Why the private sector is no model for the public sector to emulate

Last week John Cridland, director of the CBI, dismissed the impact that public sector union strikes could have. He said: "Today the most they can do is disrupt people's lives – it probably won't disrupt the economy." (reported in Guardian)

Does that mean we should discount today's ramblings by the British Chamber of Commerce (BCC) which told the BBC "many parents would lose pay for taking the day off work to look after their children, and productivity would be hit" - while demonstrating the private sector's longstanding flexibility, understanding and provision of childcare needs.

With an even greater ability to demonstrate why the public sector doesn't want to be leveled down to the private sector, David Frost of the BCC went on to give his view on pensions, adding "reforms to bring them into line with those in the private sector are essential ... The private sector has had to wake up to the tough realities of pension provision in a rapidly changing world".

Mark Serwotka, PCS general secretary, rebuts this point in today's Morning Star,

"The truth that private-sector workers have suffered horrific attacks on their pensions is indisputable. It neither follows from this truth that public-sector workers should suffer the same fate nor that public-sector pensions are unfair on private-sector workers"

The "rapidly changing world" the BCC refers to has seen the number of private sector workers entitled to an occupational pension slip from nearly half a decade ago to under one-third today. Yet, corporate profitability has increased through that period, and the directors of large companies have pension pots that have continued to rise unabated. The average chief executive of a FTSE 100 company now has a pension pot worth £5.6 million.

What the private sector bosses are worried about is neither the impact of the strikes nor the injustice of public sector pensions, but the fear that the pensions debate might highlight the injustice of private sector pensions.

See the LEAP guide: Public Sector pensions - the Facts

Fence-sitting Labour needs a push to the left

Last week, on 22 June, MPs debated the economy. It was an 'opposition day' in the House of Commons, which means the opposition party tables a motion for debate on a subject of its choosing.

The Labour frontbench chose the economy - neatly on the first anniversary of George Osborne's 'Emergency Budget'. Their motion is set out below:

That this House notes that on 22 June 2010 the Chancellor announced his first Budget with a target to eliminate the structural deficit by 2015-16 through an additional £40 billion of spending cuts and tax rises, including a VAT rise; further notes that over the last six months the economy has not grown, in the last month retail sales fell by 1.4 per cent. and manufacturing output fell by 1.5 per cent. and despite a welcome recent fall in unemployment, the Office for Budget Responsibility predicts that future unemployment will be up to 200,000 higher than expected; believes the Government’s policies to cut the deficit too far and too fast have led to slower growth, higher inflation and higher unemployment, which are creating a vicious circle, since the Government is now set to borrow £46 billion more than previously forecast; calls on the Government to adopt a more balanced deficit plan which, alongside tough decisions on tax and spending cuts, puts jobs first and will be a better way to get the deficit down over the longer term and avoid long-term damage to the economy; and, if the Government will not change course and halve the deficit over four years, demands that it should take a step in the right direction by temporarily cutting VAT to 17.5 per cent. until the economy returns to strong growth and by using funds raised from repeating the 2010 bank bonus tax to build 25,000 affordable homes and create 100,000 jobs for young people.

Very moderate stuff - and still the 'too far and too fast' line. However, it would be foolish not to recognise that this is progress from the "cuts deeper than Thatcher" line of Alistair Darling barely more than a year ago.

The pledge to cut VAT and re-institute the bank bonus tax should be welcomed as the modest, progressive measures that they would be - esepcially since they advocate hypothecating the revenue into affordable house-building (though not council house-building) and job creation to tackle youth unemployment.

However trade unions and Labour Party members still have much further to go to move the party to a more radical position of 'no cuts' - although very welcome that Unite's Executive has passed this very clear policy.

There is the sense of a real battle going on within the Cabinet at the moment. It has also manifested itself over the 30 June strikes with Ed Balls initially breaking cover to say "The trade unions must not walk in to the trap of giving George Osborne the confrontation he wants to divert attention from a failing economy". He neither supported nor condemned the strikes.

On Saturday, Ed Miliband told the Guardian the strikes were a "mistake" and said "I don't think the argument has yet been got across on public sector pensions as to some of the injustices contained on what the government is doing. Personally I don't think actually strike action is going to help win that argument and I think it inconveniences the public" - seemingly not having looked at polls showing 48% of the public supported public sector workers striking to defend their pensions, with only 36% opposed.

But later on Saturday, Peter Hain saluted trade unions "fighting for justice" in the public sector, and followed that up with an appearance on Andrew Marr where he said "One of the things that's led to this situation is the government's reckless and arbitrary attack on public sector pensions without being willing to negotiate. I mean here's Michael Gove coming on your programme and he's urging parents to break strikes. That's not a responsible way of resolving these situations". He also added it was not for Labour to urge union members to go to work saying political leaders should be trying to resolve strikes, not applauding or condemning them.

