FRFI 178 April / May 2004

The prime consideration behind Chancellor Brown’s eighth budget was to prepare the ground for a Labour victory at the next general election, possibly as early as May 2005. With the Tories now led by a more competent and credible reactionary, Brown has to ensure that the coalition of forces that brought Labour to power in 1997 remains on board. Governing in the interests of banking and multinational capital, he has to keep the support of a majority of the professional, middle and upper working class. That is no longer an easy task. David Yaffe reports.

Labour’s credibility as in any way a progressive force in British politics has been finally laid to rest as a result of its shameless imperialist intervention in Iraq. In addition, the world economic situation has significantly deteriorated and Labour’s room for manoeuvre is severely curtailed. Brown is constrained by Labour’s neo-liberal economic agenda, his so-called ‘prudent’ fiscal rules to ‘keep the debt-to-GDP ratio low and stable while balancing the current budget over the economic cycle’ – the so-called ‘golden rule’.1 Borrowing to invest is permitted within these self-imposed rules as long as public debt is kept below 40% of GDP. The much lower income and corporation tax revenues resulting from the economic slowdown, together with the already announced spending plans for health and education needed to keep middle class voters on board, have pushed these rules close to the limit.

Little room for manoeuvre
This year the government has been forced to borrow £37.5bn, 3.4% of GDP, to finance its expenditure, £10bn more than Brown was expecting in last year’s budget. This breaches the eurozone stability pact of 3% for the first time. Brown expects this borrowing to fall over the next years to £23bn in 2008-09, but, given his spending commitments and the neo-liberal dogma which prevents him raising income tax or corporation tax, this seems very optimistic. Brown’s forecasts anyway leave much to be desired. Although he tells us that over the seven-year economic cycle he will have a surplus of £11bn on the current budget, so meeting his ‘golden rule’, this is smaller than the margin of error for forecasted borrowing in two years time of £19bn. His record is far worse than this. In 2001 he predicted a surplus of £124bn and as late as last year’s budget a surplus of £45bn.

Unsurprisingly this year’s budget was very tight. Besides the plans already announced, an extra £8.5bn on education ‘tied to reform and results’ needs to be found after the last education review left many schools with unprecedented budget cuts. There is a one-off payment to pensioners over 70 to head off the growing opposition to council tax rises, costing £475m. This will barely make any inroads into pensioner poverty and no funds have been put aside for repeating the payment. An extra £669m by 2007-08 is being put aside for funding new childcare places, barely touching the problems facing millions of working parents.

In his speech Brown was keen to tell us that as a result of his prudence Britain can afford £6bn for its ongoing and additional (imperialist) commitments in Iraq, Afghanistan, Kosovo and the north of Ireland. Having allocated defence the largest increase for 20 years in the last spending review, he proposes further, unspecified, real term increases in the future. Labour knows its priorities.

The real growth in public spending has been 5% per year since 2000. It will rapidly fall to 2.7% after 2005. Outside health and education other departments’ expenditure such as housing and transport will rise by only 1.4%, a fall in their spending as a percentage of GDP. No wonder that consideration of the Barker report on the appalling state of house-building in the UK was put off until after the election.

As a result of previously announced increases, taxation will rise from 37.8% to 40.5% of GDP, the highest level since the 1980s. This will not change as a result of this budget with the net effect of all tax measures to 2006-07 a cut of only £170m.

There is no more leeway and Brown, in order to meet his spending plans, has been forced to attack some of Labour’s supporters.

Cutting jobs
The most noteworthy feature of this budget is the unprecedented attack on tens of thousands of jobs in the civil service in a pre-emptive strike to counter the Tory election strategy. Labour will seek to save some £20bn by 2007-08 from departmental running costs, using new technology and other ‘efficiency’ savings to cut at least 40,500 jobs in the civil service. The savings are already built into his expenditure plans. The job cuts are in addition to plans announced earlier in the week to disperse 20,000 civil service jobs from the South East to other regions. They were justified in terms of freeing resources from administration to ‘front-line services’. 30,000 out of a total 130,000 jobs, a staggering 23.1%, are to go from the Department of Work and Pensions, and 10,500 more from the announced merger of the Inland Revenue and Customs and Excise. How then did this differ from Tory plans? The Tories would use the savings to reduce taxes rather spend them, as Labour claimed it would do, on ‘front-line services’. Tens of thousands of workers are to lose their jobs and livelihood so that Labour can outmanoeuvre the Tories.

