FRFI 202 April / May 2008

A hole in my budget

Faced with economic turmoil in the international credit markets and no General Election planned for over a year, Alistair Darling’s first Budget was a subdued occasion with little offered but the vacuous reassurance that Britain is the ‘most stable’ economy in the G7 major capitalist countries. Indeed ‘stability’ has now taken the place of ‘prudence’, which littered the early Budget speeches of Gordon Brown’s many years as Chancellor. ‘The core purpose of this Budget is stability – now and in the future’ said Darling in opening his Budget speech and stable/stability recurred some 30 times in the speech. The British economy is however far from being stable and it faces very turbulent times in the months ahead.*

Many decisions on taxation and expenditure were already laid out in the previous year’s Budget or announced in last October’s Pre-Budget Report (PBR). Darling, like Brown before him, is rigidly constrained by Labour’s neo-liberal agenda; the ‘fiscal discipline’ needed to promote the interests of banking and multinational capital at the heart of Labour’s economic doctrine. So very little could be done given the state of the British economy. The tinkering he did meant that overall the poor still got less, while significant concessions were offered to the rich and better off. Empty gestures were made towards the environment and tackling climate change. His claims to have taken more steps in this Budget to halve child poverty by 2010 and help ‘working families to escape permanently the cycle of deprivation that blights their lives’ are risible. Public spending as a percentage of GDP is already being squeezed, and is planned to be squeezed even further in the years 2011-2013, growing by only 1.9% a year, well below the anticipated rate of growth of the economy. Most of these projections are anyway based on extremely optimistic forecasts, with economic growth revised downwards in the Budget by only 0.25 percentage points in each of the next two years, despite the economic turmoil in global financial markets. There is a large hole in this Budget which will grow rapidly over the next few years.

No matter how tight the Budget is, defence spending will continue to grow. Darling boasted in his speech that ‘the defence budget has seen the longest period of increased spending in a generation’. This year the government will raise spending by over £2bn to fund the war in Afghanistan and Iraq. The cost of operations since the invasion of Iraq in 2003 now totals £10bn and will continue to rise.

Public debt is growing
Public sector net debt – excluding the debt of Northern Rock to the Bank of England – is already getting very close to Labour’s self-imposed fiscal limit of 40% of GDP, as tax receipts start to fall with the inevitable slowdown in economic growth.  Public debt is projected to reach 39.8% of GDP in 2010-11 and will only avoid the fiscal limit because of £2.5bn tax increases in that year. These projections are also hopelessly optimistic. Cumulative public sector net borrowing from 2008-09 to 2011-12 has risen from a projected £99bn in the 2006 PBR to £140bn now – a rise of £41bn in the projections over a year and a half (Financial Times 13 March 2008). If the British economy follows the US into recession – a real possibility given the importance of the housing and financial sector in the British economy – public sector debt would rapidly rise above the fiscal limits, public spending would be cut and government anti-poverty policies would be swiftly cast aside.

Little for the poor…
The significant tax changes were made in the last budget and come into operation this April. The basic rate of income tax has been cut from 22% to 20% and the 10% starting rate for most income is abolished. Some higher earners face a rise of National Insurance (NI) contributions with the widening of the 11% band. Overall those on incomes below £18,000 a year will lose out, with those on £8,000-£10,000 a year losing most.

A one off £50 increase to the winter fuel allowance for all pensioners over 60 and £100 for those over 80 does very little to compensate for the massive rise in fuel costs over the last few years. Pensioners’ basic costs have risen well above the totally inadequate rise in the state pension and pension credit. Food prices alone are rising at 6.6% a year according to the government.

Child benefit will be raised to £20 a week for the eldest child and the child element of the child tax credit will be increased by £50 a year above inflation from April 2009. In addition, from October 2009 child benefit will no longer be counted in assessing council tax and housing benefits for working families. Together these measures with other minor changes are intended to take an additional 250,000 children out of poverty over the next few years. They are unlikely to succeed and, even if they do, the government’s target of halving child poverty by 2010 is nowhere near to being achievable. According to the Institute of Fiscal Studies, an extra £3.4bn a year would have to be spent to reach the target.  The Budget measures amounted to only £1.7bn over two years.

Most of these measures are concerned with the working poor. The non-working poor are to face a new brutal ‘welfare to work’ regime. The new work and pensions secretary, James Purnell, announced that from April 2010 all 2.7m incapacity benefit claimants are to attend medical assessment to see if they are fit to work. Private companies and voluntary organisations would be paid by results to get these claimants into low-paid jobs. The man behind these proposals is a multi-millionaire investment banker, David Freud, welfare advisor to the government.  He is the author of the Freud Report, which called for large sections of the welfare state to be privatised. 

…special treatment for the rich
Well-paid workers generally benefit most from the tax and NI changes from last year’s Budget. Wealthy pensioners and buy-to-let investors particularly gain as they do not pay NI on their income.

There had been a great deal of noise from the business and banking lobby complaining about the measures, announced last autumn, to have a single 18% flat rate capital gains tax (CGT) and to impose an annual levy of £30,000 on high earning ‘non-domiciled’ residents in Britain for at least seven years. Darling made it clear in this Budget that he has almost completely backed down.

On CGT, Darling introduced a new ‘entrepreneurs’ relief’ allowing business owners a £1m lifetime capital gains allowance at the old 10% tax rate. There are around 120,000 registered ‘non-doms’, mostly wealthy City workers. They do not pay tax on overseas earnings. Concession after concession was made to them. The £30,000 levy will remain and be classified as a tax payment to allow US citizens to offset the charge against US tax bills. They will not have to pay tax on capital gains made on UK assets in offshore trusts if the money is not brought into this country. The charge will not be increased during this parliament or the next. It will not be imposed on children under 18. Changes were even made to the method of counting the number of days an individual spends in the UK for residency and tax purposes. The days a person arrives and leaves the country will no longer be included, but only those when the person is present at midnight will be counted. It is no surprise that Michael Snyder, chairman of the City’s policy and resources committee, said Mr Darling had done everything the City had asked him to, apart from abolishing the £30,000 charge.

Tax avoidance deprived the government of direct taxes annually between £11bn and £41bn in the early years of this decade, according to the first official analysis of the ‘tax gap’ published on Budget day. The concessions made to the business and banking lobby in this Budget show the Labour government has little intention of doing anything significant about it. Closure of tax avoidance loopholes will raise a paltry £600m next year. It is no surprise that there is such a gaping hole in the Budget and that it is the poorer sections of the working class, not the wealthy friends of the government, who will be expected to pay for it.
David Yaffe

*See ‘Troubles ahead for British capitalism’ in FRFI 201 February/ March 2008.