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.
Judy Beishon
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