The 2011 Budget and its global context

Hugo Radice picks apart Osborne's budget, and predicts difficult times ahead for the UK economy.

The massive turnout on March 26 in London provided a vital public repudiation of the ConDems’ austerity programme. But although opinion polls show that a large majority of the public say that the cuts in public spending are unfair and too fast, more than half still think they are necessary. As opposition heats up all over the country, with local opposition groups being set up and public meetings and protests taking place, it is vital that the left continues to argue against the cuts. Far from being based on ‘scientific’ economics, the cuts form a determined attempt to make the poor pay for the bankers’ blunders, and to change fundamentally the relation between the citizen and the state in Britain. And what’s more, the austerity programme may well make the chances of a general economic recovery worse rather than better.

In developing our arguments over the coming months, we need a good understanding of the likely consequences of the budget, in the context of the ConDems’ overall fiscal strategy and the global economic outlook.

The budget

In his 2011 budget, George Osborne was clearly determined to stick with ‘Plan A’, adding little to the barrage of measures already decided in the emergency budget last summer. We are now braced for the full impact of those measures, especially from local authority job cuts, reductions in a range of benefits, and the rise in national insurance contributions. The Institute for Fiscal Studies has once again shown that these cuts will bear most heavily on the poor; although the top 10% will have their incomes reduced significantly by the 50% income tax rate, for the rest of us the proportional fall in income expected over the next 5 years increases as you go down the income scale. And to this, we have to add the hidden extra costs imposed on large numbers of households by the loss of public services such as libraries, day centre provision, rural bus services, and so on.

Osborne’s only substantial change in the budget was a reduction in corporation tax. He claimed that this would encourage businesses to invest more and take on more workers, but as Keynes pointed out long ago, changes of this kind – a few percent off tax or a small reduction in the cost of borrowing – have no effect if business confidence is low and if households are cutting back on spending. And as the cuts work through and spending falls, confidence is very likely to fall.

He also tried to appease the growing public discontent over the cuts with new measures helping motorists, first-time housebuyers and jobseekers. These were fully funded by new revenues from North Sea oil, tax avoiders and the banks, so the net effect on total demand is precisely zero. But the measures were in themselves so modest that they are unlikely to lift the encircling economic gloom. Although he may have thought he would win public support by taking more tax from the North Sea oil producers, a penny less a litre is not going to cut much ice given that the price has risen by 20-25 pence since the election.

The second issue for this budget was whether Osborne could find some way to increase the chances of economic recovery, given Labour’s persistent accusations that he had no strategy for growth. He knows very well that even if the coalition succeeds in its efforts to ensure that the present parliament lasts a full five years, there is little chance of re-election if the recovery is not in full swing well before that deadline. For this reason, the main emphasis in his speech was on ‘reform’ and ‘rebalancing’. He painted a picture of an entrepreneurial economy in which manufacturing, supported by a slimmed-down and efficient public sector, becomes the new engine of growth. For this purpose, he put together a menu of measures on enterprise zones, apprenticeships, technical education and tax breaks for innovation.

Such measures are all too familiar from the history of economic policy over the last half century, during which manufacturing has continually declined in terms of its relative weight in economic activity. Is there any reason why these measures will work this time round? Part of the problem is undoubtedly that most of the proposals will take a good while to implement, and even longer for their effects to feed through into jobs and incomes. The creation of new enterprise zones looks helpful on the face of it, especially in those regions of the UK which will be hit hardest by the decline in public sector employment. But the enterprise zones will have to be managed by the public sector, and the main reservoirs of expertise on regeneration, the Regional Development Agencies, are even now being dismantled and their staff dispersed. On top of this, many experts on regional development have argued that enterprise zones merely shift jobs from one part of a depressed region to another, with little net increase in employment. Proposals for expanding apprenticeships and technical colleges, and to extend tax reliefs for innovation and business start-ups, have likewise been a staple of many past attempts to revive British industry, but will take time to have any effect.

The Chancellor’s theme of ‘reform’ seems to involve cutting the cost and complexity of both taxation and regulation. While no-one in their right mind would oppose such a worthy aim, history suggests that this will prove extremely difficult. The complexity of public policy reflects the complexity of modern society; the red tape that supposedly strangles local development proposals has evolved in response to the greater importance that citizens have come to place on their environment and amenities. The furore over the proposed high-speed railway through the Tory-voting Chilterns provides a case in point.

The global context

Overall, the success of the Chancellor’s 2011 budget depends in any case on matters outside his control, matters about which he remained very largely silent. The economic forecasts published on 23 March by the Office for Budget Responsibility reflect the widespread view that economic prospects for the UK look weaker than they did last summer: growth in 2011 is now expected to be 1.7% rather than 2.1%, while the forecast for 2012 is marginally reduced from 2.6% to 2.5%. This revision is based largely on concerns that higher-than-expected inflation will cut into household spending, and therefore a slower growth of output. In turn, that will also make for a worse fiscal outturn, due to lower tax revenues and higher welfare spending.

But the OBR also points to an improving outlook for the world economy as a whole in the next two years, which raises the questions of whether this optimism is justified, and whether the UK can participate fully in the global recovery.

How do our rulers currently view the world economic context? First, the concerns widely expressed earlier in the year over tensions between the USA and China seem to have abated; the interests of their political and business élites are too closely intertwined for either side to risk a serious rupture. Instead, the last three months have seen three different areas of concern for global capitalism.

