Austerity Mark II, same as Mark I

By Michael Burke

Most media coverage of the Budget is predictably sycophantic and wrong. An objective assessment is that the amount of fiscal tightening planned in this Budget is exactly the same as outlined in the June 2010 Budget. The June 2010 Budget planned tightening of £40bn, but £3bn of this was the projected fall in interest payments. Total austerity measures were £37 billion. This time George Osborne has announced total fiscal tightening of £37 billion, with further details to be added in future Budgets.

Therefore the same result should be expected. The British economy is now 14% larger in nominal terms than it was in 2010, but the international economy is growing more slowly. Circumstances are not exactly the same then and now, but the impact of £37 billion in austerity will be broadly the same. If these plans are implemented growth is likely to slow as it did previously.

At that time in 2010 the economy was growing at a 2.2% annual rate. The imposition of austerity measures slowed that to just 0.7% in 2012 and the economy only narrowly avoided a rare ‘double-dip’ recession[i]. The stronger growth in 2013 and 2014 arose because there were no new austerity measures in the run-up to the General Election.

In that same 2010 Budget Osborne claimed the public sector net borrowing would fall to £37bn in 2014/15, or 2.1% of GDP. The outturn was actually £80 billion and 4.4% of GDP.[ii] In fact the deficit was on a rising trend in 2012 to £111 billion from £92 billion in 2011 as the economy slumped. It only started to fall once new austerity measures were halted and the economy could recover. Austerity did not cut the deficit. Growth did.

Austerity transfer of incomes

Austerity is the transfer of incomes from poor to rich and from workers to big business. Social protections (so-called welfare) are cut in order to drive workers to accept ever-lower pay. If people with disabilities can barely subsist, if the sick have subsistence incomes cut, if women have lower pay, increased burdens from worse public services and greater responsibilities as carers, this is regarded only as collateral damage, if at all.

In the £37 billion in combined tax increases and spending cuts over this Parliament, only £17 billion of that is specified in the latest Budget. Very large departmental cuts will be announced in the Autumn Statement and future Budgets, totalling £20bn. £12 billion of that £17 billion will come from cuts to social security protection, and another £5 billion is said to come from clampdown on tax evasion.

The claim that any of this has as its primary aim deficit reduction is belied by the cut in Corporation Tax to 18%. Even before this cut, businesses paid a token amount of total taxation. In the current year corporate tax receipts are expected to be £42 billion. This compares to a total £331 billion paid in income tax, VAT and council tax.

There is also a host of benefits to companies and the rich including more measures on Help to Buy, and rent a room relief to add fuel to the house price bubble. The Inheritance Tax threshold is raised to £½ million per person, up to £1 million per family on homes. Shareholders can receive £5,000 in dividend payments tax-free. Along with other changes, rich savers can now receive £17,500 a year tax-free. There is an increase in tax-free personal allowances and the main beneficiaries of all such measures are high taxpayers.

For the poorest, there are only ‘welfare cuts’. After 2017 there will be no additional tax credits, Universal Credit or housing benefit for families with more than two kids. New applications to Employment Support Allowance will be curbed, which is for people who are not fit to work. A string of further cuts to entitlements will only emerge slowly. The Financial Times has already shown that cuts to tax credits will hit ethnic minority communities hardest.

Osborne also announced a National Living Wage amid much excitement from the Tory press and the BBC. It is entirely fake. The current National Minimum Wage is not enforced and the TUC estimates 350,000 workers are paid below it, alongside an army of people in forced ‘self-employment’. The actual Living Wage is estimated objectively, and includes the tax credits that Osborne has slashed. Insultingly, the main beneficiaries of the Tory plan are actually businesses, who have had Corporation Tax and employers’ National Insurance Contributions cut by a greater amount to ‘pay for’ it.

