by Michael Roberts
George Osborne, Britain’s finance minister, delivered his
so-called autumn statement (in December!) today. This covers the
current state of public finances and plans for future tax and spending
The Conservative-led coalition faces an election next May and its
main pledge when it came into office in May 2010 was to ‘balance the
budget’ and reduce government debt. After the huge bank bailout and the
impact of the Great Recession of 2008-9 on tax revenues and welfare
spending, the government deficit stood at over 10% of GDP and gross
government debt had rocketed to over 75% of GDP.
The government blamed this on the profligacy of the previous Labour
government. This was nonsense, of course. Labour had run relatively
small deficits, has reduced government spending as a share of GDP and
debt was low until the global banking crash.
And the Conservatives would have done exactly the same as Labour in bailing out the City of London with more borrowing.
The Conservatives are obsessed with the government deficit and debt –
getting them down has been their measure of ‘prosperity’. But even on
this measure, they have failed. Osborne made much of the reduction in
the deficit ‘by half’ by April 2015. But back in 2010, he forecast that
he would balance the budget by April 2016. He has now announced that
this target will not be achieved until April 2019.
And to meet this target, even assuming that Britain continues to grow
at 2-3% over the next four years, the government will have to impose a
massive round of public spending cuts on welfare benefits and services.
It will also have to raise taxes, although it claims that it can cut
income tax again during the life of the next government (although that
promise is pushed back to 2019).
And the deficit is one thing. Government debt is still rising in
real terms. Debt is over £160 billion more than forecast back in 2010
and is now well over 90% of GDP on a gross basis and is not expected to
peak on the best forecasts until 2019.
The government has failed because the UK economy has not grown in
income anywhere near as much as the government forecast back 2010.
Osborne forecast real GDP growth would average about 2.7% a year;
instead it has averaged up to this year only 1.3%, half the rate. At
the same time, although unemployment has come down, most of the new jobs
have been part-time, low-paid and self employment (see my post,
This has meant that real incomes (ie after inflation) have fallen by the largest amount since the Great Depression of the 1930s.
As a result, tax revenues have nowhere matched that expected by the
government. So the budget forecasts have proved woefully wrong.
Revenues from income tax and national insurance during the most recent
12-month period have grown at an annual rate of only 1.8% compared with
the budget forecast of 5%.
The government stood back from imposing too severe a reduction in the
budget deficit after 2012, for fear that the economy would drop back
into a new slump – and it nearly did.
But that just means, in its obsession with the deficit, that if the
Conservatives win the election in May, they will launch a new round of
Maybe a new round of austerity won’t happen because the
Conservativces won’t win next May. But all three major parties are
committed to more spending cuts in bowing to the God of ‘fiscal
probity’. “All parties support balancing the current budget in the
next Parliament. Deficit spending is clearly still deemed to be
politically untenable in the UK.” Gavyn Davies, FT.
Compared to the Chancellor’s plan, Labour would permit extra
borrowing to finance investment (1.5% of GDP) and would allow themselves
longer to attain balance for the current budget. But they would still
impose austerity to the tune of half the amount of the Conseravtives.
Behind the obsession with deficits and debt lies the real agenda. It
is two-fold: to reduce the size of the public sector and destroy any
vestiges of the ‘welfare state’, opening up public goods and services to
deliver profits to the capitalist sector. The other aim is lower the
burden of tax on and increase the subsidies to the capitalist sector
over the long term to boost profitability.
This hidden agenda is sometimes exposed. Only this week, a Conservative MP called for huge cuts.
“The Chancellor could make a £20 billion start by culling Whitehall’s
sprawling bureaucracy, enforcing public sector pay settlements, freezing
benefits, reducing the welfare cap, scaling back middle-class welfare
and looking again at the state pension.” Dominic Raab, Conservative MP for Esher and Walton.
Note the attack on the state pension. This has been sacrosanct up to
now. But the Conservatives are now preparing to dismantle it, using
the argument that the young should not have to pay for the old and
that’s unfair. The right-wing Economist magazine took up this call: “Britain’s
fiscal problems are partly the result of over-generous spending on the
old. They should pay off some of the debts instead of passing them all
on to the young.”
But apparently it is not unfair for the poor to pay for the rich. In
the UK the bottom 10% of income earners pay more in all taxes as a
percentage of their income than the top 10%. The government could switch its priorities on spending from defence,
subsidies to industry, lowering corporation tax, more tax cuts for the
rich to boosting public investment, services and welfare. Despite its
headline noise on a few infrastructure projects (rail, flood protection
etc), it is doing no such thing.
Faster growth would soon deal with any deficit anyway. In terms of
real annual GDP growth, the OBR estimates that a 0.1% point increase
would do as much over the four years from 2015-16 for the deficit as
roughly £3 billion of spending cuts. The trouble is that the UK economy
may be growing at 3% a year currently, but nobody expects that to last. The Office for Budget Responsibility has actually revised down its
forecasts for growth after this year for every year up to 2019. Even
Osborne admitted that the “warning lights” are flashing over the health of the global economy, and Britain “cannot be immune”.
Yes, any new downturn in the world economy would soon push the UK
economy back into recession too. Osborne raises only that risk to a
booming UK economy (the fastest in the G7 this year). But there are
serious domestic risks too. Most of the contribution to the ‘boom’ of
2014 is coming from the unproductive sectors of the economy (housing –
prices rising at 12% a year; and financial services as the City of
London ploughs on).
Manufacturing output is still struggling and despite a huge
devaluation of the pound back in 2010, UK exports have failed to get
anywhere near the government’s expectations.
Productivity growth remains appalling.
That’s mainly because the business sector is unwilling to invest in
new technology or skilled labour at good rates of pay. Investment to
GDP in most major capitalist economies has been falling. But it is
particularly low in the UK.
And that is because profitability in the corporate sector, although
improving a little after all the austerity measures so far, is still
below levels seen in the late 1990s or even 2005.
After six years, the UK economy has only just got back to where it was before the Great Recession.
But the economy is standing on the chicken legs of a credit-fuelled
property and services boom, sustained, ironically, by cheap labour
provided by hard-working, young immigrants from Europe and elsewhere.
The Conservative government aims to cut back that immigration and
impose a new and severe round of public spending cuts, while big
business stands by with its arms folded. The economy will falter,
especially if there is new world economic downturn, and the government’s
targets on public finances will fall short, just as they have done up
to now in this parliament.