First and foremost, turmoil in the Middle East has had both immediate and longer-term consequences. The loss of Libyan supplies has dramatically affected the price of oil, not so much because of the volume – Libya is a minor global exporter – but because the specific characteristics of Libyan oil and its regional delivery patterns had knock-on effects on other parts of the global oil market. The price rise in itself, alongside continuing global increases in food prices, has increased inflationary pressures, the UK being a case in point. This affects the short-term prospects for global economic growth, by forcing consumers to cut their expenditure on other goods and services. Higher inflation has also encouraged the City to increase their pressure for a rise in the Bank of England’s lending rate: the government’s Keynesian critics argue that such a rise would reduce growth prospects still more. In the longer term, for global capitalism the emergence of stable democracies may mean that at last, economic progress in the Middle East will be commensurate with their wealth of natural resources, but the picture will remain unclear for many months, if not years.

Second, the disasters in Japan have disrupted supplies in some sectors and countries, but the overall economic impact for global business is mixed. Many economists argue that it will be positive, because reconstruction will provide business opportunities for many sectors which will stimulate their growth. But there are concerns about the fiscal health of the Japanese state, which has one of the highest domestic debt levels in the world, and about the rising tide of criticism aimed at the Japanese political class over the way the crises have been handled. In addition, the global consequences of the Fukushima nuclear disaster for nuclear energy policy have already been felt on the other side of the world in the state elections on 27 March in Germany: the CDU was roundly defeated in Baden-Württemburg, and the leader of the Greens is likely to become Minister-President.

Thirdly, the management of the sovereign debt of weaker Eurozone economies continue to be a source of uncertainty for global financial markets. The fall of the Socialist government in Portugal was the direct result of the conservative opposition’s refusal to endorse a cuts programme of Osborne proportions. The opposition instead advocate a bail-out by the EU and IMF, presumably on the grounds that Portugal’s politicians can then blame the cuts on external forces. But no-one questions the role of bond market speculators. They have developed the habit, ever since the first doubts surfaced about Greece’s financial health in late 2009, of picking on targets for their favourite practice of ‘short-selling’.

How does this work? First, they place bets that the market price of a country’s bonds will fall; then they spread rumours of impending default, hopefully leading the ratings agencies to downgrade the bonds; then the price falls and they snap up the bonds on the cheap; and finally, an external intervention restores market confidence, the bond prices rise again, and they walk off with the profits.

Despite these three potential hits to global business prospects, there is little sign that bodies such as the International Monetary Fund and the Organisation for Economic Cooperation and Development are revising downwards their optimistic forecasts of global growth. They expect the BRIC (Brazil, Russia, India and China) and other ‘emerging’ economies to continue their very rapid growth in the next 4-5 years, and the ConDems clearly hope that some of this growth will take the form of increased demand for British goods and services: hence, for example, the current high-level trade promotion trip to Mexico led by Nick Clegg.

But even if the global growth forecasts turn out to be correct, there must be concern about how UK-based businesses will fare in competing in these markets. In 2010, the economies which import from the UK increased their total imports by 10.7%, but UK exports only grew by 5.8%, so our share of those markets declined. Indeed, the OBR in its Economic and Fiscal Outlook says that

“relatively little of the recent strength in nominal spending has translated into domestic household wages or corporate profits. The majority of last year’s increase in spending was accounted for by higher spending on imports and higher taxes, generating income flows for overseas companies and the government rather than UK households or firms.” (p.51)

In other words, growth in exports did not feed into growth in domestic output and incomes, because of tax rises and higher imports! Nevertheless, the OBR still forecasts that for the next three years, we will increase our share of overseas markets. Likewise, business investment is expected to grow by an average of nearly 9% per year from 2011 to 2015, more than offsetting a steady decline in government investment.

If UK exports and business investment both meet these targets, which are very ambitious by historical standards, then George Osborne’s Plan A will certainly be judged a success - in terms of conventional economic measures of performance, and ignoring the devastating effects of the cuts on households and communities. Otherwise, he will be hard put to restore the coalition’s popularity in time for the next election.

This article first appeared in Red Pepper

Cracks deepen as 'recovery' proves a myth

New figures from the Office for National Statistics confirm what most people know only too well: living standards are falling sharply as a result of the recession. And the Con-Dem Coalition’s budget measures will ensure that things get a whole lot worse.

Real household disposable income – the total income of Britain's working and unemployed populations after taxes and adjusted for inflation – dropped by 0.8% in 2010, according to the ONS. The slide signals the first drop in real incomes since 1981, also during a recession, and the biggest since 1977, when there was double-digit inflation. The decline is set to worsen sharply to about 2.0% this year as the biggest public spending cuts since the second world war begin in earnest.

Incomes are being held down or falling, whilst prices of basic necessities including food, clothing and transport are soaring. Despite historically low interest rates and falling property prices, housing hasn’t got any cheaper apart from a lucky few with short-lived tracker deals.

Chancellor Osborne has learned something from the family wall coverings firm of Osborne and Little. He’s adept at papering over the cracks, or trying to, using faint praise from the Organisation of Economic Co-operation and Development – the club of rich countries – which said: “While this budget includes hard measures, we are convinced they are unavoidable in the short term to pave the way for a strong recovery".

The trouble is there’s no chance of a strong recovery. Trying to bring one about just makes things worse. Despite adopting a series of unprecedented changes, the list of bankrupt European countries is growing rapidly.

Food price inflation brought on by the tsunami of credit that followed the 2008 financial meltdown triggered a wave of simmering revolutions in the Middle East and North Africa that is spreading throughout the region to Syria and Saudi Arabia sending oil prices to record levels despite slowing demand.