Public sector pay rises will be capped at 1%. This is below the level of inflation projected by the Office for Budget Responsibility in every year from 2016 through to 2020. This is another large real cut in public sector pay. The target is not solely public sector workers, as there is what is known as a ‘demonstration effect’ where depressing public sector pay also holds back private sector pay. This seems to have operated strongly for most of the last parliament.

Politically, it is a deeply reactionary Budget. There is a real-terms increase in military budget every year and a commitment to spending 2% of GDP. This stands in contrast to the NHS, education budgets and so on. The Tory claim is that these are ‘protected’ when in fact they are frozen. As there is still inflation and the population is growing, this ‘protection’ amounts to large real per capita cuts. At the same time, Osborne signalled a large shift towards road building and continued the move away from renewable energy. It is the opposite of Green budget.

There will be a strongly regressive regional effect. Areas where there is a higher level of social protections payments, poorer areas and those with a higher proportion of public sector jobs will all be hit harder. The City of London and the South East outside London will be the beneficiaries. Scotland and Wales are threatened with the Tory version of fiscal devolution; taking responsibility for Tory cuts and the power only to make further cuts. The Irish are not even trusted that far. The intention is to try to impose the Tory version of the Stormont House Agreement, which is not what was agreed. The Tory version is a raft of cuts which would further entrench the British mismanagement of the Irish economy.

There are alternatives

The experience of 2013 and 2014 compared to the previous years of the last Government shows that growth is the key to reducing the deficit, not austerity. As the economy slowed in 2012 the deficit rose from £92 billion to £111 billion. When austerity was halted, the economy experienced a mild recovery and the deficit fell to £88 billion.

Austerity doesn’t close the deficit; growth does. The government should be investing in developing the economy and in public services for growth, which would reduce the deficit. Rather than cutting taxes, business levies should be increased in order to finance the necessary investment in renewable energy, rail transport and ports, housing, infrastructure and education. Instead, public sector net investment will be cut every year in this parliament. The projected level of £30.4 billion in FY 2019/20 will be just 1.3% of GDP, compared to 3.5% in 2009/10.

The government’s campaign against ‘welfare’ is based on a falsehood. We are not living beyond our means, as the average household contributes £463 a year more into government coffers than it receives in benefits and services (even including the NHS, education, free school meals, bus passes for the elderly and so on).[iii]

We also learn that ‘corporate welfare’ amounts to £93bn a year, which is greater than the £88 billion of the deficit[iv]. This could be cut, rather than social protection entitlements to the most vulnerable.

The tax system is hugely regressive. It could be reformed to allow those best able to pay the burden of the crisis to do so. Tax breaks on pensions for those earning over £150,000 could be eliminated.

The top tax rate of 50p could be restored at the same level. The 10% rate on Capital Gains Tax should be increased to the basic rate income tax, to ‘make work pay’. Corporate tax relief on both losses carried forward to future years and back to previous years is unique to Britain. Most countries allow one or the other, but not both, and one should be scrapped. ‘Non-domicile’ tax status applies to 115,000 residents, who are overwhelmingly the super-rich, oligarchs, etc. Their status should be ended, not just tinkered with as Osborne has done, so that if they want to live and work here they should pay taxes at the normal rate. These funds could be used to finance public investment, along with levies on business.

There is also hugely wasteful spending. Defence spending is the only area where spending is fixed as a proportion of GDP, and has no economic benefit. Trident will also cost £100bn over its lifetime, which is a non-independent nuclear deterrent and could only be used in a worldwide nuclear conflagration.

There are a myriad of alternatives. What is required is the political will to elaborate and champion them. The attack on ‘welfare’ comes first because there so little opposition to these cuts, certainly none from the Labour front bench.

Yet all Chancellors are political and this one intensely so. The pace of austerity has been slowed compared to the March Budget (which successfully induced Labour to sign up to wholly unrealistic spending plans). The small tax increases in the latest Budget do not fall on workers or the poor. This reflects Tory political weakness, as they felt unable to. This government has less support than Thatcher while it is trying to carry out a more radical programme. Opposition to austerity both inside and outside parliament can change Tory plans. They already changed once after all, in 2012. The Tories have radically reactionary plans, but they can be prevented from implementing them.

