and Skills.
The justification being given is that cutting backroom jobs will release money to employ frontline staff like classroom assistants and nurses. But frontline services cannot be efficient without back-up tasks being done, and workers presently doing ‘behind the scenes’ jobs are already overstretched and underpaid. As Nicholas Timmins wrote in the Financial Times (18 March): "The sort of cash-releasing efficiency savings that are now being sought have been tried before – notably in the NHS, where their implementation, year on year, led to filthy wards, rotten food and a rising bill for emergency maintenance".
The Financial Times’ editorial warned (18 March): "They [job cuts] are notoriously hard to nail down in any line of work, and must be won from a highly unionised workforce". Workers in the civil service union, the PCS, are already taking strike action against a paltry pay offer and now urgently need to respond to this new attack. Disgracefully, some trade union leaders didn’t even condemn the planned jobs slaughter. It was "a win-win budget for people and public services" according to Unison leader, Dave Prentis (Financial Times, 18 March).
Brown boasted in his budget speech that he has presided over the longest economic expansion for 200 years. Why then, did he only increase public expenditure by £59bn over the next three years and why is this relatively small increase to be accompanied by 42,000 job losses?
The answer lies in the fact that the economy has very serious underlying weaknesses. The UK has had higher growth during recent years than in the US or the Euro zone. Official unemployment is at a record low and inflation is low, but this is just one side of the picture. On the other side is an alarming set of figures, such as the trade deficit reaching a record £5.6bn in January, and the spiralling upwards of household debt – which is equivalent to the amount of a year’s national income and is still rising, fuelled partly by continuing house price increases.
The fact that growth hasn’t been very high – averaging just 2.5% over the last four years, combined with the effect on the UK of very weak growth in the other major global economies, has meant that UK government tax receipts have fallen below New Labour’s expectations. This, along with other factors such as the expenditure on war against Iraq, has led to a £10bn overshoot in the budget deficit this year, from a predicted £27bn to an expected £37bn (3.4% of GDP). Despite Brown’s assessment that economic growth will be over 3% both this year and next, he announced continued high borrowing in his budget: a further £33bn next year and £31bn the year after.
Much has been made in the media of Brown’s ‘golden rule’, that total government borrowing over the course of an economic cycle should only be used to finance investment as opposed to current spending. Economists are constantly warning that he will soon be forced either to increase taxes or cut public expenditure to keep within his self-imposed rule. Regardless of the fate of the ‘golden rule’, Brown faces an escalating deficit that will push him towards tax increases and further spending cuts during a third government term, providing Labour is re-elected.
For now, Brown has produced a pre-election budget in which he is gambling on sustained growth and a higher level of tax revenues. Much depends on developments in the US economy, which is also suffering from severe underlying problems. When US demand for goods falls, the worldwide repercussions will rebound on the British economy, reducing growth. New Labour will try to delay further attacks on workers’ living standards until after the general election, but great battles lie ahead when they attempt to shift the burden of the next global crisis onto the backs of ordinary people.