In America, the strengthening of financial services regulation is already making a bad crisis worse. According to Alan Greenspan, former chairman of the US Federal Reserve, the legislation “fails to capture the degree of global interconnectedness of recent decades which has not been substantially altered by the crisis of 2008”. Greenspan should know about these things as he presided over the growth of the credit bubble in the first place.

Greenspan, an arch-defender of unbridled capitalism says the modern economy is far too complex for regulators to understand, and to meddle is dangerous. He’s a much more old-fashioned kind of 'hands-off' guy, seeing crises as unfortunate exceptions to the normal functioning of the system.

He says: “Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s ‘invisible hand’ that is unredeemably opaque. With notably rare exceptions (2008, for example), the global ‘invisible hand’ has created relatively stable exchange rates, interest rates, prices, and wage rates.”

There is a truth in what he says, of course, in that market forces are pretty much uncontrollable. But in arguing against regulation, Greenspan is forced to open the can of worms that bedevils every one of the capitalist camps – the post-war relationship between growth and ever-expanding credit:

“The vexing question confronting regulators is whether this rising share of finance has been a necessary condition of growth in the past half century, or coincidence. In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living.”

Like Osborne’s wallpaper, this thinly-veiled threat fails to mask the reality. Regulation or not, the majority of us will either have to live with the devastating and worsening consequences of the great crash that inevitably brought 50 years of credit fuelled growth to an end, or organise ourselves to replace the capitalist system with a sustainable, not-for-profit alternative.

Gerry Gold
Economics editor

www.aworldtowin.net

Britons £1,000 poorer

From today's Morning Star by John Millington

Workers in Britain are more than £1,000 worse off than two years ago because of pay freezes and inflation, according to research by the BBC.

The study found that average annual salaries after tax are £20,419, higher than in 2008 but far lower than 2004 rates once the impact of price rises was factored in.

Construction sector workers have been hit particularly hard with the value of their take-home pay falling by £1,188 a month in real terms since 2009.

The Panorama programme, aired this evening, found that the squeeze in people's living standards has been made worse by workers being too afraid of losing their job to ask for a pay rise.

Even homeowners are suffering with an estimated 659,000 households struggling with their mortgage payments while around 117,000 people are in arrears.

It is thought that a further 36,000 households would struggle if interest rates were to rise by 1 per cent to 1.5 per cent, while 179,000 people would have trouble keeping up with repayments if rates returned to their pre-credit crunch level of 5 per cent, plunging an additional 17,000 people into arrears.

Economic analysts Leap co-ordinator Andrew Fisher warned following the release of the figures that pay freezes and rising joblessness because of Tory cuts were making the chance of recovery "impossible."

"The only comparable situations are the Friedmanite experiment in cuts and privatisation unleashed in Chile under Pinochet and Ireland's brutal austerity from 2008 - both with disastrous consequences for people's living standards."

And Communist Party of Britain general secretary Rob Griffiths said that the real situation was much worse than the BBC research suggested.

"A working-class cost-of-living index would show inflation running at 12 per cent a year instead of the current RPI level of 5.5 per cent," he said.

"Food, domestic fuel and public transport and housing costs have been rocketing for many millions of workers and their families, which underlines the need for price controls as well as a substantial increase in pensions wages and benefits."

LEAP Chair John McDonnell MP speaks in Budget debate

John McDonnell (Hayes and Harlington) (Lab): I listened to the Budget debate yesterday as well as today, and I want to take up some of the points raised in it. I clearly come from a different economic school from the hon. Member for Wimbledon (Stephen Hammond)—and I probably come from a different one from his erstwhile colleague the shadow Chancellor as well!

The premise of the debate so far has been that as a result of profligate public expenditure by the last Government, we have an economic crisis on our hands. The conclusion is that we can solve the deficit largely by cutting public expenditure. My hon. Friend the Member for Bassetlaw (John Mann), who is no longer in his place, referred to various Treasury charts, and I have to say that one that was published a short while ago demonstrates that the profligate expenditure argument is simply not true.

Let us consider the recent Treasury chart about public spending under the last Government and previous Governments as a percentage of gross domestic product. It shows that public expenditure under the last Government was, in fact, less than it was at the height of Thatcherism and under John Major’s period in office. I shall circulate this chart to Members. I know this is true because for many of the years the last Labour Government were in office, I was attacking them for not spending enough and for poor expenditure. I fully agree with the criticisms made of the private finance initiative; I opposed every PFI scheme that was proposed.

If we look at the chart to find out when expenditure as a proportion of gross domestic product rose dramatically, we discover that it was, as the shadow Chancellor said, only when the economic crisis hit and we had to pump out the quantitative easing into the economy. In my view, the deficit occurred as a result of the failure to match expenditure with tax justice. We had large levels of tax evasion and avoidance and, in addition, we failed to develop a whole range of other tax bases within the economy. Genuine criticisms can be made of over-dependence on the financial sector and the failure to develop the manufacturing sector during that period.

What do we do now? It is not all about cutting expenditure. In yesterday’s debate, reference was made to the crisis of the 1930s and the lessons that can be learned from it. It is worth Members returning to J.K. Galbraith, who I believe wrote the best book on the crisis, The Great Crash 1929. What Galbraith says is that although economic structures can be put in place, what will defend us most against a repeat of the crisis is memory. We seem to forget that the cause of that crisis was the cause of this crisis—speculation by the banks and other speculators and, yes, a Government who failed to regulate. I have to say, however, that when a number of Members called for bank regulation in this House, there was an element of quietude on all sides. I remember fighting for four years, in almost a solitary capacity, to secure the passage of the City of London (Ward Elections) Bill at a time when we were pressing for regulation.

