Mervyn King’s rosy recovery prediction means little for a shattered nation

Prem Sikka

The outgoing Bank of England governor Mervyn King has presided over a huge economic crisis. His parting gift is the claim “a recovery is in sight” that the UK might achieve economic growth of even 1% this year. Despite this, the GDP will still be less than the 2007 figure.

Don’t be in a hurry to pop any champagne corks, because the assumed economic recovery is not what it seems and is unlikely to be sustained. It has been achieved through quantitative easing, printing money as old-fashioned economists used to call it, to the tune of £375 billion. That is equivalent to about £16,000 per household.

This money has been added to national debt – the only thing that citizens seem to own these days – but has not been used to restructure the UK economy or start new industries. Instead, it has been mainly given to the banks and they have used it to bolster their balance sheets and pay high executive salaries.

The plight of ordinary people has been getting worse. UK unemployment is rising and the official count now stands at 2.52 million. Nearly a million young people aged 16-24 are unemployed, taking the rate to a depressing 21.2%. The number of young people on zero hour contracts has doubled from 35,000 in 2008 to 76,000 in 2012. Zero contract hours are jobs which provide no guarantee of regular work or pay and have become the preferred mode of employment for some 23% of UK employers. Many miss out on rights such as sick pay, pension and paid holidays. Many firms and even charities and public sector organisations are adopting zero hour contracts.

Large sections of the UK population are wracked with insecurity. Since the 1980s, the governments have sought to weaken and destroy trade unions. In 1979, some 13.2 million UK workers, or 55.4% of the workforce was in a trade union, but by 2011 this declined to just over 6 million workers or 23% of the work force, compared to 69.2% in Finland, 68.4% in Sweden, 66.6% in Denmark and 54.4% in Norway.

In the absence of countervailing power structures, workers' pay has been ruthlessly assaulted. In 1976, wages and salaries paid to employees, expressed as percentage of GDP, stood at 65.1% of GDP. Now it stands at barely 53%. The plight of ordinary people is made even worse because the above statistics include the rewards lapped up by executives. The rates of corporate profitability are at historically high.

Wealth has been sucked upwards with the aid of state policies. Corporation tax rate has been reduced from 52% in 1982 to 21% for 2014. The top marginal rate of income tax has declined from 83%, in 1979, to 45%. Despite the recession, the rich are getting richer. In 2012, the richest 1000 people, representing just 0.003% of the adult population, increased their wealth by £35 billion to £450 billion, enabling them to fund political parties and shape public choices.

It is misery for ordinary people who have borrowed £1.423 trillion, equivalent to the GDP, to maintain a decent living standard. Thousands of people have become victims of the payday loans industry which does not shy away from charging interest at the rate of 4000%. Some 13.5 million people, including 1.8 million pensioners and 2.5 million children were estimated to be living below the poverty line and with a deep austerity programme these numbers will increase.

The number of people relying on emergency food handouts, simply to survive, has trebled to 350,000. People are facing massive hikes in the price of electricity, gas, water, transport and other essentials and simply do not have the financial capacity to take any further hits. One survey has suggested that an increase in monthly bills of just £99 will prove to be disastrous for a large number of families.

The above sketch of the social landscape is a million miles away from the rosy picture painted by the Bank of England. Equitable distribution of income and wealth is a key requirement for any sustained economic recovery, but it is not on the agenda of any major political party. Some may be happy to gather the crumbs of economic recovery; but most of us will simply be asking, “what recovery?”

• This article first appeared at The Conversation

Are Tax Dodgers the Real Scroungers?‏

Looks like an excellent event organised by Sussex LRC, a week today as part of the Brighton Festival Fringe.

Are Tax Dodgers the Real Scroungers?‏

Wednesday 22 May

7pm

Community Base, 113 Queens Road, Brighton, BN1 3XG

Speakers: Richard Murphy (Tax Justice Network), Mark Serwotka (PCS), Katy Clark MP

Sadly, it seems tickets are sold out - though contact sussexlrc@hotmail.co.uk in case of late returns. But we'll try to get a report and even video from the meeting, if possible.