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[i] World Bank, GDP data http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG
[ii] ONS, Public sector finances, May 2015 Tables PSA1 & PSA5A http://www.ons.gov.uk/ons/dcp171778_407371.pdf
[iii] ONS, The effects of taxes and benefits and household incomes in FY 2014 http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-375072
[iv] Guardian, 7 July The £93bn handshake http://www.theguardian.com/politics/2015/jul/07/corporate-welfare-a-93bn-handshake

Deficit? Households are running a surplus

By Michael Burke

George Osborne will cast his latest ‘emergency Budget’ in terms of the imperative to reduce the deficit. This is of course nonsense. The Chancellor has cut the corporate tax rate from 28% to 20% and cut income taxes for high earners while slashing public services, social protection payments, public sector pay and jobs. This is a transfer of incomes from poor to rich and from workers to big business. Like its policy predecessors (monetarism, shadowing the Deutschemark, membership of the Exchange Rate Mechanism, and so on) deficit-reduction is simply a cloak for policies aimed at reducing wages and the social wage in order to boost profits.

The claim for deficit reduction is that ‘we are living beyond our means’. But the target of the austerity policy is the living standards of average households. They are not running a deficit at all. In fact the average household runs a surplus with the government. The average household contributes more revenue to government than it receives. Taking all taxes and all benefits into account, this surplus amounts to £463 per household on average. As there are approximately 26.5 million households in the UK, this means that the household sector ran an aggregate surplus with government of over £12 billion in the most recent year.

To be clear these benefits include benefits-in-kind including a monetary value of education, of the NHS, subsidised travel and vouchers for free school meals as well as all forms of social welfare protections. The data is compiled by the Office for National Statistics, and the key summary table is reproduced below.

Summary of the effects of taxes and benefits on ALL households, 2013/14

The household sector is not ‘living beyond its means’ and there is no imperative to resume austerity on this score. The welfare burden is anything but; households contribute more in direct and indirect taxes than they receive in benefits.

Yet the deficit is real. Part of this is the necessary spending on international aid, policing and other items, but also on wholly unproductive items such as the military budget. But these are not substantial budget items by comparison to pensions, social security, the NHS and so on. As the deficit is real, and the household sector runs a surplus there must be a key sector of the economy that is ‘living beyond its means’, or lazily scrounging off the rest of the society. In Britain that sector is big business. It receives approximately £85 billion a year in what is known as corporate welfare, tax breaks, incentives, subsidies and other transfers.

Research from the University of York suggests that the annual bill for corporate welfare in 2011/12 was £85 billion, on a conservative estimate. This includes all the subsidies and grants paid to business, as well as the corporate tax loopholes, subsidised credit, export guarantees and so on.

This is the real drain on resources. The subsidies help to preserve inefficient and otherwise unprofitable companies at the expense of both their customers and their efficient competitors. If those companies are performing a necessary function but cannot do so without the subsidies, then they properly belong in the public sector.

There is too the question of the deficit which is the ostensible reason for the austerity policy. In the most recent financial year the public sector deficit (excluding the effects of the bank bailout) was £89.2 billion.

As corporate welfare has been rising since 2011/12 it is safe to assume it accounts for the entirety of that public sector deficit. It is business, not the poor, people with disabilities, women burdened by increased carer responsibilities or public sector workers who should shoulder the burden of the crisis they created.

*Aditya Chakrobortty has provided an excellent update of the latest estimate of 'corporate welfare', which now stands at £93 billion. This is greater than the entire public sector deficit in the latest financial year.