One of the lessons of the 1930s is that the one thing we should not do in a recession is cut public expenditure, because that will turn a recession into a depression. However, it is exactly what the Government seem to be doing. At present 2.5 million people are unemployed, 1 million young people are unemployed, according to recent statistics 1.7 million people are in involuntary part-time employment, and the £80 billion cuts proposed by the Government will make at least another 1.2 million people unemployed.

What I am really anxious about, however, and what we should all be anxious about, are the cuts in capital expenditure. We are told that there will be a 4% cut next year and a 6% cut in the year after that, and that local government capital expenditure is to be cut by 30%—possibly more, according to the Red Book. I believe that if that element of demand is removed from the economy, we will experience either a deflationary spiral or the worst of all worlds, stagflation: increasing inflation along with stagnation in the real economy. I do not believe that there will be a double dip. My fear is that we will become like Japan, where asset values are falling, and will scrape along the bottom of economic activity for perhaps a decade.

People ask what the alternative is. I have mentioned the lessons of the 1930s, and Keynes’s name has been bandied about many times today. It is true that Keynes concentrated on the bond market, but one of the main lessons to be learned from him is that the key issue is unemployment. I think we should be declaring, across parties, that our objective must be the return of full employment, which appears no longer to be cited as a policy objective. As has already been pointed out, the most effective way of restoring investment is through capital investment—the development of capital programmes in housing, renewable energy and transport. I ask Members to look at the green new deal and to examine the One Million Climate Jobs booklet produced by trade unions including the Public and Commercial Services Union, which sets out a capital investment programme that could get people back to work.

How would that be paid for? Let me list just a few short-term measures. I am very pleased that windfall taxes have come back into fashion, and I commend the Government for that, but I do not think that the windfall taxes on the banks go nearly far enough. The lending rates on personal loans in particular are exploitative and extortionate in the markets. I also think that if we are to consider organisations that have profiteered during the recession, we should consider the supermarkets. Commodity inflation is about 3%, but they have increased prices by 6% and above, and they have been profiteering for a number of years.

I think that a windfall tax on energy is appropriate. The current profits of British Gas average 24%, and Ofgem has reported an average profit margin of 38% per customer since last November. That is profiteering during a recession. Some economists have suggested that a windfall tax in those three areas would produce up to £10 billion to get people back to work.

Let me make clear, however, as I did under the last Government, what should happen in the longer term if we are to avoid future deficits. Yes, it is about careful expenditure and it is about having confidence in local and regional decision making, but it is also about achieving a fair and just tax system which will fund our expenditure. First, we must tackle tax evasion and avoidance. What has been done about that by past Governments and by the present Government is trivial. According to Richard Murphy and John Christensen of the Tax Justice Network, £150 billion a year is potentially available to us. Secondly, we need a financial transaction tax. We have been talking about a Robin Hood tax for too long, and we should now be implementing it. Thirdly, I think we should deal with land speculation. I believe that now is the time for land value taxation. If we tax the wealth in land, we will encourage development rather than preventing it.

On Saturday, there is to be a 'march for the alternative'. I expect at least half a million people to march in the streets against the cuts, and I want them to march for a just alternative. I believe that one of the alternatives they will expect us to implement in the House is a fair taxation system allowing investment in public services so that we can all share in that wealth.

A budget for tax avoiders everywhere but the Channel Islands

Richard Murphy

George Osborne said this was a budget to tackle avoidance. How wrong he was. Lawyers and accountants all over the country must be jumping for joy this afternoon – unless they're in the Channel Islands.

Employee benefit trusts – often based in Jersey – are going to be hit hard by this budget, and rightly so. These are last remnants of the age-old pursuit of avoiding PAYE. If they're consigned to history Osborne's done at least one thing right.

And Osborne gets full marks for tackling another abuse long overdue to be abolished – which is the absurd industry shipping CDs, DVDs, computer memory and other items from the UK to the Channel Islands and then straight back again simply to avoid VAT. At least £200m a year was lost in this way – and countless fuel wasted. This is a reform that will cost consumers a little, cost Jersey and Guernsey a lot, and which will put jobs back on the high street.

But after that it was almost all good news for tax avoiders. The new charity rules sound open to massive abuse – and the Charity Commission and HM Revenue & Customs will need massive resources to police them, which they haven't been given.

The inheritance tax rules on gifts will be keeping will writers in business for years.

A new 5.75% tax rate on the treasury functions of large corporations in tax havens (yes, you read that right – 5.75%) will see corporate money flowing out of the UK faster than it will be possible to count.

And big business gets more tax cuts for its foreign operations which will increase their tax planning opportunities almost endlessly.

The same will be true for non-domiciled people – now able to bring money into the UK tax free through a new loophole for investment.

Will this budget help beat tax avoidance? No, it won't. It's the biggest boost in the arm for the tax abuse industry that it's had in a long time. Osborne knows who his friends are.

• Richard Murphy is an adviser to the Tax Justice Network and the TUC on taxation and economic issues, and the director of Tax Research LLP

March for a real alternative

Figures published on the eve of the Budget shed more light on an unrelenting global crisis that pays little or no attention to chancellor Osborne, or to his shadow-boxing 'critics' at the Trades Union Congress.

Ever since the TUC announced its March for the Alternative way back in October, it has been promoting the slogan – “Jobs, Growth, Justice”. In practice, it's no alternative at all.