In the meantime, you'll have to make do with this Class blogpost 'Who are the real scroungers?' - which should be a good teaser for the meeting.

But even more clearly - are tax dodgers the real scroungers? Look at this graphic and make up your own mind ...

Hype wars: Return of the FDI?

Here's the propaganda: Chancellor George Osborne has pulled off a massive coup by personally negotiating a deal to secure the next film in the blockbuster Star Wars saga will be made in the UK.

George Osborne has not been shy about hyping his own success in making this happen:

"It is clear evidence that our incentives are attracting the largest studios back to the UK.

"I am personally committed to seeing more great films and television made in Britain."

Yes, there's our doughty chancellor securing foreign direct investment (FDI) to Britain and securing a healthy future for the UK film industry ... or so he'd want you to believe ...

Here's the reality: previous Star Wars films (in fact the first four) have been made (entirely or substantially) in the UK too, so this is hardly breaking new ground or attracting new business to our shores.

It's also worth analysing what Osborne means when he talks about "our incentives". What that means is that even if just a quarter of the film's production occurs within the UK, then the producers (Lucasfilm) can claim back tax relief on 80% of the full budget. This is a colossal tax break - and is basically offering multinational firms a tax avoidance scheme - giving them the option to reassign profits from elsewhere to the UK.

Hailing this as some kind of success story - when in reality it represents a race to the bottom on tax (i.e. governments prostrating themselves to business)  - is typical of a chancellor who hailed the 'Irish miracle' in 2006 for its slashed corporation tax, shortly before that economy spectacularly imploded.

Of course, Osborne's economic strategy is based on slashing taxes for business and the super-rich. What underpins the Chancellor's thinking is either a deeply flawed belief in Hayekian economics or more crudely a policy of class war: reducing taxes on the wealthy while slashing services and entitlements for everyone else.

Far from being return of the FDI, this is more the (evil) empire fights back ...

The UK minimum wage - flying at half mast ...

As previously reported on this blog, the UK minimum wage is being cut in real terms this October, and would be 7% higher today if it had increased in line with inflation over the past 5 years.

The infographic below shows just how much the UK minimum wage needs to catch up not only with inflation, but with rates in many other comparable countries.

(We're reliably informed that if the national minimum wage (NMW) had increased at the rate of that for FTSE100 Chief Executives since 1998, it would today stand at more than £19 per hour - equivalent to a full-time salary of £39,000 a year!)


A recently published infographic by the PCS union* shows that the UK NMW lags behind comparative rates in many other nations (though the UK edges the US on 32%).

The graphic also mentions that if our minimum wage was equivalent to that in France, low paid UK workers would be earning an extra £1.95 per hour - equivalent to nearly £4,000 extra a year. (If it rose to New Zealand levels, our NMW would be £9.55 per hour - equivalent to nearly £19,000 a year for full-time work).

For the national minimum wage to reach the UK living wage of £7.45 per hour would mean the NMW being equivalent of 42% of average earnings - the same rate as in Portugal, and just below that in Australia.

It's a commonly made argument that raising the minimum wage would increase unemployment. Indeed that same argument was made the NMW was first introduced. Study after study (including this one from the US) shows that not to be the case - and there are even Tories calling for an increase in the minimum wage.


It's quite clear that the UK's low wage economy is having a drag on demand (one that loosening credit doesn't solve). Indeed, a PCS report published earlier this year - Britain needs a pay rise - showed that the real value of wages has fallen by 7%, there has been a real terms drop in consumer demand of 5% over the same period.

And the misery doesn't end there for low paid UK workers - who are also facing a real terms cut in a range of in-work benefits, including working tax credit and child tax credit - while child benefit is frozen for the third consecutive year.

If you want an economic recovery, you need more £s in people's pockets. If you want more £s in people's pockets, you have to either legislate for a higher minimum wage (as many other nations have done) or restore some trade union rights, so that workers have greater bargaining power to win better pay.