Wages, profits & investment In Greece

By Michael Burke

The IMF has placed a road-block in the way of a deal with the Greek government and it remains unclear whether any agreement can be reached. The prior agreement which the IMF rejected was itself already very onerous. But the IMF wants to shift the burden of paying for the crisis away from taxes on business and the better-paid towards more cuts in social protection. This is an insupportable burden as net median household incomes are already below €8,000 a year. Many multi-member households without work subsist solely on state and public sector pensions.

The IMF argues that taxes on business will hamper growth, as business profits are needed to fund investment. This argument is an important one and should be addressed. It can be demonstrated that it is false argument. In demonstrating that, it is also possible to identify a way out of the crisis.
In general, in a commodity producing economy profits are the decisive factor in determining the rate of growth. In a capitalist economy it is the profits of the private sector which predominantly fund the accumulation of productive capital via investment.

But if profits alone were sufficient, then there would no crisis at all in Greece. Greece has the highest profit share (profits as a proportion of national income) in the whole of the OECD. The Greek profit share was 52.4% in the most recent data. This is substantially greater than many other countries in the OECD and as a consequence the labour share of national income is also the lowest in the OECD.

Table 1 below shows the profit share and the wage share in selected OECD countries. In effect, the IMF prescription is that those who are least able to pay should bear the burden of the crisis.

Table 1 Profit Share & Wage Share of National income in Selected OECD Economies

Source: OECD, based on Gross Operating Surplus &
Compensation  of Employees as a proportion of GDP, data for Q1 2015.
Does not sum to 100% because taxes on production omitted

It should be noted that the crisis countries of the EU in general have the higher levels of profit share but Greece leads the pack. The trends in Greek profits and wages are shown in Fig. 1 below.

Fig.1 Greek profits and wages

There are already ample funds in Greece for productive investment in the form of the profit share of the business sector. The crucial point- and the driving force behind both the structural and cyclical crises of the Greek economy- is that Greek businesses are not investing, but are hoarding capital instead.

Providing businesses with a shield against austerity while cutting social protection will not provide the investment needed. This is because Greek businesses are unwilling to invest. The level of profits in Greece and the level of investment (Gross Fixed Capital Formation, GFCF) are shown in Fig.2 below, as well as the gap between the two.

Fig.2 Greek Profits and GFCF

In the most recent full year the nominal level of Greek profits was €95bn while the level of GFCF for the whole economy (including government and households) was just under €21bn. It is this level of uninvested profits which is the main cause of the crisis in Greece.

Table 2 below compares the profit share and the rate of investment. Using OECD data it is also possible to show what proportion of that investment is actually made by the business sector itself.

Table 2 Profit Share, Investment Share & Uninvested Profits Share of National income

In Selected OECD Economies

Source: OECD, * Most recent year 2013 or 2014

There are of course many other calls on the Gross Operating Surplus other than investment, such as taxes and social contributions, but in the case of Greece all these taken together amount to no more than 5.8% of national income. The net savings of the business sector are far larger, at 9.2% of national income, along with another 2.9% distributed to shareholders.

In a certain sense the situation in Greece is just an extreme case of the general trend in the Western economies, where the profit share has been rising and yet the investment share has been falling. It is the extremely high level of uninvested profits which is the cause of the crisis. There is nothing to prevent the business sector investing all of its profits and more, via borrowing. This frequently occurs in economies where growth is strong. But in the OECD as a whole the business sector is hoarding capital. Greece is an extreme case because this has been the case over decades, and deteriorated further during the crisis.

These savings are not being held in Greek banks, which is a factor contributing to their precarious state. Bank of Greece data show that deposits by Greek firms fell by €8bn (equivalent to 4.5% of GDP) in the year to April 2015 even though both profits and savings were substantial. This amounts to looting the country; extremely high rates of exploitation combined with minimal investment and spiriting away the resulting savings and shareholder dividends to overseas banks.