To back up its central plea for growth, the TUC has been arguing that spending cuts announced last October and being implemented around the country by Labour and Tory councils alike, are just not necessary. They are simply part of a conspiracy by the government to favour the bankers who are really the culprits and should be made to pay the cost of the yawning deficit.

This simplistic, muddle-headed 'analysis' has, unfortunately, been picked up and broadcast onwards by people engaged in the most radical of actions. As one student in a college occupation said: “There are real alternatives to the problems facing higher education funding ... what we are seeing are ideological political choices, not necessities… It is the public sector, including students and lecturers, who are being made to pay, not the overzealous banking system who caused many problems that the country is now dealing with.”

At the heart of it all is a global crisis of capitalism, however, not just a bunch of crazed bankers who got out of hand. This can’t be sorted by pumping more money into the economy and can make even matters worse, as figures from the Office for National Statistics show. The injection of massive doses of credit to shock the stopped heart of global capital back to life after 2008 has at best put the economy back on the accelerating inflationary path it has been following for more than 10 years, whilst gross domestic product – the key measure of growth – has failed to recover.

The Consumer Prices Index annual rate of inflation has risen to 4.4%, while a more realistic index shows a rate of price increases of 5.5%. All the essentials are soaring: clothing, footwear, food and fuel. Diesel prices have passed 140 pence per litre at the pump in some areas. Clearly much worse is to come as events in the Middle East unfold.

The combined effect of the crisis and actions by governments has been to reduce the incomes of households in the UK. The real income of those in the middle of the income distribution will be 1.6% lower in 2011 than it was in 2008, wiping out all the gains made in the previous 50 years. Pensioner households saw their average income fall even further, by 2.4%. As Stephanie Flanders, the BBC’s economics editor has it, for most people “the recovery has been more painful so far than the recession”.

All the analysts agree on one thing: Osborne has little room for manoeuvre. So we’re likely to see plans to revive the Wild West-style low tax, low regulation, low-wage economy of enterprise zone of the 1980s. It's desperate stuff from a cornered government that, however, knows it faces little official opposition in Parliament or from the TUC.

This isn’t a peculiarly British phenomenon that can be fixed with more credit, or even by changing the government. The TUC’s policies of more taxes and higher public spending wilfully fail to address the real issue: the meltdown at the core of the economic system of production for profit, aka capitalism, for which there are no quick fixes. Avoiding the challenge of an alternative not-for-profit model of ecologically-sustainable production for need, simply strengthens the hand of Osborne and company.

See you in Hyde Park?

Gerry Gold
Economics editor
www.aworldtowin.net

LEAP Budget report launched

PRESS NOTICE:

FOR IMMEDIATE RELEASE:


A Windfall Tax on Recession profiteers: banks, supermarket and energy companies
. . . LEAP launches 2011 Budget Report

A report by left economics think-tank LEAP has today dismissed the argument of Chancellor George Osborne that public sector spending has been a contributory cause of the UK’s economic problems. The report shows that actually instability as been driven by an increasing reliance on the private sector and is now being exacerbated by “a laissez-faire labour market policy”.

The report, published today, advocates a Windfall Tax on the excessive profiteering of the UK banks, energy companies and supermarkets to fund job creation and capital expenditure programmes to tackle unemployment and

John McDonnell MP, LEAP Chair, said:

“As they see their services cut and as they lose their jobs more and more people are beginning to understand the implications of the Government’s economic policy and are looking for an alternative.

“Funded by a windfall tax on recession profiteering we can put people back to work on greening and growing our manufacturing base to rebalance our economy. Demand is increased and by increasing demand we get onto a virtuous economic cycle

“The alternative is straightforward enough. We now need to bring this Government down so that we can implement it.”

Andrew Fisher, LEAP co-ordinator, said:

“Hacking away at spending – as Osborne is doing on an unprecedented scale – is reminiscent of the amputation of infected parts of the body by medieval quacks, who are then bemused when the patient dies. In fact Osborne is worse: he has misdiagnosed the illness too.

“The real problem for the UK economy is not public spending, but high and rising unemployment. We need to restore the public and create jobs to grow and rebalance the economy.”

-Ends-

Download the report

Budget 2011: Global Economic Outlook

Graham Turner

“It’s not the recovery we wanted. It is a recovery beset by tensions and strain, which could even sow the seeds of the next crisis”

Dominique Strauss-Kahn, IMF chief, speaking in early February

Mr Strauss-Kahn was referring directly to the imbalances that have emerged during the latest upswing, which in some respects are now bigger than before the 2008 credit crunch. The IMF chief cited China and Germany for their over-reliance upon exports. Germany sells BMWs, Mercedes and Porsches to rich Chinese. China continues to industrialise at a frenetic pace, racking up bigger trade surpluses with countries such as the US and UK.

China is not more productive or innovative than the West. However, it has displaced US and UK workers by the use of cheap labour and – critically – through aggressive currency intervention, hitting a record US$393bn in the second half of 2010 alone. All talk of rebalancing in the UK economy is fanciful so long as politicians grovel to China and other Asian mercantilists.

But self-imposed austerity will not secure the much sought rebalancing. Last year, retail sales rose just 0.5% in volume terms in the UK. This was the lowest annual gain since 1995. And yet, UK imports from China rose 25.1%. The UK trade deficit with China hit a record £23.1bn in the year to January.

The UK retail sector is dominated by a small number of monopolistic giants, for whom by-passing the UK worker has become an article of faith, as they seek to widen margins and drive profits – already at record levels – remorselessly higher.

