The change of Chancellor and the decision to leave the European Union (EU) did not alter the timeworn formula underpinning the Budget speech. As usual there is little correlation between the exaggerated claims for the state of the British economy and the stark, grim reality of millions more working class people driven into low-paid jobs, confronting failing public services and increasing poverty. David Yaffe reports.
On 8 March, in his first Budget speech, Chancellor Philip Hammond spoke of a British economy that ‘has continued to confound the commentators with robust growth’; which ‘delivers further investment in our public services’; ‘extends opportunity to all our young people’; has ‘a labour market delivering record employment’, and ‘a public sector deficit down by over two-thirds’ as it ‘continues the task of getting Britain back to living within its means’. It is an economy, he said, that provides ‘a strong and stable platform’ for Britain’s negotiations to exit the EU while ‘building the foundations of a stronger, fairer, more global Britain’.1 The reality is markedly different.
The dreadful state of public finances inherited from previous Chancellor George Osborne and the low wage, low productivity British economy with deteriorating public services, gave Hammond little room for manoeuvre in this Budget. On current projections the government will still need to borrow £16.8bn in 2021–22 – Osborne had expected to be in surplus by then – with government finances unlikely to be in balance until the end of the 2020–25 parliament. Even achieving this end would require a further eight years of austerity, that is, a total of 15 years of cuts to public services and living standards since 2010. In these circumstances it is no surprise that Hammond’s proposed new Budget measures began to unravel almost as soon as he finished his speech.
Tinkering around the edges
Osborne may have been replaced as Chancellor, but the ideological legacy to cut back the state sector to levels last seen in the 1930s remains. His so-called ‘long-term economic plan’ of ‘sound public finances to deliver security’ and ‘lower taxes on business and enterprise to create jobs’ has meant years of unremitting austerity and devastating cuts in public services.2 This will not change. Hammond warns that there is no room for complacency. ‘The deficit is down, but debt is still too high’ to keep ‘Britain at the cutting edge of the global economy’ as it prepares for a future outside the EU. Government finances must be in balance in the next parliament. Britain, he says, needs a competitive tax system. ‘My ambition is for the UK to be the best place in the world to start and grow a business’. So, as announced in previous Budgets, corporation tax, which was 28% in 2010, will fall to 19% in April this year, ‘the lowest rate in the G20’, and ‘in 2020, it will fall again to 17%’. In accepting these constraints, Hammond had boxed himself in, giving him little room to manoeuvre to find funding for three immediate government priorities: the social care crisis; businesses struggling with alarming rate increases; and higher spending on education, skills and training supposedly to improve workforce productivity.
Hammond was under pressure from Conservative MPs to address the severe funding crisis in social care. In the Budget he set aside additional grant funding of £2bn for social care in England over the next three years, with £1bn available in 2017–18. This was to enable elderly patients to be discharged from hospital when they were ready, so freeing up NHS beds by making sure that they were receiving the care they needed in the community. Campaigners dismissed the extra funding as ‘sticking plaster’, making the point that it would not even reverse the £5bn cuts the service had suffered since 2010.
The first revaluation of business rates in seven years in England will come into effect on 1 April 2017. While businesses in many regions will see their rates decrease or stay flat, those in London and the south east are facing an overall rise, with some confronting up to a quadrupling of payments. The Budget offered a £435m package to reduce the amount paid. There are three main measures: a cap so that rates rise by no more than £50 a month for small businesses losing their rate relief; a £1,000 discount on business rates bills in 2017 for all pubs with a rateable value of less than £100,000, which, says Hammond, covers 90% of all pubs; and a £300m fund for discretionary relief from local authorities.
Following the ideological preferences of much of the Conservative Party and particularly of Prime Minister Theresa May, the Chancellor found funding for 110 new free schools, on top of its current commitment to 500. £320m will be available in this parliament for these free schools, including some academically selective and potential grammar schools. Budget documents however show that, on top of this, an extra £655m will be scheduled for these 110 free schools in 2021–22, in the next parliament, bringing the funding close to £1bn. This is happening as state schools in England are facing the first real-terms cuts to their funding since the mid-1990s, with large cities, especially London, facing heavy cuts to fund rises in the shires. Spending per pupil in England is to fall 6.5% by 2019–20. £500m will be made available for improving technical education for 16-19 year olds, introducing a new qualification, T-levels.
No apology for raising additional revenues?
Hammond was committed to funding his spending decisions in this Budget by raising additional revenues, rather than borrowing more. ‘I make no apology for raising additional revenues and for doing so in ways which enhance the fairness of the system’, he said. Events soon demonstrated that he was out of his depth. His determination to balance increased spending with higher taxes put him on a collision course with tenacious right-wing newspapers and rebellious Conservative MPs.
