Monday, 23 August 2010

Tax Justice not cuts injustice

There was an excellent article on Comment is Free over the weekend by LEAP contributor Richard Murphy 'Let's tackle the tax gap once and for all'.

In the article, Richard writes:

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.

And the news has just got worse. Within 48 hours of that article being penned, it was revealed in the Mail on Sunday that the coalition government was cutting 20% of of the staff from the High Net Worth Unit – created in 2009 to achieve greater tax enforcement from the wealthy.

Tax avoidance and evasion are mostly carried out by the super-rich and big business. The appointment of billionaire tax dodger Philip Green to investigate public spending last week probably means the deficit crisis will continue to be plugged by the poorest rather than those who can afford to pay.

Friday, 13 August 2010

Austerity obsession will prolong misery

Stephanie Blankenburg

So, here we are. The economy is going into wind down before it has had time to get back on its feet. The Bank of England has just revised its growth outlook downwards and US news is more than disheartening. Equity markets are falling worldwide, and even China has, it seems, eventually been caught up in the global slowdown.

This dismal picture was marginally lightened by the unemployment figures of the Office of National Statistics (ONS) in the UK: a fairly large quarterly rise of people employed, a considerable fall in the claimant count. But even here much caution and warnings as to a shortlived surface phenomenon, unlikely to survive what most regard now as an inevitable "double-dip" recession or even a long depression – near zero growth and high unemployment for many years to come.

Overall, then, we are going into slowdown. Little, if any, doubt, about it. But why, exactly? There is much detailed discussion by experts – for example, of fiscal stimulus programmes in the US having failed, and having mistakenly outcrowded monetary policies geared towards keeping down the costs of borrowing by the state, ie bond (Treasury) prices, of the Cameron-cum-Clegg austerity obsession bringing this on, at least in the UK.

All of this is besides the point, though much of it will, eventually, come into the narrative. There is no immediate technical and short-term reason for this downturn, but there is an important longer-term one: there was a very big crisis. One that shed considerable doubt on the ability of a radically decentralised system of economic co-ordination to assess risk and promote general welfare.

In the aftermath of this crisis, nothing essential or effective was done to remedy the original problem of the failure of markets to assess social risk properly. Some villains were too big to fail and thus bailed out. The burden was shifted from private to public finances. There were some half-hearted fiscal stimulus programmes to reflate debt-ridden economies in some parts of the world, and a bit of "quantitative easing" in others. All of which have failed to infuse private sector agents with sufficient confidence to move on, to invest and lend again. Instead, those who can have retreated to speculation on commodities (copper, wheat, oil) as their safest bet in the longer term.

The likely outcome will be worldwide stagflation. Inflation, brought on by high long-term commodity prices (for copper, wheat, oil) through financial speculation, that will eventually lead to an increase in interest rates. Hence, mortgages and household debt will remain a huge headache, especially in the UK where current household debt is, still, particularly high. And stagnation, brought on by a sustained lack of private sector confidence and expectations of sales in anything other than commodities.

Meanwhile, when October comes round, and with it the spending review, stand by to blame the government. Their long-announced austerity measures can only worsen the hell we are headed towards by making very sure that private sector expectations are going to be even less salutary than expected. After all, 500,000 jobs lost in the public sector, at a minimum, and 600,000 to 700,000 in the private sector by the end of this parliament, aren't exactly what you would call a confidence-inspiring upward trend. "The markets" – and their self-appointed guardians, the credit rating agencies – know as much, and are worried. Not about the UK debt, but about the lack of future sales perspectives.

The Cameron-cum-Clegg austerity obsession will do little, if anything, to solve the original problem. The big crisis and its causes. It won't get the debt down, since the economy will stagnate, at best, but it will do much to prolong and deepen the misery of the many. For very many years to come.

*This article first appeared at Comment is Free

Wednesday, 11 August 2010

US economy on the brink

The self-created mirage of recovery that helped sustain the tattered remnants of the American Dream evaporated yesterday as reality came calling.

