FRFI 203 June / July 2008

Britain: digging an even deeper hole

Immediately after the March 2008 Budget a significant number of Labour MPs began to protest against the removal of the 10p starting rate of tax, which was due to come into operation in April 2008. This had been announced a year earlier in Gordon Brown’s last Budget.  As we pointed out in March 2007, over a year ago, this would hit millions of low-paid workers (see FRFI 196). Could it be that these same Labour MPs had not realised its significance at the time due to the theatrical declaration at the end of Brown’s budget speech that the basic rate of income tax would be cut in April 2008 by 2p to 20p in the pound – the lowest basic rate for 75 years? Labour had been pandering to middle class voters throughout its decade in office, and this, after all, was one over on Tory leader David Cameron. DAVID YAFFE reports.

By March 2008 many Labour MPs were becoming uneasy as Labour’s popularity rapidly waned throughout the country. Alastair Darling’s first Budget heightened their fears. Their parliamentary seats and their privileged lifestyles could easily go in a couple of years if Labour lost the votes of millions of low-paid workers.  Frank Field, a right-wing Labour MP, led the protest and the government was eventually forced to listen with local government and London Assembly elections imminent. The results of those elections were devastating for Labour. Livingstone lost the London mayoral election to Boris Johnson and Labour was driven into third place in the local government elections with only 24% of the vote. With the by-election due in Crewe and Nantwich soon after, the government was forced to take panic measures. In what essentially was a mini-budget only two months after the Budget, Darling introduced £2.7bn tax cuts designed to end the rebellion over the removal of the 10p tax band and improve Labour’s chances in the forthcoming by-election (all to no avail, see page 2).

The tax cuts, through an increase of the personal tax allowance by £600 to £6,035, will be worth £120 a year on average to around 22m basic rate taxpayers. The level at which the 40p tax rate is paid has been lowered so that higher earners paying that rate will not gain or lose from the change. 17m basic rate taxpayers unaffected by the removal of the 10p band will receive a tax cut costing £2bn and described by Darling as ‘support for those on middle incomes’. 80% of the 5.3m households which lost from the removal of the 10p band will now be fully compensated at a cost of £700m. However, around 1.1m low- paid workers earning between £6,634 and £13,355 will still be worse off by up to £112 a year. Nevertheless, Frank Field ended his protest, saying the measures taken were wonderful.

In the wake of very poor election results, this somewhat desperate attempt to bribe the electorate will see Darling digging an even deeper hole in public finances than that left by his first Budget. If the tax cuts for most taxpayers this year are not repeated for the next financial year and low-paid losers from the removal of the 10p band are compensated only through tax credits, 18m households will be worse off by around £3 a week in the run-up to the next general election. If the gains are made permanent, public sector net debt will rise above 40% of GDP, breaching one of the government’s self-imposed, neo-liberal fiscal rules. 

The overall situation can only deteriorate. The government is relying on hopelessly optimistic growth forecasts to allow it to stay within the limits determined by its fiscal rules. A day after the ‘mini-budget’, the Governor of the Bank of England, Mervyn King, argued that there could be no interest rate cuts before 2010 if inflation were to be kept in check. Inflation will rise far above government targets over the next two years. ‘The nice [non-inflationary consistently expansionary] decade is behind us’ he said. Inflation has already reached 3%, well above the 2% target, and with food prices up 6.6% and energy prices 8.3% over the last year and continuing to rise, millions of workers can expect a significant fall in real take-home pay, which will slow down consumer spending and growth. King does not rule out the British economy sinking into a recession. The continuing crisis in the housing and mortgage markets, record oil prices, the rising current account deficit and falling pound can only make matters worse.

Brown told the Institute of Directors at the beginning of May that, despite the fiscal crisis, he intends to cut corporation tax even further. Darling told the annual CBI dinner on 20 May that ‘I am determined that British business will not be the fiscal fall guy’. The reform  – that means privatisation – of state welfare will continue as Brown’s draft Queen’s Speech in the middle of May so clearly demonstrated. David Cameron even claimed that the speech had been stolen wholesale from the Tory Party. Public sector workers face significant wage cuts and more workers are being driven into poverty. The coalition that came together to elect the Labour government in 1997 for three consecutive terms of office has fallen apart.