The question Labour is failing to clearly answer is 'which side are you on?' Labour continues to sit on the fence. It needs members and unions to give it a firm push to the left.

Public Sector Pensions – The Facts

With 750,000 public sector workers about to take strike action on 30 June, public sector pensions are a hot topic. The government is trying to persuade us that they are unaffordable and unfair to those in the private sector. The reality is that low and middle income earners in the public and private sectors are being treated unfairly:

1. The cost of public sector pensions is falling. As noted in the Hutton Report, public sector pensions cost 1.9% of GDP today, but will fall to 1.4% by 2060.
2. Public sector pensions are affordable and sustainable. Reports by National Audit Office (December 2010) and by the Public Accounts Committee (May 2011) find this to be true.
3. Public sector pensions are not ‘gold-plated’. The average public sector pension is around £5,000 per year. For a woman in local government the average is £2,600.
4. Private sector pensions cost the taxpayer too. Private sector pension schemes received £37.6bn in tax reliefs in 2007/08 – that same year they paid out pensions worth only £35bn, research by Richard Murphy shows.
   
5. Cutting pensions means increased eligibility for means-tested benefits. LEAP estimates the cost of providing council tax benefit, housing benefit and Pension Credit to pensioners will be £13.5bn this year.
6. Private sector pensions are often poor or non-existent. But the blame for that is on private sector executives (many of whom have very good pensions) and shareholders.
7. But some private sector pensions are very generous. In 2009, TUC research showed the average value of a FTSE 100 director's total pension rose to £3.4m
8. There are 2 million pensions living in poverty in the UK. A European Commission report in July 2009 showed that only in Cyprus, Latvia and Estonia was there higher pensioner poverty than in the UK.
9. Life expectancy is rising faster for the wealthy. An average 65 year old man in Kensington and Chelsea can expect to live a further 23 years, while in Glasgow it is only 14 years. Raising the pension age has a disproportionate impact on low and middle income earners.
10. We’re all this together – public and private. Changing pension indexation from RPI to CPI would save the private sector £100 billion over the lifetime of existing schemes, according to Pension Capital Strategies. According to TUC research, an 80 year old pensioner with an average public sector pension would be more than £650 a year worse off.

Update: The latest YouGov/Sunday Times poll (pdf) has revealed the unions edging in front in the battle for public opinion – with an almost equal split on Danny Alexander’s reforms and a small majority against Lord Hutton’s proposals. On Hutton, who proposed public sector workers should contribute more to their pension, retire later and receive a lower pension, 43% oppose his plans against 38% in support. Those in the private sector support him 46%-33%, with public sector workers strongly against, by a margin of 66%-21%.

Update 2: An ITV/ComRes poll shows public believe 'Public-sector workers are right to strike over maintaining their pensions': Agree 48%, Disagree 36%.

Update 3: A new ComRes poll finds 49% of people agreed that public sector workers have a legitimate reason to strike, only 35% didn't. By 46% to 35%, people believe that the Government would be wrong to change public sector pensions if most workers affected oppose them.

Inflation is a class issue - the IFS confirms

If imitation is the sincerest form of flattery then the development of your idea is pretty satisfying too.

Yesterday the Institute for Fiscal Studies published a report 'The spending patterns and inflation experience of low-income households over the past decade'. In 2009 LEAP published 'Inflation Report 2009: why inflation is a class issue'. It showed that inflation was hitting the poorest hardest, and concluded that:

"the rate of inflation is not an objective single headline figure, but a subjective complex of forces which affect people very differently"

The IFS report showed that the poorest fifth of households faced an average annual inflation rate of 4.3% between 2008 and 2010, while the richest fifth only had a rate of 2.7%. This is because, as LEAP found, if the cost of essential goods (e.g. food, utility bills, housing) rise then the hardest hit will be the poorest who spend a higher proportion of their incomes on essential goods.

The IFS doesn't endorse our 'Essential Inflation' measure but does refer to 'Inflation inequality', which means "that poorer households will have fared worse over the period of the recession than poverty and inequality statistics that don't account for these differential inflation rates would suggest".

The report also finds that "Pensioners, and in particular those dependent on state benefits, experienced higher rates of inflation than non-pensioners". People on working age benefits have experienced an average rise of 4% in recent years, compared with 2.9% for those in work. This makes the change to CPI uprating for pensions and benefits all the more appalling.

Like our report in 2009, it's important that trade unions and other campaigners use these statistics to make the case for their causes: whether that's an end to pay freezes, uprating of benefits and pensions by RPI or wages (whichever is greater) or for nationalising or regulating the profiteering energy companies.

Expert joins calls for tax on bankers

Economic experts have unearthed “hard evidence” supporting TUC claims that a tax on bank transactions would raise billions of pounds currently being hived off Britain’s public services.

