FRFI 214 April / May 2010
Labour Chancellor Alistair Darling, interviewed by the BBC a day after delivering his Budget on 24 March, said that his public sector spending cuts will be ‘deeper and tougher’ than those imposed by Tory leader Margaret Thatcher in the 1980s. He almost admitted as much when he said in his Budget speech: ‘… it is clear that the next spending settlement from 2011 onwards will be very tough – the toughest for decades’. None of the ‘very tough’ spending cuts to reduce the public sector deficit were detailed in the Budget. This was, after all, an election Budget, and he needed to keep the opposition at bay and Labour’s potential supporters on side. DAVID YAFFE reports.
This was Darling’s third and possibly last Budget as Chancellor. In it he had to reconcile a number of increasingly contradictory requirements. First, he needed to contain and rapidly turn around Britain’s explosive increase in public sector debt, both to retain the confidence of the City of London and those international investors expected to finance the debt, and to ensure the British economy remains a world centre for finance. Second, he had to try and prevent a double-dip recession – growth turning negative again. Finally, despite the massive and as yet unspecified cuts in state spending ahead, with the General Election barely six weeks away, he had to keep onside a substantial section of the coalition which voted Labour back into office in 2005.
Slashing the debt
In the Queen’s Speech in autumn 2009, the Labour government programme committed itself to a ‘fiscal responsibility bill’ which would bind the government to cut the public sector deficit year-on-year and halve it within four years. This would mean drastic cuts in public spending and significant tax increases. Labour however had, for obvious reasons, no serious intention of implementing or detailing them until after the election. Darling defended his decision to wait until 2011 before tackling the deficit, arguing in his Budget speech that: ‘cutting support now would take demand out of the economy, pull the rug from under our recovery, and delay our return to sustained growth’. This was a pointed attack on the Tories who had argued for immediate deficit reduction to retain the confidence of financial markets.
Darling said he would therefore stick with previous government plans to increase public spending by 2.2% for 2010-11. He was able to announce that the public sector deficit for 2009-10, at £167bn, would be £11bn lower than forecast in his pre-Budget report in December, due to higher corporate profits (extra corporation tax) and lower unemployment than expected (lower payout of benefits) and the return of the VAT rate from 15% to 17.5%. In addition the one-off 50% tax on bankers’ bonuses above £25,000, announced in the pre-Budget report to discourage bonus payouts by banks, raised £1.3bn more than expected as bank after bank paid out much higher bonuses than in the previous year.
There will, however, be only a very small net increase in public spending overall for 2010-11 of £1.4bn. This will finance the phasing in of the rise in petrol duty and the stamp duty relief to first time buyers for two years on homes worth up to £250,000. The latter is to be partly financed by an increase in stamp duty to 5% on homes above £1m to start in April 2011. A £2.5bn support package for businesses will be put together and finance found for 20,000 extra university science and maths places, and to get 16-24 year olds into work or training. On the whole a very neutral and unexciting Budget to satisfy the financial markets and some potential Labour supporters.
The public sector deficit is planned to fall from £167bn in 2009-10 to £89bn in 2013-14, from 11.8% to 5.2% of GDP – more than halved as a proportion of GDP over a four-year period. The debt will be £100bn lower by 2013-14 than was expected in the 2008 Budget. It is planned to fall to £74bn or 4.0% of GDP at the end of the forecast period in 2014-15. The overall national debt will increase from £777bn in 2009-10 to £1,400bn in 2014-15, that is from 58% to 75% of GDP. Even these amounts depend on very optimistic assumptions about the growth rate of the British economy – 1-1.5% in 2010, 3-3.5% in 2011 and 3.25-3.75% in the following years. If the economy grows at a slower rate, the spending cuts will have to be even greater.
Extra revenue will come from previously announced tax increases from the last Budget or the pre-Budget report. These include the 50% rate of tax on incomes above £150,000, the tapering down and withdrawal of personal allowances for those earning more than £100,000, the restriction of higher-rate pension tax relief for those earning more than £130,000 and the freezing of the inheritance tax nil rate band at £325,000 for four years. Personal allowances for all taxpayers have been frozen at the 2009-10 level. National insurance rates on employers and employees will rise by 1% from 2011-12. Together these amount to extra revenue of around £19bn.
In the pre-Budget report in December 2009 Darling announced that all public sector pay increases would be capped at 1% for two years from April 2011, a steep cut in pay rates with inflation at more than 3%. These cuts will bring savings in public sector pay and pensions of £4.4bn by 2012-13. In mid-March he announced a further freeze from April for 120,000 highly-paid government employees.