*PCS has a great series of infographics which you can see via the PCS Facebook page

Borrowing for growth - some advice for Ed

Earlier this week Labour leader Ed Miliband made the case (somewhat haphazardly) for more short-term borrowing to stimulate the economy.

Not unexpectedly, Miliband's reluctance to admit that an alternative to austerity might involve borrowing was seized upon by the the right wing press.

Miliband's unease reflects a battle within Labour that has yet to be won. Seumas Milne analyses that ongoing political fight in his Guardian column. As Milne correctly observes:

"The Tories want to lure Labour into signing up for the same medicine – or a mildly watered down variant – as they did in the far more benign economic environment of 1997.

"If Miliband and Ed Balls (who still defends the 1997 decision to stick to Tory spending limits) fall into that trap, it would be a disaster – both for Labour's election prospects and the chances of rebuilding an economy that delivers for the heavily squeezed majority".

But I want to look at the economic timidity (and the power of the Tories' economic framing) that made Ed stutter in that interview.

Ed should have responded by saying this:

"Yes of course it means borrowing - but borrowing to grow the economy. George Osborne is borrowing over £240 billion more than he said, our debt is rising, because his policies are failing. He has to borrow for his failure, we would borrow for growth."

The graph to the right shows how Osborne's plan set out in his emergency budget has faltered - as many predicted it would - due to the self-defeating nature of austerity policies in an economy with already weak demand.

Labour should be ramming this home. The choice - framed by the Tories and put to Labour - is not between cutting spending or borrowing more. It is between borrowing for failure or borrowing for growth.

Ed Miliband should have had these arguments to his fingertips. The Labour leadership still seem caught in this false trap between borrowing or austerity. This stems from the acceptance of another narrative that Labour borrowing and investment in public services is the reason for the deficit today. It's not, no matter what economic illiterates like Liam Byrne scrawl.

In office New Labour spent less as a percentage of GDP than the governments of Thatcher and Major (as this graph shows) and had reduced the national debt prior to the economic collapse caused by the banking crisis (as this graph shows).

So while Ed should swat aside the silly jibes about Labour's spending, saying:

"The last Labour government invested in public services, while the governments of Thatcher and Major spent more on social failure, just like David Cameron's government today."

Finally, Labour's borrowing plans. All the World at One furore was caused by Ed Miliband's plan for a temporary VAT cut - "The point I was making yesterday was to get growth going by cutting VAT, then over time you will see borrowing actually fall. That was the point I was making."

There's a good solid case for permanently reducing VAT - a regressive flat tax - and redistributing the tax burden onto those on higher incomes (e.g. restoring 50% tax rate) or by taxing wealth (mansion tax). Assuming some revenue neutral combination of the above, there is a stimulus effect because poorer people have to spend their income, whereas the rich invest their surplus wealth. Taxing wealth of course unlocks capital.

However, a temporary VAT cut (and the timid message it sends) is hardly the most effective way of stimulating demand.

Why not instead argue for a mass housebuilding programme - that would create thousands of construction jobs (a sector where there is excess capacity) and more in the supply chain. Getting people into work (or more work) means more taxes and fewer benefits.

Building new homes, with a hefty chunk of council homes, would also meet an urgent social need and provide revenue to local government through rents. The knock-on impact of furnishing new homes would also boost the retail sector.

Housing is of course only one example, but there are others from new energy infrastructure, energy efficiency programmes to new transport networks.

By enmeshing economic stimulus with meeting social need, Labour could then mobilise thousands of people into backing their demands. But that needs the political fight to be fought and won within the party ... back to Seumas.

How to reform housing benefit

Housing benefit at £24 billion a year is one of the costliest chunks of the social security bill. As the graph below (taken from this Declan Gaffney article) shows, it has risen 3.5 times relative to GDP since Thatcher was first elected in 1979.

Writing an excellent article for Labourlist, Labour London Assembly member Tom Copley points out that the bulk of this increase occurred under the Thatcher government. In fact under Thatcher, the housing benefit bill rose by a colossal 450%. Since then the cost of housing benefit has actually been pretty stable - so to address the mountains of moolah spent on housing benefit we have to understand why it shot up under the Thatcher government.

