You are in > Britain
Britain
Back to the future
Writing in 1998, Professor John Hills of the London School of Economics recalled:
[The Thatcher] Government’s first White Paper on its public spending plans began with the bald statement that, “Public expenditure is at the heart of Britain’s present economic difficulties”. Much of the politics of welfare in the 1980s revolved around “cuts” and restrictions in public spending designed to allow tax cuts, particularly reductions in the rates of income tax.
However, as Professor Hills emphasised:
In this context it may come as something of a surprise to see... that in its last year in office, 1996-97 (the financial year starting in April 1996), the Conservative Government devoted almost the same share of national income to the main welfare services as its Labour predecessor had twenty years before.
Thus the welfare state, encompassing universal public services and a mixture of universal and means-tested state benefits, which had been achieved gradually since the late 19th Century although its main expansion took place following World War Two, was left substantially still in place. And to that very important extent, society and the economy was not fully returned to the dog-eat-dog principles of raw capitalism. Further radical progress- or more accurately, regression- in that direction was left to the next generation of Conservative leaders; allied, as it has turned out, by the next generation of Liberal leaders.
As is already becoming apparent, there will be four prongs to the assault on the welfare state. Firstly and most obviously, massive reductions in public services and welfare benefits. Secondly, an assault on the pay and conditions, notably including the pension schemes, of those who manage to retain their jobs in the public sector. Thirdly- as exemplified by the plan to break up the local planning structures of the NHS and force GPs to use private consortia in order to buy hospital treatment and other specialist services on behalf of their patients; and also by the plan to take money away from state schools and hand it over to the proposed so-called 'free schools' (privately-owned schools that will be subsidised by the state)- the further fracturing, privatisation and marketisation of state-funded services. Fourthly and most insidiously, the attack on the principle of universal provision- council house tenants to be evicted from their homes if they earn above a poverty-line income, 'middle class' toddlers prevented from attending Surestart children's centres, child benefit and the pensioners' winter fuel allowance to be means-tested.
This latter process, as Ed Balls has pointed out, will take us increasingly towards ghettoised services; the state to deliver a second or third class rump provision only for the destitute or semi-destitute, while those who are presumed able to fend for themselves are left to fend for themselves. The Tory rhetoric is that the 'better off' should not be subsidised via the state, and where does the logic of that argument end? If they are emboldened by success in implementing their current proposals, why not, during a subsequent Conservative or Conservative-Liberal term in office, a means test for using the National Health Service or sending ones children to state schools, with free heathcare and schooling only for those who can prove that they are below the poverty line?
The renewed drive to roll back public welfare is of course an international phenomenon, resisted among leaders of the main developed countries only, and weakly, by Barack Obama. But, as was the case under Thatcher in the 1980s, the UK is leading the pack- allied on this occasion, as it has turned out, not by the US administration but by other European governments, particularly the Geman administration of Angela Merkel. In a leader article illustrated with a depiction of David Cameron as a punk rocker, the editors of The Economist on August 12th enthused about Britain's return to its Thatcherite status as the test-tube for fundamental capitalist reforms:
Britain has embarked on a great gamble. Sooner or later, many other rich-world countries will have to take it too.
...within its first 100 days the Con-Lib coalition has emerged as a radical force. For the first time since Margaret Thatcher handbagged the world in 1979, Britain looks like the West’s test-tube. It is daring again—not always in a good way but in one that is likely to be instructive to more timid souls, not least Mr Obama and his Republican foes.
Declaring their support for the cuts programme, The Economist editors employed the increasingly familiar anti-'big government' rhetoric:
Throughout the rich world, government has simply got too big and Mr Cameron’s crew currently have the most promising approach to trimming it. Others—and not just the tottering likes of Greece and Spain—will surely follow. That includes America. At present, unlike in the 1980s, there is no Reaganesque echo from the other side of the Atlantic: despite the Tea Partiers’ zeal, the Republicans seem as clueless as Mr Obama in producing a credible medium-term plan to balance America’s budget. But pretty soon, as in Europe, somebody will have to come up with one—and Britain, for better or worse, is likely to be the place they will come to for ideas.
And, for good measure, they added the usual claim that the public expenditure policies of the previous UK government make the massive cuts programme of the current government a sheer necessity:
...the main prompt [for the government's radicalism] has been necessity. The Tories inherited such a massive budget deficit (11% of GDP) that there was little political upside in postponing the pain. Indeed, if there is a spiritual godfather of Britain’s punk politicians, it is that old Celtic headbanger, Gordon Brown. If he had not trashed the government’s finances before the recession, Mr Cameron, who back then was muttering about “sharing the proceeds of growth”, might have had a “muddling through” alternative.