There has been much trumpeting of the recovery in the UK manufacturing sector in some of the less discerning newspapers. But manufacturing output is still below the low point of the dotcom downturn. Manufacturers have reversed less than half the loss in output sustained during the credit crunch. Furthermore, manufactuing employment had barely risen from the new low of 2.53m reached in the recent recession. When the Conservatives came to power in 1979, there were 6.68m manufacturing jobs in the UK.

It is perhaps ironic to hear the UK Tesco chief executive, Richard Brasher, recently fretting over the squeeze on real disposable incomes for the UK consumer, and the impact on retailers’ margins. Mr Brasher seems willfully oblivious to the self-evident contradictions. Even Henry Ford recognised in the 1920s that if the US auto manufacturer wanted workers to buy the cars it was producing, then it had better pay them accordingly.

The Bank of England governor, Mervyn King, might have been too optimistic when he suggested that real wages could stagnate for six years. The imbalances in the global economy, which precipitated the credit crunch of 2008, have now indirectly pushed commodity prices close to the levels reached nearly three years ago. That now threatens to send inflation to above 5% in this country, at a time when the average wage is rising by just 2.2% y/y according to the latest data from the Office for National Statistics.

It is perhaps worth reflecting upon the linkages between globalisation and rising inflation. Critics of the Bank of England and the Federal Reserve have been quick to denounce quantitative easing for the recent surge in commodity prices. In truth, these policies were an unavoidable response to the deep recessions created by the crisis of 2008. Indeed, there was no quantitative easing at the time of the last commodity price ‘boom’ in 2008. Furthermore, both the US and UK have continued to be net recipients of capital from emerging market countries, again contradicting claims that ‘loose’ monetary policies in the West have been responsible for the run-up in inflation.

The cause of the commodity price ‘bubble’ lies on the other side of the fault line – emerging market countries have been running excessive credit policies, reminiscent of Thailand and others in the run-up to the infamous Asian crisis of 1997. China, Brazil, India, and a host of others have presided over double-digit money supply growth and consumer led booms that have fuelled the rise in commodity prices. Time and time again, we have seen countries trying to play catch up with the West lose control over their monetary policy, often as they seek a competitive advantage, intervening in the currency markets to keep their exchange rate too low. As Mr Strauss Kahn warned, herein lie the seeds of the next credit crunch, a potential replay of 2008.

Of course, we should not lose sight of the role played by Peak Oil and climate change in driving inflation higher either. The aggressive promotion of ethanol in the US, which now subsumes 40% of the country’s corn output, has been a major cause of higher food costs globally. But the pressure to develop ethanol stems from the logic of Peak Oil. The failure to develop sustainable alternatives to fossil fuels is hurting the global economy.

Japan’s crisis is a manifestation of the same failings. Japan has relied too heavily on nuclear energy instead of promoting safer, cleaner alternatives. The safety record of the industry has been called into question regularly too, long before the power stations in Fukushima malfunctioned.

The political upheavals of North Africa and Middle East can be traced to the commodity price bubble too. China’s extreme intolerance for dissent in recent weeks also underlines the many contradictions of a global boom, based on the gains that have been eschewed to narrowly in favour of a new class of emerging market billionaires, fuelling popular dissent. Ironically, as geopolitical risk rises, many of these individuals are relocating to the West end of London, creating further distortions in the UK property market.

While the financial sector has at least enjoyed a swift recovery from the dark days of 2008 on the back of business generated by many of the credit bubbles overseas, confidence elsewhere has evaporated. In its latest survey of the UK consumer, the Nationwide reported that confidence had collapsed in February to its lowest level since records began. Respondents were more depressed than even at the worst point of 2008 crisis, and when Northern Rock folded in 2007. The survey’s spending index had tumbled to record lows. The fear factor was likely to be reflected in less spending, which suggests the Q4 contraction in GDP may not have been an aberration.

The fight to defend public services may well dominate the political stage over the coming weeks and months. But a broader issue looms, how to rebuild an economy against the global backdrop wracked by extreme imbalances. Judging by the manner in which the current Prime Minister, aided by the Business Secretary Vince Cable, have traveled the globe touting the UK’s rather limited export portfolio (defence and not a lot else), it is quite clear that the coalition government does not comprehend the monumental challenge it faces trying to achieve the elusive rebalancing.

It is not clear either whether the current opposition party has much of an idea either of the real causes of the crisis. The debate has been too narrowly confined to how quickly it is safe to cut public spending. A serious economic debate over this ongoing financial crisis requires a thorough evaluation of the risks which stem from participating in today’s global economy.

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Keynesian consensus equals a constructive advance

John Grieve Smith says Labour must argue for properly funded investment in the nation’s future

The two key objectives of Labour’s economic strategy should be to reduce unemployment while maintaining and improving public services. That would be in stark contrast to the coalition’s policy of cuts that will increase job losses and cause serious difficulties for education, health and other vital services. As all this becomes apparent, there should be growing support for alternative policies.

The last Labour Government was one of the international leaders in using increases in public expenditure and cuts in taxation to increase demand for goods and services in order to fight the recession. The consequent budget deficits led to extra public borrowing and hence higher interest payments on public debt. But this was money well spent in minimising the reduction in output and employment, with all the waste and personal suffering that involves.

The trouble now is the widespread hysteria about the deficits, exemplified by the Greek and Irish financial crises, as financial markets panic about governments’ ability to meet the future interest and repayment costs of their increased debt. The consequent cuts in public expenditure to boost financial market confidence will prolong, rather than reduce, high levels of unemployment. The latest Office for Budget Responsibility report suggests that unemployment will continue rising until it reaches a peak of 8 per cent next year.