The desperate measures taken to halt the imminent sacking of hundreds of thousands of public sector workers was only one event in a day of reckoning.

Five stark paragraphs comprising the statement issued by the Federal Reserve – America’s central bank – reek of the stench of exhausted defeat. The first outlines the problem. It needs no interpretation:
Information received since … June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in non-residential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

In the action paragraphs, the committee explains that base interest rates will be kept at their historic low, but reiterates that “resource slack”, which means massive overcapacity in production, eliminates any hope of anything changing for years or decades to come.

In what is seen as a reversal of previous policy, the Fed is intent on printing even more money in a bid to stimulate the economy. It plans to use the income from repayments on mortgages it bought during the financial meltdown of 2008 to pump out more dollars.

If nothing else it gives a new meaning to recycling. Once the money has been captured from American families, the figures just keep moving around inside the Federal Reserve’s computers. Paul Ashworth of Capital Economics called the decision a "symbolic gesture".

Yesterday, Obama recalled the members of the House of Representatives back from their summer recess so that they could pass an emergency bill approving $26bn (£16.4bn) funds for states which have run out of money, and $16.1bn to extend funding for the Medicaid healthcare programme for low-income Americans.

Without the emergency aid, states would have laid off police, teachers and firefighters and all of the key services would have ceased functioning. The states themselves have suffered during the recession through a loss of revenue through sales and property taxes. The aid will only get them through the current financial year, however.

Those who claim that public spending is the answer to the economic crisis have had their fingers burnt by the US experience. Obama’s government has spent trillions in various stimulus packages – all to no avail.

That’s because the crisis of capitalism is global and marked by the classic symptoms of over-production, over-capacity and falling demand. The boom was artificially fuelled by mountains of credit and debt which inevitably proved unsustainable and led to the implosion of the financial system. Without easy credit, consumers are in general spending what money they have on necessities like food and shelter.

It all adds up to the American economy being on the brink of collapse, adding to the sense of political crisis gathering around the Obama presidency.

Gerry Gold
Economics editor
11 August 2010

Tuesday, 10 August 2010

Taking down the public sector punchbag: Part 1 - Pay

Public sector workers caused the economic crisis - it was their bloated pay, gold-plated pensions and comfortable conditions which started it all . . . or so you'd think if you read the mainstream press in the UK.

Even if you didn't believe that, you'd still be forgiven for believing that the public sector has it easy compared with the private sector. You'd be wrong again though.

The reality though is somewhat different. In the year to March 2010, ONS figures show that the average pay rise in the private sector was 3.6%, while in the public sector (excluding settlements in the 'nationalised' banks) it was 2.8%. The average pay rise in the finance sector was 5.2% over the same period.

Despite Osborne and Cameron regularly referring to private sector workers having to cope with pay freezes last year, just 20% of private sector workers faced a pay freeze in 2009 and only 10% did in 2010. This divide-and-rule strategy of public sector vs private sector is underpinned by f**k all evidence. In 2009, the average pay rise in the public and private sectors was 2%.

The Hay Remuneration Report published earlier this year shows that public sector pay is 4.3% below the private sector nationally. This differential drops to 3.6% in London, presumably because public sector unions have won 'London weighting' in many areas.

At lower paid grades, the public sector average is roughly comparable with the private sector, but private sector pay pulls away at the higher grades. There is one noticeable exception to this though - call centre workers in the public sector are paid 14.3% less than their counterparts in the private sector. Most of these will be civil servants working for the Department for Work & Pensions or HM Revenue & Customs.

Indeed, civil service pay compares particularly poorly with Administrative Officers, who make up 48% of the civil service staff, paid 21% than their colleagues doing comparable jobs in the private sector (perhaps the reason why they have better pension and redundancy schemes?).

The grade below AOs, Administrative Assistants, in the civil service (doing clerical duties like processing benefit claims, tax credits, self-assessment forms) earn £979 less per year than their private sector counterparts and £572 less than their colleagues in the rest of the public sector.