Darling had also said in the pre-Budget report that he would demand annual ‘efficiency savings’ of £11bn from his spending departments through ‘reforms’ without damaging frontline services. After the Budget speech details were given out. The Department of Health, for example, was down to find £4.35bn of savings and that of Children, Schools and Families £1.1bn by 2012-13. Such savings are not credible in departments whose budgets are supposed to be protected by the government after 2011. In addition, these departments are also burdened with Private Finance Initiative (PFI) project costs, which have to be paid back whatever the circumstances. PFI project costs throughout the public sector now total some £210bn and annual payments to cover the capital costs and service of the projects will be paid out over the next 25 years and will peak at just over £10bn a year in 2017. ‘Efficiency savings’ from such departments will be severely limited. Savings also will be found, said Darling, by reducing the number of civil servants working in London by a third and relocating them elsewhere. While he was delivering his Budget, civil servants on national strike over redundancy pay mounted picket lines outside parliament.
All these measures together will reduce the deficit by a little over £24bn at best. So after the election real and dramatic cuts in public spending will begin. The Institute of Fiscal Studies confirmed that once the unavoidable costs of debt interest and social security have been taken into account, Labour’s plans will see cuts greater than those imposed by Thatcher in the 1980s, when unemployment reached more than 3 million. These cuts are around 10% in real terms over the three years from April 2011. The Labour government has said that it will protect the budgets of health, children, schools and families, the police and overseas development. If that is the case other departments will face devastating real cuts of between 18 and 24% (Financial Times 25 March 2010). In reality all the major public services will be under attack.
Still banking on the City
During the financial crisis the losses of financial institutions were socialised and transferred to government balance sheets. The results of this and the fiscal stimulus – tax cuts, higher government spending etc – necessary to lift the major capitalist economies out of recession, have been some of the highest public sector deficits in peace time. Financial services dominate the economy of Britain.
Despite paying lip service to curbing the speculative activities of the banks, the ruling class in Britain has not done anything of consequence. So Darling could say in all seriousness in his Budget speech that: ‘There should be no return to business as usual for the banks. But we also must remember that their success is vital not only for the global economy but for Britain’s future.’ He went on to remind us that London is the world’s leading financial centre and across the country the sector supports over a million jobs. He continued: ‘A healthy, strong financial services industry is essential for our long-term prosperity.’ The Labour government has no intention of regulating the speculative activities of the banks.
Bank profits are rapidly rising. Massive bonuses are still being distributed to bankers as the unexpected windfall from the tax on bankers’ bonuses above £25,000 so clearly demonstrated. Barclays made record profits of £11.6bn last year. Pre-tax profits at BarCap, its investment bank, rose 90% to £2.5bn. It apparently was showing restraint in paying its 23,000 investment bankers 38% of its revenues, some £4.5bn in total, including a £2.3bn bonus pool. RBS, 84% owned by the state, made a loss of £3.6bn. Yet more than a hundred of its top bankers were awarded bonuses of at least £1m last year. Its investment banking arm made profits of £8.3bn and it said a bonus pool of £1.3bn was the least it could get away with. RBS paid an average salary and bonuses to its investment bankers of £173,000 last year compared with an average of £191,000 for BarCap.
In his Budget speech Darling made great play in setting the state supported banks, RBS and Lloyds Banking Group, a £94bn target for lending to business. Both banks failed to meet their net lending targets last year, in fact lending a negative £41bn, with repayments higher than lending. This year, although the targets are higher, they are gross targets and the banks should have little difficulty in achieving them.
The Labour government will not take any measures that would undermine the City of London as the engine of British imperialist interests throughout the world. Nor will the other ruling class parties. Whoever wins the election, it will be the vast majority of working people who will be made to pay for the crisis of capitalism. With the British opportunist left calling for a vote for the Labour Party, a new movement will have to be built. Class politics will only be restored in this country by militant forces coming on to the streets, involving millions of working people, young and old, in work and unemployed, determined to resist the destruction of public services by whichever ruling class party wins the General Election.
1 For a discussion of how Darling dealt with this in his second budget see ‘Years and years of austerity ahead’ in FRFI 209 June/July 2009.
2 See ‘Banks on a roll as Britain staggers out of recession’ in FRFI 213 February/ March 2010, and earlier articles in FRFI 194 and FRFI 210 on the parasitic character of British capitalism. All available on our website: www.revolutionarycommunist.org