As far as the United Kingdom is concerned, no one should seriously suggest that we are in danger of defaulting on our public debt. The coalition Government does not need to take precipitate action to reduce the deficit when it is likely to exacerbate the unemployment problem. Cuts in public expenditure involve a direct reduction in employment in the public sector and the firms supplying it. In addition, as people lose their jobs and spend less, companies supplying consumer goods and services will suffer – and cut their labour forces.

When we are safely out of the recession, careful action should be taken to achieve a gradual reduction in the deficit. This should not involve cuts in expenditure on public services, but increases in types of taxation which have the minimum effect on employment. Tax increases on people with lower incomes can lead to a corresponding drop in their expenditure. Tax increases on those who are better off may well lead them to dip into their savings in order to maintain their spending on consumption. Moreover, taxes on capital, such as an increase in inheritance tax, may have little or no effect on consumption. So an increase in progressive taxation is the best way to tackle the deficit, with the minimum – if any – effect on employment.

Such an approach would match the public mood of discontent with the growing inequality of incomes, as exemplified by the much-publicised high salaries and bonuses of top bankers and company directors. Britain has the fourth highest level of inequality of all the countries in the Organisation for Economic Co-operation and Development. Again, it seems a safe bet that there will be increasing concern with present policies as local services, such as schools and hospitals, begin to feel the pinch – both from cuts in current spending and delays in new investment.

The size of the public debt would be seen in better perspective if it were more widely recognised that borrowing is the normal way to finance investment in improved infrastructure such as transport, and public services such as health and education. It would help if the Government’s accounts were to distinguish debt arising from new investment and ascribe it to the sectors which are benefiting – for example, education.

Labour is in no way being irresponsible or opportunist if it takes serious issue with the coalition over the cuts. We should make it clear that a Labour government would not be prepared to accept a continuation of the present high levels of unemployment. It would make the reduction of unemployment a key objective in determining its approach to the budget deficit, public expenditure and taxation. This would signify a return to the Keynesian consensus that existed in the days of full employment before Margaret Thatcher’s reign. Such an approach would be consistent with promoting progressive taxation, rather than cuts in public services, as part of a campaign to reduce the current level of inequality and establish a fairer society.

• John Grieve Smith is the author of There Is A Better Way: A New Economic Agenda For Labour
• This article also appears in the current issue of Tribune
  

The future of the Northern Rock: questions for the re-mutualisers

There's a new campaign being led by Labour MP Chuka Umunna to remutualise Northern Rock, with a letter supporting the proposal published in the Guardian and an EDM tabled in Parliament.

The proposal has cross-party support with two Conservative MPs co-signing the Guardian letter, along with a Liberal Democrat and even Unite General Secretary Len McCluskey.

As I argued in October 2008, there should be "a return for the public" for the huge loan bailout and subsequent nationalisation of Northern Rock.

I have to say I'm currently only lukewarm about the campaign. I'm instinctively sympathetic - my savings and current account are both with a mutual - but I'm just not clear on how re-mutualising Northern Rock would work, and if it would be fair to taxpayers who after all are the ones responsible for its continued existence.

Sadly, neither the letter, EDM nor campaign page answer these concerns - it just tells me mutuals are more accountable, democratic, and that it would be popular, none of which I would dispute.

The questions I have for the campaign are therefore:

• What is the benefit for the taxpayer? The taxpayer collectively saved Northern Rock so why should only current customers benefit?

• Which bits of Northern Rock are we talking about - it was split into good and bad over a year ago, and with differing results - and will the taxpayer be again left with the bad bit? Gerry Gold raised this here on LEAP blog

• Why not just keep Northern Rock in public ownership and use future profits to fund public services?

• Shouldn't former employees benefit too? Over 2000 have lost their jobs since 2008 - yet it was their taxes that paid to 'save' it as much as anyone else's. And would this be a building society model or would staff have a governance role too? If so, what?
  

• Also, what about a benefit for all those whose homes were repossessed early by the lender as it aggressively tried to repay the government loans it received?

For the time being my opinion remains that Northern Rock be publicly owned and publicly controlled. It's already the former, but we should be campaigning for the latter - it seems fairer than re-mutualisation.

Unemployment rises and it's only going to get worse

Earlier this week unemployment hit 2.53 million, 8% - its highest level since 1994.

For young people the picture is far worse: 974,000 16-24 year olds are out of work - this 8 year age range makes up nearly two-fifths of all the unemployed. For 16-17 year olds the picture is increasingly grim: 37.7% are unemployed.

To be clear being under 25 and unemployed is particularly nasty. The young unemployed only get £51.85 per week on Jobseeker's Allowance (less than £2,700 per year), and under-25s (soon to be upped to under-35s) only get housing benefit at the shared room rate.

The government's response to this has been to put blind faith in a private sector recovery - a truly laissez-faire attitude to highest unemployment in a generation. Osborne believes the deficit, not unemployment, is the problem. Actually he's wrong, and economically illiterate - reducing unemployment would not only help reduce the deficit - it's the only effective way to do so.

As everyone from the Labour leadership to the CBI has pointed out, Osborne has no strategy for jobs.

Paul Krugman writing in the New York Times notes the same thing in the US: "no job-creation plans have been advanced by the White House and all the policy focus seems to be on spending cuts".