To counter these excessive pay packets in the public sector, the Blairite right-wing Social Market Foundation is urging the government to impose a three year public sector pay freeze - rather than the two year freeze imposed to date. This would mean a real terms pay cut of over 10%.

These pay differentials will get worse - 35% of public sector pay settlements in April 2010 were pay freezes. In 2011, IDS estimate the average private sector pay rise will be 4%, while in the public sector just 1%.

Of course Cameron and Osborne have another alternative - their Big Society - and volunteers will run public services: Volunteer firefighter, database engineer, or dentist anyone? No, thought not.

We should not forget, as the HM Treasury leak in June told us, cutting public sector jobs (and/or pay) will only harm the private sector. That's why the estimated 600,000 jobs cuts in the public sector will result in 700,000 lost in the private sector.

Making money out of extreme weather

Capitalism has a genius for inventiveness that drives those who represent its interests to extraordinary feats of creativity. The more extreme the weather, the more money they can make.

Global temperatures in the first half of the year have been the highest since records began 130 years ago. Synchronised violent weather events are disrupting and consuming lives and displacing millions across the world from Pakistan through Russia to the USA.

The entire population of Moscow is struggling for breath and hundreds have already died as the city is engulfed in smoke from wildfires burning throughout vast areas of European Russia, Ukraine and Kazakhstan. The long drought which turned the land to tinder has ruined crops on a huge scale while in Pakistan up to 14 million are affected by floods in one of the greatest disasters in history.

With mounting evidence of the effects of climate change adding up to a planetary emergency, post-Copenhagen talks have taken a step backward. The Obama administration has all but abandoned attempts to pass emissions limiting legislation because the additional costs on business might impact their chances in the November elections.

This is further proof that there can be no solution within the framework of capitalist society. Quite the opposite. Capitalists can and do find ways to overcome any barrier to profitable activity, irrespective of the lives they trample on the road to riches.

Reports say that commodity traders from Glencore International prompted the Russian government to ban exports of wheat, thereby boosting the already soaring world price of this critical foodstuff, denying access to the next meal for billions of people, but enabling the Swiss-based commodities corporation to increase its profits. The ban on exports meant that grain trader Glencore could cancel its contracts based on earlier, lower prices and make new deals exploiting the increase. The brilliance of the seriously sick at work.

Wheat isn’t the only globally-traded commodity which has seen prices rocketing in recent days. There’s a causal connection between the horse-has-bolted attempts to rescue the global financial system and the price of basic foods including barley and rice.

Joachim von Braun, former director-general of the International Food Policy Research Institute puts it like this:

There are increasing indications that some financial capital is shifting from speculation on housing and complex derivatives to commodities, including food. While the financial markets have recently been regulated to curb excessive speculation, commodity markets have remained largely untouched and are the open flank of the system attracting speculation. A food price crisis is not of great significance for the relatively rich. But for the bottom 3 billion it poses a nutrition disaster with appalling long-term health consequences. The number of undernourished people has increased against the backdrop of economic recession.

Another example of this deranged genius comes from the United States. The location is the Chicago Mercantile Exchange, the home of the market in financial derivatives that, from the 1990s onwards, did so much to express and satisfy the mounting demand for credit throughout the late stages of the post-war economic expansion.

The mathematical wizards who invent money-spinners for the global gamblers have come up with a new futures market in “cooling degree days (CDDs)”. It works like this: in common with much of the rest of the northern hemisphere, the US is experiencing record temperatures. Demand for air conditioning has seen power consumption rise by 10%, boosting the profits of the power generators and suppliers. CDDs give a measure of demand derived from the degrees of air temperature in excess of 65oF (18.3oC) and speculators with money to burn gamble on what this number will be in a few months time.

By any standard these people are among the clinically insane. Capitalist exploitation of the planet and its people has to end, as a matter of extreme urgency, before we are dragged beyond the limits of the ecosystems’ ability to recover.