Biting the hand
The success of these arguments is nothing less than an ideological coup, a triumph of chutzpah. Barely has the worst economic crisis since the 1930s been stabilised- a crisis caused by the de-regulated growth of the capitalist private sector, and prevented from causing economic meltdown only by the public sector and massive state interventions- and now it is presented that it is the public sector and 'big government' which was and is the problem; a problem which must be solved by the slashing of state provision.
So, not only were hundreds of billions of pounds of the debt of the capitalist financial system transferred to the public sector in order to avert the catastrophe engendered by the 'free market'; it transpires that the blame for the economic debacle and its financial consequences has also been transferred to the public sector. And by that miracle, the free market right wingers, who desire nothing less than the fruition of Margaret Thatcher's uncompleted project for a return to full-blooded capitalism, unencumbered by the 'welfare state', have been delivered their marvellous opportunity.
Though now cast as the villain, the public sector has been the main rescuer of the UK economy. It played, and still plays, a highly significant role in preventing the crisis from becoming a meltdown- and not merely through the nationalisations and bailouts which saved the banks from bankruptcy. Because private sector economic activity is driven by markets, it plunged downwards in the wake of the credit crunch. As Michael Burke observed in February this year:
Of a total decline in Britain's GDP of £80bn, personal consumption has fallen by £29.5bn and fixed investment has fallen by £45.9bn. In fact, the fall in investment accounts for a little under 60% of the aggregate decline in GDP...
Manufacturing investment is down 37.5% from its peak, construction down 54.3%, engineering and vehicles down 37.8%, transport down 29.8%.
The rise of 800,000 in the numbers of people unemployed was also a private sector phenomenon, caused by firms laying off staff and ceasing to take on new workers. A report for the Royal Bank of Scotland posed the question 'Is the resilience of the labour market all about the public sector?' and noted:
Between Q1 2008 and Q3 2009 private sector employment fell by [approximately] 3.3% while public sector employment increased by 2.4% (excluding the impact of financial sector interventions).
The stabilising effect of the public sector has actually been considerably greater than these figures indicate, because public sector expenditure is not merely used to employ public sector workers- much of it goes to privately owned companies which are either contracted to carry out work for the state or are dependent on supplying products to the public sector. A January 2009 article in The Times reported under the headline '‘Soviet’ Britain swells amid the recession':
Across the whole of the UK, 49% of the economy [in 2009] will consist of state spending, while in Wales, the figure will be 71.6% – up from 59% in 2004-5. Nowhere in mainland Britain, however, comes close to Northern Ireland, where the state is responsible for 77.6% of spending, despite the supposed resurgence of the economy after the end of the Troubles.
Even in southern England, the government’s share of spending is growing relentlessly. In the southeast, it has gone up from 33% to 36% of the economy in four years.
The Times added, in a horrified tone:
The state now looms far larger in many parts of Britain than it did in former Soviet satellite states such as Hungary and Slovakia as they emerged from communism in the 1990s, when state spending accounted for about 60% of their economies.
While production and investment that was dependent on private market activity was crashing downwards, it was this 'Soviet' aspect of Britain that kept the economy going. In the construction industry, for instance, as a report for Marketreasearch.com noted:
[The] public sector accounts for around 40% of all new work in 2009 - compared to around 25% in 2006/07.
Thus in the aftermath of the credit crunch, the welfare state has protected not just the population, but to a great extent the capitalist economic system itself, from the consequences of its own excesses.
Taxation evasion
Nevertheless, as a result of the economic crisis, we now have rising levels of public debt; and due mainly to a combination of reduced tax revenue caused by the fall in the incomes of the population and an increase in benefit payments caused by higher unemployment, there is a large fiscal deficit, currently at 11.1% of GDP. From the Tory-Liberal assertion that there is no alternative to enormous cuts in state spending, the Labour Party differs only as to the scale and timing of the cuts required. Furthermore, as Conservative-Liberal government ministers point out, the previous Labour government was in debt and running a deficit even before the onset of the recession; proving, they claim, that the Brown administration was profligate with the nation's finances- the concepts of profligacy and wastefulness extending by implication to infect the whole idea of public services.
To put the latter point into perspective, it can be remarked firstly that the pre-recession levels of public deficit and debt under Labour (at 3.1% and 36% of GDP respectively in 2007) were similar to, and in the case of the debt actually slightly better than the levels in the last year of the previous Conservative government of John Major which left office in 1997 (respectively 3.0% and 42% of GDP).
