FRFI 216 August/September 2010

The arrogance and self-confidence of the new ConDem coalition government was highlighted by George Osborne’s emergency Budget presented to Parliament on 22 June 2010. It amounted to a wholesale assault on the public sector. No less than the Financial Times chief economics commentator, Martin Wolf, was driven to say that ‘nothing in the election campaign could have prepared the British public for this bloodbath’. It was a declaration of class war. DAVID YAFFE looks at this remarkable turn of events.

It is important to understand the Labour Party’s role in this development. Just as the Labour government began the attack on the public sector in the mid-1970s and laid the ground for Margaret Thatcher’s neo-liberal counter-revolution, so the Labour government’s planned deficit reduction in its pre-election March Budget opened the way for the ConDem’s coalition programme to dismantle and privatise state welfare over the next parliament.

It was Prime Minister James Callaghan who told the Labour Party conference in 1976: ‘We must get back to fundamentals…We used to think that you could spend your way out of recession, and increase employment by cutting taxes and boosting government spending. I tell you in all honesty that that option no longer exists…’ The Callaghan government opened the way to Thatcherism by complying with the conditions of an IMF loan to defend the pound. It set monetary targets and cut public spending and wages.[1]

In the third week of 2010, Labour Chancellor Alistair Darling told the Financial Times that he would order his ministers to start work on the most swingeing cuts in public spending in a generation. Halving the public sector deficit in four years, he said, was ‘non-negotiable’. This was confirmed in his March Budget. For the Labour Party, as for any other ruling class party in power in this country, the interests of the international markets, the financial services sector and the City of London are the unquestionable priorities.[2] It should be no surprise that the ConDem coalition felt confident enough on coming to power to slash state welfare and public spending even further.

The crisis of British capitalism and the public sector deficit

At the end of August 2009, Lord Turner, the head of the Financial Services Authority (FSA) and a former banker, described some of the innovative activities of the City of London, such as credit default swaps, as ‘socially useless’. He said that the financial services sector had ‘grown beyond a socially reasonable size’ and the City had become a destabilising factor in the British economy. These were dangerous thoughts given the importance of financial services and the City to British capitalism and the Labour government’s priority that the City of London remain a centre of world finance, the financial arm of British imperialism. Lord Turner’s remarks were very quickly drowned out by an ideological assault on the public sector, directed at this stage not at public services as such, for which there is massive public support throughout the country, but at ‘unsustainable’ public sector borrowing. Suddenly the most dangerous threat to the British economy was not the bloated financial sector, but the debt of the public sector.

This was given ideological expression through an orchestrated campaign in the media with politicians of all persuasions rapidly and willingly following this lead. What followed was almost a public auction by the main political parties over the cuts in public spending necessary to tackle the ‘unsustainable’ public sector deficit.[3] The main difference between the Labour and Conservative parties revolved essentially around the starting date of the cuts, with Labour arguing in its March Budget that cutting too soon, before April 2011, would drive the economy back into recession and the Conservatives insisting on immediate deficit reduction to retain the confidence of the financial markets. So powerful, however, was the ideological offensive on public sector borrowing that Ipsos Mori, a market research company, was able to report that while in March 2010 the number opposing the Conservative strategy was double those in favour of it, by the end of June this had radically changed, with 44% backing swift deficit reduction and 35% against (Gary Younge The Guardian 19 July 2010).

It is necessary to contest this ideological offensive against state spending. The economic crisis has its roots in the overaccumulation of capital in the main capitalist countries, in the lack of profitable investment opportunities globally for capital, which has led to growing rivalry between the main capitalist powers for the spoils of imperialist plunder and super-exploitation of the vast majority of countries of the world. The speculative and parasitic activities of the financial corporations in the main imperialist countries are the necessary product of this crisis of global capitalism. This is why none of the main capitalist countries will take seriously measures to curb the large banking corporations. At the end of June 2010 at the G20 summit the banks were ‘let off the hook’: intense lobbying by the financial sector led to a delay in introducing rules to force banks to hold more capital. Plans to implement tough measures this year were shelved and governments were given leeway to introduce them in their own time.