Gerry Gold
Economics editor
A World to Win
10 August 2010

Thursday, 5 August 2010

Lloyds racks up £1.6bn profits from cuts

From today's Morning Star

Louise Nousratpour

Taxpayer-backed Lloyds Banking Group has boasted of a "significant milestone" when it announced half-year profits of £1.6 billion.

The result came as a marked turnaround on the £4bn of losses seen a year ago and was better than expected by most analysts in the City.

Lloyds, which is 41 per cent owned by the public, claimed that sharply lower bad debts had helped its recovery, with losses on loan defaults more than halving in the first six months of 2010.

However Left Economics Advisory Panel Andrew Fisher refuted the banks version of events.

"The profit is not due to successful operation, but due to private equity-style asset-stripping with 16,000 jobs cuts, pensions cut and branches sold off to Santander," he said.

Mr Fisher added sarcastically that the taxpayer should be pleased with the profit because "with a 41 per cent stake we should be welcoming over £650 million into the public coffers. That figure would more than pay for the Health in Pregnancy grant that was abolished in the last Budget."

Finance union Unite said that the profits had only been possible because of staff who had worked "tirelessly in extremely difficult circumstances."

National officer Cath Speight said: "Since the formation of the bank there have been over 16,000 jobs lost and those who hold the key to the success of the bank continue to face insecurity and uncertainty about their futures because of the sale of bank branches.

"Employees have also suffered as Lloyds severely curtailed their future pension benefits."

Lloyd's profits contributed to a combined haul of more than £11bn from the four major high street banks.

HSBC reported a bumper £7bn half-year profit on Monday.

Monday, 2 August 2010

HSBC bank big-wigs brag of super-profits

From today's Morning Star

Louise Nousratpour

Banking giant HSBC has boasted that it had more than doubled half-year profits to £7.2 billion - prompting demands for a windfall tax and the nationalisation of the banking system.

The British-based group's super-profits roared 121 per cent ahead in the first six months of this year as bad debts plunged to their lowest level since the financial crisis.

In Britain, where HSBC cut 4,600 jobs last year, profits totalled £1.3 billion, an increase of 26 per cent. The bank has also set aside £6.2bn in staff pay, bonuses and benefits for the first half of the year - up 7 per cent on a year earlier.

Left campaigners said that the recent super-profits announced by the corporate sector confirmed that we are not "all in this together," as Prime Minister David Cameron keeps telling the nation, with big business flourishing while Chancellor George Osborne "robs ordinary people of £6bn in austerity measures."

Left Economics Advisory Panel co-ordinator Andrew Fisher said: "The eye-watering figures from HSBC reinforce the fact that the corporate sector has had a good recession.

"We are seeing the same phenomenon whether it's BT, British Gas or the banks - corporate profitability restored to or above pre-recession levels, while the recession they barely felt is used as an excuse to cut jobs, suppress wages and raise prices."

Mr Fisher warned that a "stark class warfare" was being waged by the Con-Dem government and "its corporate pals who were given £25bn in tax breaks in the last Budget.

"The reality is that the government still holds over £850bn in bank assets.

"There is no need for a single job to be cut or for a penny to be taken away from a single public service."

Communist Party of Britain general secretary Rob Griffiths renewed the labour movement's demand for a windfall tax on all super profits and for the banking sector to be brought in-house to plug the deficit and fund public services.

"Banks were kept afloat because the government and the Bank of England pumped £1.3 trillion into Britain's financial system, yet the working class are being forced to pay the cost of the crisis while the fat cats grow fatter on their ill-gotten gains," he added.

Britain's other major banks are due to report their results later this week. Part-nationalised Lloyds is forecast to report £800 million in profits, while the 83 per cent state-owned Royal Bank of Scotland (RBS) is expected to post interim profits of around £200 million.

Labour leadership frontrunners David and Ed Miliband have both called for the recently introduced banking levy to be doubled.