Tabloid-like pronouncements about cutting ‘waste and bureaucracy’ look attractive to some when written on paper. Indeed one union leader Kevin Curran, general secretary of the GMB union, was happy to go along with this when he said that Brown ‘has bravely negotiated cuts in Whitehall departments that will ensure that public service investment reaches communities where it can most help individuals and families’. The reality is quite different as millions found out to their cost when at the receiving end of the Inland Revenue’s failure last year to pay out tax credits promptly and accurately. Many other fiascos have been reported over the last few years in those civil service departments losing thousands of jobs, as workers have struggled to keep up with a multitude of tax, national insurance and other regulations imposed on them by Labour policies. These cuts are unacceptable and must be vigorously opposed. They reflect Labour’s gross contempt for millions of public sector workers.

Mark Serwotka of the Public and Commercial Service Union was the only one to reflect the anger of many civil service workers when he called the budget ‘a day of long knives for public servants across the UK’. Arbitrary cuts, he said, in vital public services are not the answer. Other union leaders were more equivocal. Brendan Barber, general secretary of the TUC, appeared not to take the cuts very seriously, as he thought the announcement of civil service job losses ‘had more to do with shooting the opposition’s fox than acting as a responsible employer’. Indeed he said that the ‘steady-as-you-go Budget strikes the right note’. Dave Prentis, head of Unison, the biggest public sector union, warned that: ‘Central government provides essential services that enable us to deliver at the local level. We would not want anything to happen to undermine the cohesion of public services.’ Nevertheless, he went on to say that: ‘This is a win-win Budget for people and public services’.2 It seems highly unlikely that any fightback will come from this quarter.

Closing tax loopholes
Brown had been forced to attack sections of the middle classes in order to squeeze a little more tax revenues from his tax base. It seems these classes have become too enterprising. He has closed two major tax loopholes.

The zero rate of corporation tax on the first £10,000 profit for small companies to ‘encourage entrepreneurs’, has it seems been abused. 250,000 consultants, media freelancers and other self-employed people have registered themselves as companies, paying themselves in dividends instead of salaries and so avoiding income tax. This measure was budgeted to cost £20m in 2002-03 and £265m in 2003-04 but as a result of such ‘enterprise’ it could be costing the government £1bn a year. This loophole has now been closed and a 19% tax will be paid on the distribution of small company profits in future.

The other tax loophole closed concerns inheritance tax and is designed to stop people giving away assets while continuing to enjoy the benefits of those assets, such as living in a house you have given to your children. Income tax will now be charged on the retained benefit. This will mainly hit the professional and middle classes living in the South East. In addition, in future, all tax avoidance schemes have to be disclosed to the Inland Revenue by accountants for investigation.

Labour’s rich fat cat friends need not worry. Wealthy foreigners who live in the UK and pay no tax on their worldwide income or capital gains face only a consultation paper whose aim is fairness in the tax system, so long as reform does not damage the UK’s competitiveness. So no problem there. Brown has also backed down over fat cat pensions allowing a new more generous lifetime limit for tax-free retirement savings of £1.5m rising steadily to £1.8m by 2010. Labour knows how to treat its real friends.

Finally the poor will continue to be bullied into low-paid jobs. A £20 ‘work-search premium’ scheme will be extended from lone parents in parts of the country to the sick and disabled, and to six areas of high levels of ‘worklessness’. Anyone in a family receiving tax credits and not working will receive £20 a week if they join the New Deal and search for a job. There will also be a ‘work-focused interview regime’ for some sick and disabled people who claim benefit. 2.7m people claim incapacity benefit, nearly three times the official unemployment figure, and Labour wants to bully a significant section of them into work. A tight budget from a reactionary government.

1. This and other quotes come from Brown’s budget speech 17 March 2004. For a discussion of the strategic considerations behind this and previous Labour budgets see ‘The budget: making the poor pay’ in FRFI 167 June/July 2002 or on our website in the FRFI section.
2. Quotes from the Financial Times 18 March 2004.