In another parallel, Krugman reports that "There are almost five times as many unemployed workers as there are job openings. Here there are under 500,000 vacancies and over 2.53 million unemployed, plus a further 1.7 million involuntarily working in temporary or part-time jobs (i.e. looking for more work).

Back to the UK and there's a final piece of the puzzle to be fitted in. At a time when unemployment is high and rising, the government is sacking 9,300 staff in Jobcentre Plus and forcing through a draconian Welfare Reform Bill.

Every indication is that Osborne will use the 2011 Budget to give more tax breaks and incentives to business to hire - but all the evidence shows they will pocket them as higher profit margins.

That's why we need an interventionist budget that levies a windfall tax on the profiteers and invests in jobs.

Osborne’s policies risk deflationary spiral, warns LEAP

. . . Calls for a Windfall Tax on profiteers to fund investment and jobs

The Coalition Government risks pushing the UK into a deflationary spiral warns the Left Economics Advisory Panel (LEAP) ahead of Wednesday’s Budget statement.

Osborne’s plans to date have already sapped demand from the economy through job losses, wage freezes, welfare cuts – and the full impact of cuts and job losses is yet to hit. LEAP identifies rising unemployment, pay freezes and sub-inflation pay deals, higher pension contributions, reduced capital spending and rising food and fuel prices as factors which could combine to push the UK into a deflationary spiral and possible double-dip.

A full report, published on Monday, will set out in full LEAP’s proposals ahead of the Budget. As well as the windfall tax on recession profiteers to fund investment in infrastructure and jobs, LEAP will also be calling for tax reforms to close the £120bn annual tax gap, introduce a Robin Hood Tax and to implement Land Value Tax.

John McDonnell MP, LEAP Chair, said:

"If the rumours around Osborne’s plans prove correct then this government and this Budget could send the economy into a deflationary spiral.

"We need an interventionist Budget that plans large scale investment in green jobs paid for by an immediate windfall tax on the profiteers from this recession: the banks, energy companies and supermarkets."

Andrew Fisher, LEAP Co-ordinator, said:

"Neoliberal policies were the cause of the recession and more of the same will deepen the crisis and make a double dip more likely. Osborne’s deregulating, tax-cutting agenda for business will only serve to further increase profit margins and executive salaries.

"While cuts have sapped demand, there has been rampant profiteering by the banks, energy companies and supermarkets. A windfall tax would prise open that capital and invest it in the jobs we need to bring down unemployment and avoid further misery for millions."

-Ends-

Don't scare off the banks, says Demos

Amid all the suffering - unemployment, welfare cuts, redundancy notices, pay freezes, etc - some of us have turned our frustrations on the banks. Thankfully the self-described 'leading independent think tank in British politics' (Demos) has come to their rescue with a new publication by New Labour's former City Minister Kitty Ussher.

The Guardian reports that Ussher carried out in-depth interviews with senior bankers and gleaned anecdotal evidence that suggests banking may be on the verge of leaving the UK citing rising taxes, threats to split the big banks and scrutiny of bonuses. Hmm, the 'we'll go overseas' line. Ironically the Economist recently gleaned some anecdotal evidence of its own that "they might be bluffing".

Ussher's report asserts that UK-based banks employ "1 million people and supporting a further 500,000 – and data showing the sector brings in £53bn in tax, 11.2% of the UK's total tax take". So best not push them away or that's 1.5 million jobs gone and £53 billion in tax down the swanny?

But Ussher, rather conveniently, conflates two issues: elite speculative investment bankers with the banking sector. Allow me to elaborate. Let's say Bob Diamond and his ilk despair at the bank levy, 50% tax rate, and the findings of the Vickers Commission and decide to relocate their head offices to Zurich. Does that mean every branch of Barclays would close on UK high streets and its 60,000 staff be made redundant? No, in fact no branches would close, and all but a global elite of staff would still work and pay their taxes in the UK.

Funnily enough, I have an ally in the Financial Times too - which wrote the below in its editorial earlier this month:

Such threats should be faced down, not just because they are unreasonable but because they are of questionable credibility.

It is not clear what “moving abroad” actually means. Were a bank such as Barclays to shift its headquarters, the impact on the UK would surely be minimal as it would still do much of its business and pay taxes in the country.

What is more likely anyway is that rather than upping sticks altogether, some banks may reduce their new investments in Britain. This might make the City slightly less of a hot spot, but it would not be a disaster. And were it to be the price of financial stability,this would be a price worth paying.

So where did Ussher's '£53bn in tax' figures come from? Again her anecdotal assertions are of "questionable credibility". Given the total corporation tax take in the UK was only £43 billion in 2010-11 this seems a pretty fanciful calculation. Indeed the report doesn't explain how the figure was arrived at, just that PriceWaterhouseCooopers calculated it.

So what do the banks - not their staff - contribute in tax? According to the Richard Murphy penned TUC report - The Corporate Tax Gap - not much. It says that as well as benefiting from an £850 billion bailout from taxpayers and the Bank of England during the recession, banks are able to offset their £19 billion [cash value] of tax losses between 2007 and 2009 against paying tax on future profits.

In 2009 Barclays paid just £113m in corporation tax - just 0.26% of total corporation tax and a would-we-miss-it 0.02% of total tax receipts.

Let's say the four big UK banks are similar to Barclays - that's 1% of corporation tax receipts and 0.08% of total tax receipts. And we wouldn't have to bail them out again (not that we should have done before without full nationalisation).

Despite what Demos might tell you, there is little to be lost from the departure of these parasitical tax avoiders. Nevertheless expect the Cabinet of millionaires to pay more attention to Demos than to LEAP.