As FRFI has repeatedly pointed out, it is the particular parasitic character of British capitalism – its reliance on the earnings of its overseas assets, particularly its bloated and usurious banking sector, and the ever growing importance of financial and business services in the domestic economy – that made it one of the imperialist countries most affected by the international financial crisis. At the start of this crisis, banking assets were five times Britain’s GDP. More than two years into the crisis (2009), Britain’s foreign investment was a remarkable 6.25 times GDP, with the usurious and parasitic transactions of UK banks accounting for more than 66% of these investments, equivalent to around four times Britain’s GDP.[4]

The speculative activities of the financial corporations and the uncontrolled lending that fuelled unprecedented property booms in the main capitalist countries led to the biggest financial meltdown in history. The capitalist system survived this process because the state underwrote the debts of the banks and financial institutions on a scale never seen before. The rapid rise in state borrowing and increased public spending was necessary not only to prevent capitalist economies from falling into even deeper recession, but also to ensure the survival of the imperialist banks and financial institutions. In the case of the UK, total government gross debt was 44.1% of GDP in 2007 and had risen to 68.2% in 2009. The US saw a rise from 62.1% of GDP to 83.2%, Germany from 65.0% to 72.5%, France from 63.8% to 77.4% and Japan from 187.7% to 217.5% over the same period.[5]

The debate about when and how much to cut public borrowing is an ideological diversion. It is little more than a cover for the ruling class as it prepares a massive attack on the living standards of working people in a brutal attempt to lay the foundation for resolving this crisis of imperialism.

Declaration of intent – the Budget

‘An admirably tough-minded statement of intent’ declared The Economist (24 June 2010), the house journal of the British ruling class, reporting on ConDem Chancellor George Osborne’s emergency Budget. The international markets likewise approved, with both the pound and government bonds rising. Osborne claimed that this was a fair and progressive budget with everyone paying something but the people at the bottom end of the income scale paying proportionally less – the supposed result of Liberal Democrat influence on the coalition government. This brazen lie was soon exposed by just a cursory examination of the Budget which brutally cut public spending, slashing tens of thousands of jobs, and cut wages while increasing taxes on consumption.

£113bn of spending cuts and tax rises, £4,300 a year on average for every household in the country, is to be imposed by 2014-15 as a result of measures taken in the Budget. This is an additional £40bn, comprising £32bn spending cuts and £8bn net tax rises, added to the £73bn announced by Labour in its March Budget before the general election. Public sector borrowing will fall from 10.1% of GDP this year to 1.1% of GDP in 2015-16. The current budget deficit will move into surplus in 2014-15 and the total public sector net debt of the UK will peak at 70.3% of GDP in 2013-14. IMF predictions for 2015, made before the additional cuts and tax rises in Osborne’s emergency Budget, show general gross government debt of the UK reaching 96.6% of GDP, significantly below that of the advanced capitalist countries as a whole at 110% of GDP ( So Osborne’s argument that the extreme nature of the UK’s deficit justified the savage measures in the emergency Budget has little credibility even on his own terms. Nor has his argument that the severe deficit reduction was necessary to prevent a bond market crisis.

Limited tax rises

Tax rises are by far the smaller component of the £113bn fiscal tightening in the Budget. The split overall, in­cluding measures in Labour’s March Budget, is 74% public spending cuts and 26% tax rises by 2015. The new tax changes will have a very unequal impact. The largest rise in revenue will come from the increase in VAT from 17.5% to 20%. This will raise £13.5bn a year by 2014-15. VAT accounts for nearly twice as much of the disposable income of the bottom 20% of households as those in the highest 20%. Lowering the rate of capital allowances for businesses will raise around £2.8bn. It will have a much bigger impact on manufacturing industry than financial and business services with capital allowances a much greater share of profits in the former than the latter. The levy on bank balance sheets, not unexpectedly, is token. It will raise around £2.4bn, less than half the £5-£8bn predicted. The coalition government has no plans to legislate to limit banker’s pay and bonuses. It will allow the banking corporations to regulate their own pay and bonuses to ‘regain public trust’.

Capital gains tax will be increased only to 28% for those paying the higher rate of income tax, letting wealthy property speculators and share­holders off the hook. It will remain at 18% for those paying basic income tax and 10% for ‘entrepreneurs’ for the first £5m of qualifying gains, up from £2m. This will raise less than £1bn.

Although Labour’s 1% national insur­ance increases for employees and employers will still go ahead from April 2011, the threshold at which employers start paying will go up from £110 to £131 a week, offsetting about two thirds of the rise and costing the government nearly £4bn. The corporation tax rate will be reduced from 28% to 24% over the next four years to the lowest level on record, at a cost of £4.1bn. It will almost certainly offset the bank levy for the larger banks.

Finally as a sop to Liberal Demo­crats for keeping on message with this thoroughly regressive budget, the income tax threshold for those on basic tax will rise by £1,000 to £7,475, child tax credits will increase by £150 a year for the poorer sections of the working class, and the state pension will be linked to earnings.