But more profoundly, if it is accepted that the gap between the government's taxation revenues and its expenditure was too high in 2007 that by no means shows that too much was being spent on public services in that period. It can equally be argued from that premise that too little was being raised through taxation; and that is also the case with the statement that the present and projected future national debt and deficit levels mean that no alternative exists to huge reductions in public services. All that statement reveals is that those who make it are evading the alternative of a substantial increase in taxation on those who can afford to pay.
It must be noted here that Keynsian economists and others point out that the UK's current public debt level is not particularly high by historical and international comparisons, and also that it is a good thing for countries to run deficit budgets and increase their national debt during a recession because that will allow the economy to grow rapidly. However the present deficit rate is unsustainable in the long term, and even were the country's GDP to return quite soon to pre-crisis levels, the budget gap following this recovery would be wider than it was in 2007 because of the interest and repayments on the accumulated increase in debt- therefore to avoid cuts, sooner or later there would need to be a substantial increase in taxes.
The government's decision to narrow the deficit by cutting public services and welfare benefits rather than by raising taxes on those with high incomes is precisely that- a decision, made for reasons of ideology and the financial interests of the rich and the very rich. As even The Economist noted in its 12th August edition, referring to David Cameron's finance minister George Osborne:
Mr Osborne has... nailed his radical colours to the mast by relying on spending cuts for three-quarters of the squeeze by 2014-15, leaving relatively little work for tax rises. In the ten biggest consolidations among rich countries from the late 1970s to the mid-2000s, just two countries—Canada in the 1990s and Ireland in the 1980s—leaned more heavily on spending cuts, according to a study by the OECD in 2007.
Actually, Cameron, Osborne and their sidekick Nick Clegg are nailing an even more radical flag to the mast than The Economist suggests. The UK government's target is to rely on spending cuts for 80% of 'the squeeze', with only 20% to be raised by tax increases.
Our present levels of taxation on big companies, wealthy people and those on high incomes are ridiculously low when compared with with the rates that were applied before the Thatcher era. Under the government that was in office in Britain from 1971 to 1974, the main rate of Corporation Tax was set at 52%; Estate Duty (now called Inheritance Tax) had a top rate of 75%; Income Tax rose by several graduated bands to 75%, with an added 15% surcharge on unearned income including share dividends, resulting in a potential top marginal income tax rate of 90%.
These taxes were considered quite normal, and did not need to be justified by any declarations of fiscal emergency. The prime minister at the time was not a man who modelled himself on Karl Marx or Robin Hood. He was Edward Heath, Margaret Thatcher's predecessor as leader of the Conservative Party.
But in Britain nowadays, the main rate of Corporation Tax is 28% and by decision of the current government will be reduced to 24%. Inheritance Tax has a single maximum rate of 40%. The new highest rate of Income Tax, set by the previous Labour government at a mere 50%, applies only to 1% of the population.
Defending his decision to levy the new 50% tax rate only on those earning over £150,000 per year, which due to a change in tax allowances also made people on between £100,000 and £150,000 liable to a marginal tax rise, the UK's former finance minister Alistair Darling told a parliamentary committee in 2009:
I was quite clear that, as far as the rate of taxes was concerned, I wanted to push it as high up as I possibly could. I was particularly concerned about people on, what I would call, middle or modest incomes, people up to £100,000, and I did not want to do anything that would increase the amount of direct tax that they paid. You ask me why I chose the level of £150,000 and that was simply my judgment. I had to balance reluctantly, if you like, because, having spent the best part of 10 years in a government that had essentially two rates of tax, I think it is important that we are competitive, but in the present circumstances, and other governments are going to be confronted with this, we need to take action to support our economy and also to live within our means, and I thought this was a fair thing to do.
The idea that individuals who earn up to £100,000 are 'people on middle or modest incomes' would come as something of a surprise to most people in Britain, given that the median average salary of a full-time worker is just above £25,000. In fact 75% of workers earn less than £32,000 per year.
Cameron and Osborne have raised the rate of VAT (sales tax); despite their rhetoric about 'fairness', this, along with the other main measures announced in the budget, will hit the poor and those on medium incomes hardest. The scope for improving the revenues of the government sufficiently to remove the 'neccessity' of slashing the welfare state is abundantly clear from the most recent available statistics on the distribution of income in the UK. Due to the steep rise in inequality during the Thatcher period, which was largely maintained under New Labour, the share of the country's income (exclusive of taxes and state benefits) which goes to the top 20% of households has risen from 43% to 51%. After changes in the tax regime are taken into account, the proportion of all income received by the top one-fifth has risen by 22% since 1978. And within that top one fifth, it is the people on the very highest incomes who have gained the most.