Institute of Development Studies published its latest findings yesterday, which argued that a financial transaction tax (FTT) could be viably implemented across Europe. The research sparked fresh calls for the government to introduce a Robin Hood tax in Britain.

The institute will tell a gathering of economists, policy makers and academics in Brussels today that an FTT on bankers making foreign exchange transactions would raise as much as £15 billion worldwide.

The charity will add that in Britain alone it could raise £7.5bn — roughly the same as the country’s entire aid budget.

TUC general secretary Brendan Barber argued that the findings confirmed that a Robin Hood tax is completely viable and could play a key role in reducing deficits and supporting economic growth.

He said: “As more European governments sign up to a Robin Hood tax, it’s time for the British government to admit that banks are not contributing their fair share towards repairing the mess they’ve created and publicly commit to a stronger tax on banks and major financial institutions.”

John Christensen of Tax Justice Network, an independent organisation analysing the harmful aspects of tax evasion, tax avoidance, tax competition and tax havens, argued that an FTT would not only reduce opportunities for making profits on ultra-low margin trades, it would also potentially raise billions of additional revenue to offset the ongoing damage caused by the financial crisis.

He said: “Bankers may well howl in protest but very few, if any, will act on their threats to leave the country.”

The findings by the institute were laid out in the first comprehensive review of the feasibility of FTTs, dubbed The Tobin Tax: A Review of the Evidence.

Report author Dr Neil McCulloch stressed that the evidence of a significant source of currently untapped revenue cannot be ignored when most of the world’s financial centres are driving through large spending cuts.

“There has never been any compelling economic case against what is a very modest tax on activity by banks and other financial institutions,” said Roger Seifert, professor of industrial relations and human resources at Wolverhampton Business School.

But he added that the main problem has always been and remains the lack of political will by those running the economy for the benefit of the rich and powerful.

Left Economics Advisory Panel co-ordinator Andrew Fisher said: “It is not markets that need to be stabilised, but the people whose lives are derailed by market speculation. The revenue raised from FTT could secure real investment in jobs and support those ravaged by rising fuel and food costs — increasingly caused by speculative trading.”

"Speculative trading is exacerbating crises around the world. A financial transaction tax (FTT) should, like green taxes, have a deterrent as well as a revenue raising effect. This report highlights both how feasible and beneficial a FTT would be."

This article first appeared in the Morning Star on Tue 14 June

Download the IDS report in full

Madhouse economics with lunatics in charge

Where has all the wealth of this country actually gone?
by Prem Sikka
Friday, June 3rd, 2011

Britain’s economic landscape is blighted by economic misery and social exclusion. Nearly 2.5 million people are officially unemployed and 1.5 million are working part-time but would like a full-time job. Youth unemployment is heading towards the one million mark and graduate unemployment is around 20 per cent. Approximately 13.2 million people, including 2.8 million children and 1.8 million pensioners, are living in poverty. Britain’s state pension, as a percentage of average earnings, is the lowest in western Europe. Some 15 per cent of high street shops are empty and the Government’s austerity measures are set to deepen the misery. This is the stark reality of the world’s sixth largest economy and the third largest in Europe. So where does all the wealth go? The answer to this question is crucial because it has a bearing on the possibilities of building a sustainable economy and society.

This country’s gross domestic product has grown from the 1976 figure of £621.22 billion to a current estimate of £1,318.31 billion, but has not been accompanied by equitable share for working people. In 1976, salaries and wages paid to workers accounted for 65.1 per cent of GDP. Following mass privatisations, the demise of skilled jobs in the manufacturing sector and the weakening of trade unions, this declined to 52.6 per cent of GDP in 1996. Following the introduction of the national minimum wage and expansion of the public sector, workers’ share rose. It is now in decline again and stands at 54.8 per cent of GDP. The indications are that, at some companies, the workers’ share of value added is running at less than 50 per cent. Many are facing wage freezes and loss of pension rights. The Government is reviewing employment laws which will inevitably further shrink workers’ share. Of the 200,000 new jobs created in the last year, only 3 per cent are full-time and many do not give employees statutory rights to pension, sick pay or holidays.

All this tells only a partial story, because corporate executives have taken the largest slice of the shrinking share. A recent report by the High Pay Commission shows that, between 1997 and 2008 when Labour was in power, income for the top 0.1 per cent of the population grew by 64.2 per cent, while that of an average earner increased by just 7.2 per cent. A typical FTSE 100 executive receives a pay package of £3.7 million – nearly 145 times more than the average worker.

These trends have resulted in 50 per cent of the population owning less than 1 per cent of the national wealth. The Sunday Times 2011 Rich List shows that the 1,000 richest people in the country have amassed wealth of £395.8 billion, an increase of £60.2 billion since 2010. With wealth of £4.2 billion, Sir Philip Green is listed as the 13th richest person. Many of his employees still receive the minimum wage.

