By Stephen MacAvoy
George Osborne’s latest budget launched another assault on living standards of millions of people whilst defending narrow interests and further entrenched the policies that are creating economic stagnation. Only a clear break with these policies will prevent a detrimental impact on the living standards of the majority and years of slow growth.
Politically, the purpose of the measures was clear. The measures, described by the Financial Times as “eye-catching tax cuts to Britain’s wealthy” – such as the reducing the 50% rate of income tax for the less than one percent earning over £150,000 and the cuts to corporation tax – are an attempt to shore up the core base of the Tories. As Ed Miliband pointed out, 14,000 people earning more than £1m annually will receive a tax cut of more than £40,000 each year. The increase of the income tax threshold was an attempt to reach out to a wider set of voters, but the average additional £170 income per year will not compensate for the reductions to their income already underway.
Economically, the aim of the budget is equally clear. Tory stagnation has clearly slowed down the economy but the focus of the Tory strategy is not restoring growth but maximising profits. Given the backdrop of a declining economy, this can only be achieved by driving down working class living standards and increasing the share going to profits and to the owners of capital.
To achieve this, the government announced another package of assaults on the working class: tax increases on millions of pensioners, regional pay in the public sector, £10bn of further welfare cuts planned on top of all those already proposed and real-terms cuts in the minimum wage. The cuts in corporation tax, totalling £4bn by 2017, are aimed at ensuring the capitalist class receives a greater share of the economy.
The Tories’ priority is restoring capitalist profit which they hope will also then induce companies to invest and thus create growth and jobs. The budget assumes profits will grow faster than wages in each year of austerity.
The damage that austerity is doing to living standards of the majority, to unemployment (now over 50% for young black males) and to growth is clear.
The latest GDP figures show that the economy is suffering from protracted stagnation – set to grow by just 0.8 per cent this year as it did in 2011. This stagnation is the key feature of the economic landscape, regardless of whether there is a ‘double dip’ recession. The economy remains 3.8 per cent below its 2008 peak and on current OBR estimates it is not set to return to its pre-recession levels until 2014, a full six years after recession kicked in, making it the longest slump in over a century. As the FT’s Economics Editor put it, “Britain is on a stopping train, not a high-speed line”.
The chart below shows that it is Tory economic policy that has caused the flat-lining of the economy, with growth of only 0.3% since the third quarter of 2010 – that is once the policies outlined in George Osborne’s emergency austerity budget in June 2010 began to take hold. Of course, slower growth leads to declining tax revenues and increased government borrowing.
Prior to this, and as the direct result of Labour’s stimulus under Gordon Brown’s government, which was itself wholly inadequate, both investment and government consumption increased, leading to a resumption of economic growth This led to the economy recovering 3% of the 7.1% slump lost during the 2008/9 recession, with around two-thirds of this expansion accounted for by rising household consumption and investment
Chart 1: Tories cause stagnation
Osborne’s latest budget will do nothing to tackle the key causes of economic stagnation. As the chart below shows, from the last year prior to the crash of 2007 to the end of 2011, the economy has fallen by around £40bn (in fixed 2008 prices). As explained in a previous article, investment originally drove this collapse. However government policies – including VAT hikes and welfare cuts – and falling real wages and unemployment have since driven down household consumption. Now both investment and consumption contribute equally to the near £40bn decline in the economy, with the impact partially offset by government expenditure and by net exports (two-thirds of which is due to falling imports).
Chart 2: ONS figures
Austerity policies that attack investment and consumption clearly worsen not only growth, but also the government’s stated objective of debt, which is now much higher than the Tories first estimated when they took office and has led to them announcing plans to extend very deep cuts into the first two years of the next parliament after 2015.
Instead, and given the collapse of investment drove the recession (see chart 3) and remains well below its pre-recession peak, government policies should be orientated to increasing investment as well as consumption to create jobs and spur economic growth. Instead the overwhelming majority of austerity measures are still to come, with spending cuts so far amounting to £23bn of the total £126bn that are planned.
As Jonathon Portes, Director of the National Institute of Economic and Social Research, explained: “This Budget will do nothing to address the most obvious problems that economic policy could do something about: the UK’s creaking infrastructure and the long-term social and economic damage if we allow current unemployment levels to persist.”
The government has revised down its estimate for business investment in 2012, from last November’s Autumn Statement estimate of 7.7% to just 0.7%. Even the Office of Budget Responsibility’s report fails to back up Osborne’s claim that the flagship policy of nearly £4bn of corporation tax cuts will increase business investment. Their figures show this will lead to an increase in business investment of just 1 per cent by 2016, leaving national income just 0.1 per cent higher.
Public investment meanwhile continues to fall, with it set to fall by over half, from 2.6% of GDP to 1.1% between 2010-17, whereas Labour had expanded this in the early years of recession, contributing to greater levels of growth and leading to higher business and consumer spending.
Consumption will remain weak as wage rises are set to remain below inflation – that is real term wage cuts – until 2014. Incomes were previously protected not only by low interest rates but by the temporary cut in VAT and increased government spending. They are now being undermined by the very opposite polices, which are acting as a drag on the economy.
Against this Tory austerity, the left needs to offer serious economic alternatives, not purely rhetoric, that can lead the political debate. The living standards of millions of people require this.
Chart 3: Investment driven recession
Chart 3 compares current levels of different components of GDP to their peak before the recession in percentage terms. Clearly, tackling the decline in investment must be at the core of economic alternatives, as this in turn will create the jobs, growth that would increase living standards and in turn deal with the debt levels.
With the private sector not investing the state should step in and carry out a government investment programme, such as a house building programme, that would stimulate the economy. As Martin Wolf explains in the FT, this could be afforded as the government is “confronting extremely low borrowing costs”.
There are however other measures possible too. British companies have estimated cash reserves of £700bn – nearly twenty times the amount by which the economy remains below its previous GDP peak. Given the capitalist are on an investment strike with a negative impact on millions of people’s lives, the government could tax these to provide funds for investment or simply take these resources over and invest them productively to kick-start the economy. Likewise the nationalised banks could be used to fund investment programmes.
These measures are all rejected by the capitalist class and their political representatives solely because they would require the state – i.e. non-private actors – to intervene into the economy and thus weaken the power of private capitalists.
Nonetheless, these are the type of measures required to stimulate the economy. The alternative is years of slower than historic growth and high unemployment and attacks on the population’s living standards.