It is precisely these idle resources of the business sector, especially the Greek oligarchs which should be tapped. This is not simply to shield workers and the poor from further austerity, as important as that is. But these idle resources could be deployed to fund an investment-led recovery that would regenerate the economy. It is precisely taxes and levies on the business sector which are required, and perhaps stronger measures such as nationalisation, in order to tap these resources. They are also the measures that provoke the fierce hostility of the international institutions led by the IMF.

The argument that this will curb the investment of the business sector does not stand up. Despite claiming 52.4% of national income the business sector’s investment is equivalent to just 4.4%. The bulk of investment in the Greek economy comes from households, mainly on house building and repair. Business investment is just a fraction of the level of uninvested and profits and savings. This remains the source of the Greek crisis, which cannot be resolved without state-led investment.

Syriza not crushed yet

By Michael Burke

A majority of European leaders have opted to try to strangle the Syriza-led government slowly rather than immediately crush it. In order to survive the Syriza leadership has had to make a series of compromises. The burden of these new measures offered in the latest negotiations is overwhelmingly tax increases and they mainly fall on companies and the higher paid. But, unless there is a breakthrough on debt reduction, there is no progress on ending austerity.

One faction, led by German finance minister Schauble and supported by his Irish and Spanish counterparts wanted to organise a run on the banks and overthrow the government in a re-run of the crisis that was provoked in Cyprus in 2012. Reports suggest that US Treasury Secretary Lew was instrumental in pursuing a line of compromise instead. But all the institutions ultimately represent the interests of big capital and Greece’s creditors. As a result they remain committed to austerity and the ultimate destruction of all anti-austerity forces in Europe, including the Athens government. What they dare not risk is the possibility of European and possibly global financial market turmoil from a disorderly ‘Grexit’.

The new tax measures Syriza has offered are significant. According to the Financial Times, “More than 90 per cent of the €7.9bn fiscal package would be covered by increases in tax and social security contributions. The tax measures include a special levy on medium-sized companies’ profits, higher value added tax rates, a rise in corporation tax and a wealth tax on household incomes above €30,000 a year.” According to Eurostat, median household net incomes in Greece were €7,680 in 2014.

Other reports suggest that even this is not acceptable to the IMF, which represents US interests. They want the burden of taxation shifted from business to cuts in social security payments. While the US holds no Greek government debt, it is the biggest foreign owner of Greek listed shares.

It is clearly preferable that the fiscal burden is borne by companies and the higher-paid. But there is nothing in the current agreement which improves the position of the mass of the population. The effect of the concessions will be slower growth, even if most workers and the poor have largely been shielded from the worst direct effects.

Further details have yet to be hammered out. The focus on the primary surplus (the balance of government income and spending excluding debt interest payments) is meaningless as it is based on the false premise that spending cuts or tax increases will lead to equivalent savings, ignoring the economic effect of slower growth on both government spending and tax revenues. The only possibility for measures to boost growth via investment is if there is significant debt reduction and lower interest payments. On this, the IMF representing the US is more willing to support debt reduction precisely because almost nothing is owed to the US. For the opposite reason, hostility to debt reduction is most ferocious among some of the European governments.

The majority line among the institutions is clearly based on political considerations. Immediate crisis and turmoil has been avoided because of the wider risks to a fragile set of advanced industrialised economies. But undermining Syriza and demoralising its supporters remains the aim. The latest set-backs are only the first steps and the institutions will welcome any splits in the government.

But Syriza still has room, and some time to act. It can improve the balance of forces domestically and internationally by taking unilateral anti-austerity measures using the resources of the Greek oligarchs, possibly supplemented by overseas investment. It is now obvious that it must have measures to protect bank deposits from another bank run provoked by the ECB and others. The institutions will return with further demands in future, when this new measure fails to produce growth and improved government finances. Syriza should prepare for that inevitability.

End Austerity Now - Demonstration 20 June London

Assemble: 12 noon

Bank Of England (Queen Victoria St) London
Tube: Bank (Central/Northern/DLR lines)

Organised by the People's Assembly Against Austerity

Details here