The tax gap
There is, as one would expect, a neo-liberal theory which asserts that it is economically impossible to increase the revenue of the state by raising the rate of taxes on those with the highest incomes; and this theory does contain a grain of truth. Although the rich are the ones who can afford to pay, they- or at least the very richest among them- are also the ones who are most able to avoid paying, by employing accountants to discover loopholes in tax regulations, breaking the law in order to evade paying their taxes, shifting business operations or even themselves to tax havens and other countries with lower tax regimes.
However, when capitalist governments have wanted to raise revenue because high state expenditure was, in their eyes, unavoidable, they have achieved it by levying taxes on the rich. In the USA for example, the top rate of income tax was raised to 94% during World War Two; and in the period of huge military spending during the early part of the Cold War, the US government exacted top tax rates (between the years 1951 and 1963) of 92 and 91%.
How to deal with tax avoidance and evasion? Close the loopholes, employ more inspectors, prosecute wealthy offenders and increase the minimum and maximum prison sentences for the guilty. That, after all, is how society demonstrates its lack of tolerance for the serious crimes which poor and average people are apt to commit.
Instead, the government has opted to soften the state's approach to corporate tax evaders. As the Financial Times reported on 19th August:
Revenue & Customs will adopt a less combative approach to resolving tax disputes with businesses in a move designed to cut a mounting legal logjam and unlock billions of pounds tied up in court battles over avoidance.
Dave Hartnett, permanent secretary for tax at HMRC, said there had been examples of officials being too “tough” in disputes over tax assessments. “HMRC is packed full of very intelligent people, but we are sometimes too black-and-white about the law,” he told the Financial Times.
...A greater willingness to settle cases would be welcomed by businesses critical of the Revenue’s uncompromising approach to litigation and also chime with the coalition’s “open for business” message.
The Revenue’s more conciliatory approach was recently demonstrated by a £1.25bn settlement of a long-standing tax dispute with Vodafone, the telecoms group.
Taxation expert Richard Murphy, who is an advisor to the Trades Union Congress, commented in The Guardian on the UK government's lack of enthusiasm for collecting the taxes owed by rich people and the companies they own:
The tax gap has three parts. The first is tax avoidance, which I estimate to be about £25bn a year. This arises from the exploitation of loopholes in UK tax law and between UK tax law and that of other states – especially tax havens. The second part is tax evasion – that is breaking the law. I estimate this to be £70bn a year. HM Revenue & Customs claims it is much less, but their methodology for estimating anything but VAT evasion is very weak. Last, there is unpaid and late-paid tax – currently evaluated by HMRC to be at least £26bn.
Put these figures together and they come to more than £120bn. Enough, at least in principle, to close the whole current government deficit. Of course, no one will ever collect all tax theoretically owed – that's just not possible. Serious measures could be taken to tackle the tax gap, and yet there is no evidence that the coalition government is adopting any.
The current government is continuing the policy of cutting staff at HMRC [the government's tax enforcement department] – a policy initiated by New Labour. Almost 26,000 jobs have gone since 2005. Last year 5,000 frontline staff went and more still are to go. This makes no sense: each frontline member of staff brings in on average 30 times in tax what it costs to employ them. The result is that tax that is so badly needed to keep services going is being given away.
The objection that some rich individuals and corporations would take their wealth out of the country if faced by higher taxes is a more forceful argument; but this would have more credibility if the UK government- which, as The Economist perceives, takes a leading role in shaping the policy of the other wealthy countries- was seeking to use its influence to prevent states undercutting each other in a 'race to the bottom' in terms of tax rates. Instead, the Tory-Liberal administration has signalled its intention to lead the downward spiral, by announcing the cut in Corporation Tax. With the support of previous PM Gordon Brown, the G20 meeting in March 2009 agreed some modest measures- inadequate, but a slight step forward- to restrict the activities of international tax havens. The present British government is showing no interest in following up and improving on these measures.
Back to the future
So, we will have massive cuts; and the present brief moment, in which to conceive the effects of the reductions in state services and benefits is a matter of imagination, will be replaced by the Conservative-Liberal reality. The period of Thatcherism- during which unemployment, homelessness and inequality rose to previously unimaginable levels- provides some glimpses, but the details of our near-future are yet to be revealed. The overall and long-term result, however, is more certain.
Deprived of the buffer of the welfare state against the depredations of the capitalist system, society will revert- though on a higher technological basis- towards the 19th Century model. In its insecurity, the ever-widening gulf between rich and poor, and the lack of a social safety net, our experience will increasingly resemble the world as described by Charles Dickens and analysed by Karl Marx.
We have much to learn about the realities of life under pure capitalism. Let us hope that in these new-old conditions we learn not only how to suffer, but also how to struggle.