The self-employed now account for 15% of all workers and 45% of the growth of employment, the so-called ‘jobs miracle’, since the financial crisis of 2007–08. 18.6% of Britain’s self-employed have incomes topped up by tax credits, compared to 10.6% of employees. So the Chancellor risked the anger of the self-employed when he announced that he would raise the Class 4 National Insurance contributions (NICs) of the self-employed from 9% to 10% next year, with a further increase to 11% in 2019. For the Chancellor this was an issue of ‘fairness’. Employees (who pay 12% NICs), he said, and the self-employed ‘use public services in the same way, but they are not paying for them in the same way’. The lower NICs paid by the self-employed, Hammond said, is forecast to cost the Treasury over £5bn this year alone. ‘That is not fair to the 85% of workers who are employees.’
The abolition of class 2 NICs for the self-employed (payable at a flat rate), announced by Osborne in the 2016 Budget, and due to take effect in 2018, with the increases proposed for class 4 NICs in this Budget (payable as a proportion of profits) would raise a net £145m a year for public services by 2021–22. It would also mean, according to Hammond, that ‘all self-employed people earning less than £16,250 will see a reduction in their total NICs bill’. This did not impress the self-employed, who argue they should pay less tax as they have no sick pay, holiday pay or parental benefits. 2.5 million self-employed workers would lose out as a result of the proposed Budget measures by an average of £240 a year. Many would be from the ‘ordinary working families’ that May’s Conservative government supposedly has pledged to help.
In an additional move to raise revenues, justified by the need to address an unfair ‘discrepancy in treatment’, Hammond cut the tax-free allowance on dividends for directors and shareholders from £5,000 to £2,000 a year. It would also close a tax loophole used by individuals who ‘incorporate’ themselves, forming companies simply to reduce tax liabilities. This will affect more than two million people and raise around £1bn a year by 2020. It also would not have been appreciated by many Conservative Party supporters.
Hammond continued with the manifesto commitment to increase the basic and higher tax-allowance thresholds to £12,500 and £50,000 respectively by the end of this Parliament. This measure will mainly benefit higher paid workers. More than 40% of workers do not earn enough to pay income tax and around 80% of the gains will go to the top 50% of households. The claim to have lifted many millions out of income tax also ignores the fact more and more people are being drawn into paying NICs, where the threshold at £8,164 from April remains significantly lower.
Budget measures unravel
As soon as he finished his speech, Hammond was under attack. It was pointed out that he had broken a Conservative manifesto commitment not to raise income tax, VAT and NICs for the duration of the 2015–20 parliament. The day after the Budget, the Prime Minister, responding to a potential rebellion from Tory MPs, announced that legislation for the rise in NICs on the self-employed would be delayed until the autumn. A week later, unable to withstand further pressure from the right-wing press and Conservative MPs and facing a large enough revolt in the Commons to overturn her small majority, May told Hammond to axe the increase in NICs on the self-employed. The humiliated Chancellor was forced to release a letter to Conservative MPs withdrawing the measure as a result of the ‘clear view’ that it breached the 2015 manifesto commitment.
What was missing from the Budget, together with the accompanying Office of Budget Responsibility (OBR) forecasts, was very significant. The potential impact of a hard Brexit was not taken into account, with the OBR saying there was no meaningful basis for such forecasts. No explicit allowance for the size of the exit bill from the EU, expected to be in the region of €40bn to €60bn, was made.
Hammond maintained in his Budget speech that ‘despite higher-than-target inflation, real wages [will] continue to rise in every year of the forecast’. Paul Johnstone, director of the Institute for Fiscal Studies, at the traditional Budget-day briefing, pointed out: ‘On current forecasts average earnings will be no higher in 2022 than they were in 2007. Fifteen years without a pay rise. I’m rather lost for superlatives. This is completely unprecedented.’ The Resolution Foundation said that the pay of 5.4 million public sector workers will be £1,700 lower in 2020 than in 2010.
The 2015 Conservative manifesto pledged to cut £12bn from the welfare budget as part of its long-term plan to reduce public borrowing. That was missing from this Budget. The last Chancellor had been forced to reverse the £4.4bn planned cuts to tax credits due to opposition from MPs. Hammond had already said that the government will not attempt to implement further welfare cuts in this parliament, but he still plans to continue with those already announced. These include three more years freezing most working-age benefits in cash terms with further cuts to universal credit. The fall in the pound and the rise in inflation since the Brexit referendum will make these cuts even more devastating. Between 2015 and 2020 single parents who are not working are expected to lose more than 20% of their income. The number of children in poverty will rise by more than a quarter over the next five years to 5.1 million.3
The Spring Budget was a shambles. But what it did show was the dismal prospects for millions of working class people in a divided, unequal capitalist Britain.
Fight Racism! Fight Imperialism! 256 April/May 2017
1. All quotes are from the Budget speech unless otherwise stated.
2. See ‘Budget 2016: Bullish Chancellor blown off course’ in FRFI 250 April/May 2016 on our website.
3. This article uses material from the Financial Times and The Guardian Budget analysis 9 and 10 March 2017.