David Miliband told a south London party meeting on Sunday that the tax, expected to raise £2bn a year from banks, was "incredibly small."

Sunday, 1 August 2010

Whatever happens, the buck will stop with the Chancellor

Hugo Radice

WHEN the post-election dust settled and George Osborne moved in to the Treasury, one of his first acts was to set up the Office for Budget Responsibility (OBR).

This latest addition to the roster of economic policy institutions had been trailed in February. Osborne claimed that the Treasury had provided first Gordon Brown, and then Alistair Darling, with whatever forecasts they wanted that would support their political decisions. From now on, the Treasury's forecasts would be vetted by an independent body; as a result, the Chancellor's public credibility
would be restored.

Trailed as an innovation on a par with Gordon Brown's 1997 decision to set up an independent Monetary Policy Committee at the Bank of England, the OBR looked like a potentially useful body. Two months on, however, Osborne's plan seemed in tatters.

First of all, after a Treasury leak raised serious questions about the employment forecasts presented in the coalition's Emergency Budget, the OBR rushed out some fresh figures conveniently in time for David Cameron to head off the critics during Prime Minister's Question Time. Shortly after, it was announced that the OBR's first chief, former top Treasury adviser Sir Alan Budd, was going to resign after only three months in post. It also turned out that for all its vaunted independence, the OBR had set up shop within the Treasury, a few doors down from the Chancellor.

Was this another political fiasco, on top of the abrupt departure of David Laws, the Chief Secretary to the Treasury? Had the unexpectedly self-confident Mr Osborne shot himself in the foot? Well, not really. It turned out that Mr Budd had all along only intended to head the OBR for three months in order to get it established. As for the physical location of the OBR, one might as well argue that the Chancellor's residence at 11 Downing Street meant that the Prime Minister could easily keep him on a tight leash: try telling that to Tony Blair.

However, the establishment of the OBR does raise some important issues about how economic policy is made in a democracy. Back in 1944, the Polish economist Michal Kalecki famously predicted that as government spending became more and more important, governments would be tempted to engineer a boom towards the end of their term of office, in order to get re-elected. Once back in power, they would then slam on the brakes and restore the fiscal balance, only to start spending again as the next election loomed.

He called this "the political trade cycle". The post-war experience of stop-go economics in Britain seemed to bear out his prediction.

To avoid this political manipulation, a fiscal authority independent of the government of the day might seem to be a good idea, but it would make ministerial government completely pointless. Fair enough in a dictatorship, but it is hard to see how such a move would be acceptable to the political élite, let alone a democratically-inclined public.

Given this, Osborne's OBR is an attempt to shore up the Chancellor's credibility by at least ensuring that the taxation and spending commitments are based on rock-solid forecasts of where the economy is going. And here we come to the real problem: rock-solid forecasts do not and cannot exist in a market economy. As we know only too well from the credit crunch and the downturn which followed, the behaviour of financiers, businessmen and other economic actors – even politicians – is fundamentally unpredictable: they are human beings after all, not machines. This means that economic forecasts depend heavily on what we might call educated guesswork.

So what about the OBR's forecasts? They expect economic growth of 1.2 per cent this year and 2.6 per cent to 2.8 per cent thereafter, despite falling public spending, notably a halving of public investment in areas like roads and schools. A rapid and sustained private sector recovery will, they say, reduce the number of unemployed people claiming benefits, from 1.6 million last year to 1.2 million by 2014. Such a recovery in private sector activity has never been seen before after a major economic downturn.

But in addition, the OBR expects that the profits of the financial sector will grow at nearly 9 per cent this year and 6 per cent a year thereafter, giving a big boost to tax receipts. It is very hard to see how this can be reconciled with the need to rein in the City's more speculative activities, as well as building up the financial reserves of the banks in order to avoid a repeat of the credit crisis.

The real story about the OBR, therefore, is not its independence, but whether its forecasts turn out to be accurate. In any case, however things turn out, the buck will always stop with the Chancellor.