This happened for some very clear reasons that were deliberate policy:

1. Over 1.7 million council homes were sold off between 1979 and 1992 - diminishing the stock of council homes and pushing more and more tenants into the hands of housing associations and - more expensively - private landlords
2. In 1989, her government abolished rent controls - which had existed to give local authorities the power to limit rents. With controls removed, landlords could charge what they wanted, regardless of the social impact
3. Her government liberalised credit and gave tax breaks to buy-to-let merchants, which vastly increased the size of the private rented sector, as right-to-buy and stock transfers were depleting the social sector. 

Those policies also had the consequence of massively inflating house prices (and therefore rents) - which the constrained supply due to the absence of new building by successive governments, including the current one, has only intensified.

Today 33% of just over 5 million housing benefit claimants live in private rented sector - i.e. not the social rented sector (councils and housing associations). And yet if we look at the largest claims - those over £200 per week (so over £10,000 a year) - we find that 68% of those claims are made from the private rented sector. These cases are only 3.3% of all cases, yet they account for over 10% of total housing benefit expenditure.

Private landlords are guzzling from the housing benefit pipe because of structural reforms brought in by Thatcher. Measures such as the benefit cap will lead to councils deporting their own citizens, increased homelessness and poverty, but they will do little to tackle the rising cost of housing benefit - even if one could ignore their inherent injustice.

To tackle the housing benefit bill, and to do so in a just way, a Labour government would have to build homes and cap rents - as Copley spells out for Labourlist. But he also makes the important point that the housing benefit bill would be reduced by tackling unemployment (something this government has failed to do), and by increasing wages through living wage campaigns.

The latter is particularly important, since 93% of new housing benefit claims in the last two years have been from households in which at least one person works. That fact should also silence the 'better off on benefits' brigade, as so many people in work are dependent on benefits just to keep a roof over their heads.

It's also imporant to note that money spent on housing benefit to council tenants is effectively just an administrative cost - from central government to local government and then back to central government.

The next Labour government has a choice: invest in public housing and cap rents or keep shovelling taxpayers money into the expanding property portfolios of private landlords.

But Labour can also be populist about this - pledge to cut the welfare bill at the same time. Here's more on how.

MPs expose tax firms' 'inside track' on loopholes

MPs and unions today fiercely criticised an "unhealthily cosy relationship" between the Treasury and big accountancy firms that enables wealthy people and companies to avoid paying tax.

The public accounts committee said that it was "very concerned" at the way the "big four" accountancy firms - Deloitte, Ernst & Young, KPMG and PwC - were able to exploit loopholes in the tax laws.

It noted that staff were regularly seconded from these accountancy firms to advise the Treasury on technical issues when drafting legislation, only to return to advise clients on how to use those laws to avoid tax.

This "insider knowledge" on changes to Britain's tax laws enables them to identify loopholes in legislation quickly, the committee said.

Committee chairwoman Margaret Hodge said the practice represented a "ridiculous conflict of interest" which should be banned.

"The large accountancy firms are in a powerful position in the tax world and have an unhealthily cosy relationship with government," she said.

She warned that HM Revenue & Customs was engaged in a "battle it cannot win" in seeking to stem the losses to the exchequer from tax avoidance.

It had far fewer resources than the big four firms which employ almost 9,000 staff and earn over £2 billion a year from their tax work in Britain.

Left Economics Advisory Panel co-ordinator Andrew Fisher called for an end to the "revolving door between HM Treasury and the tax avoidance industry.

"At a time when cuts are forcing millions into poverty and thousands into homelessness, the continued existence of the tax avoidance industry should shame any civilised nation.

"Trade unions like PCS and Unite and campaigners like the Tax Justice Network and UK Uncut should feel proud that they have forced this injustice into the public glare."

PCS general secretary Mark Serwotka said: "This cosy network around the Treasury and the big accountancy firms helps wealthy individuals and companies to deprive our exchequer of tens of billions of pounds a year.

"This then helps the government to peddle the myth that there's no money for our public services."

This article first appeared in the Morning Star