The state has not collected a higher share of the GDP in taxes to enable it to redistribute wealth. In 1976-77, taxation took 43 per cent of GDP. By 1995-96, the tax take declined to 37.2 per cent of the GDP, rising to 38.6 per cent in 2007-08 and back to 37.2 per cent in 2010-11. This decline is one of the reasons behind the brutal public expenditure cuts and loss of welfare rights. The state, or the public share, of taxes has declined even though more people are in work, there are more billionaires than ever before and the corporate sector enjoyed, before the recession, record rates of profitability.

Corporations have been the biggest beneficiaries of government policies, as successive governments have shifted taxes away from capital to labour, consumption and savings. Hikes in VAT and National Insurance contributions are a reminder of this major shift in policy. Income tax personal allowances have not kept pace with inflation and more individuals have become liable to higher rates of income tax at middle earnings. For example, the freezing of personal allowances in the 2011 Budget may result in another 750,000 people paying the 40 per cent higher rate of income tax.

Successive governments have been engaged in a race to the bottom and have appeased the corporate lobby by reducing corporate taxes. In 1982, the rate was 52 per cent of taxable profits. By 2007, it declined to 30 per cent. It is set to be further reduced to 23 per cent by 2014 and corporations are demanding even lower taxes.

The supporters of corporations will point to the fact that, in 1979, corporation tax receipts of £4.6 billion accounted for 5.4 per cent of total tax revenues. Last year, they rose to £38.5 billion and accounted for 7 per cent of the total tax revenues. However, this does not tell us the amounts that they should be paying, as corporations and wealthy elites have become very adept at shifting incomes and profits by using opaque structures and schemes to avoid taxes. For example, Boots, the high street chemist, now has its headquarters in Switzerland to enable it to avoid British taxes. Google dominates the internet and its revenues from this county have soared to £6.35 billion over six years, but the company is estimated to have paid only £8 million in corporate tax.

The United Kingdom is the home of a destructive global tax avoidance industry, headed by major accountancy firms: KPMG, PricewaterhouseCoopers, Deloitte & Touche and Ernst & Young. Various economic models suggest that, due to organised tax avoidance, we may be losing around £100 billion tax revenues each year. Inevitably, this has reduced the tax take, increased the national debt and threatened hard-won welfare rights.

The claim is that reducing corporate taxes somehow stimulates investment and creates jobs. Such a thesis is very simplistic and ignores the availability of skilled labour, education, training, infrastructure and disposable income of ordinary people. A recent study by the Canadian Centre for Policy Alternatives concluded that: “As a means of stimulating growth, employment and even private business spending, the historical evidence suggests that business tax cuts are both economically ineffective and distributionally regressive.”

The reduction in workers’ share and the state’s share of GDP means that more is available to corporations and their shareholders in dividends. This does not mean that their resources necessarily stimulate the UK economy. According to a government study, individuals in Britain own around 10 per cent of the shares listed on the London Stock Exchange. Investors from outside this country own 42 per cent of the shares listed on the London Stock Exchange and a variety of insurance companies, pension funds, unit trusts and investment trusts. Banks own the other 48 per cent. This means that a vast amount of dividends flow out of Britain and are not subject to UK tax.

A few years ago, Sir Philip Green’s business empire paid a dividend of £1.3 billion. Of this, £1.2 billion was paid to his wife who was resident in Monaco and thus escaped a tax of around £285 million, which would have been payable if she resided in the UK. Many private finance initiative companies use tax havens to avoid taxes on payments made to them by British taxpayers.

The current distribution of income and wealth will not facilitate a sustainable economic recovery. Ordinary people spend money on everyday things such as food, transport and clothing and thus generate a greater multiplier effect compared to the concentration of wealth in relatively fewer hands. Yet the UK trend has been in the wrong direction. There is no evidence to support the contention that feeding fat cats somehow percolates wealth downwards. The obsession with reducing corporate taxes has not been matched by any boom in private sector investment and jobs.

Too many people already make ends meet by borrowing and that was one of the factors behind the banking crisis. Yet the Government has learned nothing from that. Rather than redistributing wealth or pursuing progressive taxation policies, it expects ordinary people to take on even more borrowing to stimulate demand. Personal household debt is already £1.62 trillion, bigger than Britain’s GDP and the largest per capita in Europe. The Government expects it to reach £2.13 trillion by 2015. These are the economics of a madhouse. There is so sign of any sustained attack on organised tax avoidance or broadening of the tax base by considering financial transactions tax, mansion tax, wealth tax, monopolies or land value tax.

Prem Sikka is professor of accounting at the University of Essex

This article first appeared in Tribune magazine