Cutting back the state

The state welfare budget will be cut by £11bn, more than a third of the £32bn additional spending cuts. Child benefit will be frozen for three years from 2011. Child trust funds are to be abolished from January 2011. All state benefits, apart from state pensions and pension credit, will rise in line with the consumer price index (CPI) instead of the retail price index (RPI). The RPI includes housing costs. The CPI in June was 3.2% and the RPI 5.0%. This means that the rise in benefits each year is intended to be significantly less than before. Housing benefit will be cut by 7% by introducing maximum limits for payments, among other changes. The National Housing Association has said that more than 750,000 people are in danger of losing their homes in the south-east because of these changes (The Guardian 23 July 2010). 1.8m people claiming disability living allowance will have to undergo new more stringent medical tests assessing their capability for work. Single parents will be expected to look for work when their youngest child goes to school. Health in pregnancy grants will be abolished next April and Sure Start maternity grants will be restricted to the first child. Most of these cuts will have a disproportionate impact on the poorer sections of the working class.

The income of better paid workers and the lower middle class will start to be squeezed. Tax credits for middle income families will be abolished, affecting 600,000 families earning more than £40,000 and less than £58,000. There will be a two year pay freeze for public sector workers earning more than £21,000.

The details of the most savage public spending cuts will be announced during the autumn spending review. From the Budget figures, departmental budgets will need to be cut on average by around 25%. However, according to the Institute of Fiscal Studies (IFS), the commitment to protect the health and overseas aid budgets and restrict the cuts in education and defence to around 10%, means that all other departments could face incredible cuts of the order of 33%. That this is the government’s intention can be seen in the decision of the Treasury to ask all government departments to draw up plans for cuts of between 25% and 40%. Such cuts will have a devastating impact on the jobs not only of the six million public sector workers but also on those 1.2 million private sector workers directly depen­dent on government contracts.

The intention of the government is brutally clear. The recently announced wholesale reorganisation of the health service, the abolition of health authorities and primary care trusts and the intention to turn Foundation Trust hospitals into privately run not-for-profit enterprises, are a prelude not only to cutting costs, but to accelerated privatisation of health services. A similar process is underway in education with the rapid expansion of Academy schools and the undermining of local education authorities. Cameron’s so-called ‘Big Society’ plan is simply a cover for this process. In introducing this in March this year he told us: ‘It includes a whole set of unifying approaches – breaking state monopolies, allowing charities, social enterprises and companies to provide public services…’. It is barely disguised neo-liberal cost-cutting of public services, preparing the ground for their privatisation and opening up new sources of profit for capital.

Together all these measures will hit the poorer sections of the working class much harder than the better off and the rich. According to the IFS, as a result of the emergency Budget, the incomes of the poorest fifth of the population will decline by 8%, those of the middle fifth by 4% and the richest fifth by less than 3% (Financial Times 23 June 2010). This is well before the savage cuts in public services from the autumn spending review really hit home. When they do, unemployment will grow rapidly to reach levels last experienced during the Thatcher years of the early 1980s. Millions of families who depend on public services in their day to day life will be abandoned. This is a declaration of class war. It has to be resisted by millions of working people, young and old, in work and unemployed, determined to halt the destruction and privatisation of our public services.

1 See David Yaffe ‘The Labour aristocracy and imperialism’ Part 4, FRFI 164 December 2001/January 2002. Issues of FRFI are available on our website at:

2 See David Yaffe ‘Banks on a roll as Britain staggers out of recession’, FRFI 213 February/March 2010 and ‘Deepest cuts for decades’, FRFI 214 April/May 2010.

3 See David Yaffe ‘Britain’s crisis: public services under attack’, FRFI 211 October/November 2009.

4 Recent figures from the ONS (first quarter 2010 release) on foreign investment have been substantially revised with the introduction of UK banks assets and liabilities in financial derivatives. They change the statistical series from 2007. In 2008, foreign assets of UK banks financial derivatives were a massive £4,040.2bn and took the foreign assets of the UK to £10,980.5bn or nearly 7.5 times the GDP. This is much higher than the figure given in previous articles in FRFI, before UK banks financial derivatives were included. The revised statistics have been used in the text above for the first time and show foreign assets were reduced in 2009, as the effect of the international crisis was accentuated. Future issues of FRFI will include the revised statistical series in more detail.

5 These debt statistics are given in terms of total government gross debt in order to make international comparisons. Statistics from In discussing the UK Budget changes below, the statistics are those given by the Office of National Statistics and refer to public sector net debt – public sector gross debt minus financial assets.