An economy as if people mattered

Andrew Fisher's speech for People's Budget at the Southampton People's Assembly

After a minute's applause for both Tony Benn and Bob Crow, these are the notes from which I made my speech (with a few ad libs!)at the Southampton People's Assembly on 20 March, responding to the Budget and arguing for an economy as if people mattered:

Well I hope you’re grateful.

Two years ago the Chancellor was taxing your pasties – that is what you people eat isn’t it?

And taxing your caravans – that is how you people holiday?

But now look:

You’re getting tax cuts on beer and bingo (or working class culture as the Chancellor calls it). See, tax cuts aren’t just for big business and millionaires, they’re for you – the little people – too!

Budget 2014

So aside from the Tories'  lame efforts to persuade us they're on our side, what were the main things we learned in the Budget?

• No end to austerity: because it’s ideological - by 2018 public spending will be lower than at any time since 1948 - the year in which the NHS was founded. "Rolling back the state", but going further than Thatcher ever managed. And if anything austerity is being ratcheted up. Public spending has risen by less than inflation (so a real terms cut), but his estimate for 2015-18 is for cuts to public spending in absolute terms 
• ISAs – who can save £15,000? Someone working full-time on the minimum wage doesn't even earn £15,000 a year.
• And what's underpinning Osborne's forecast for more growth? The assumption is more household debt - which will rise to the levels that precipitated the crisis. There's also some utterly delusional figures for business investment rising between 8-10% year-on-year for the next three years.
• An array of green taxes were scrapped or capped in the Budget, making more of a mockery of the Coalition's "greenest government ever" rhetoric.

What the Budget didn’t address

• Pay – it did nothing for people's wages and falling living standards. As Bob Crow said: 

• The Housing crisis – nothing in there that will build the homes our country needs, nothing to tackle rising homelessness or the rising costs of paying the rent. We are back to a pre-war situation where more of us are dependent on private landlords, with not enough council housing and fewer able to afford a mortgage.

• Jobs or industrial strategy – far from being a budget for 'doers', following his 'march of the makers' budget, OBR projections show UK exports falling in future years. This is a government - to be fair, like those before them for the last 35 years - without a serious labour market or industrial strategy. The recovery in unemployment is due to low wage, insecure jobs.

• And the energy crisis – nothing to tackle the fuel poverty which disproportionately affects the poorest pensioners; and nothing to address the UK's woeful investment in renewable energy, in which we lag behind the rest  of Europe.

What sort of economy we want

While Osborne rattles on about his modest and delayed economic growth, and the 24 hour news tells us every hour how the FTSE is doing, what would an economy look like as if people mattered?

Five questions, I think would matter to most people:

1. Are we reducing poverty and inequality?
2. Is unemployment falling?
3. Are people's living standards rising?
4. Is the tax gap - the £120bn of avoided, evaded and uncollected tax - reducing?
5. Is the economy stable and environmentally sustainable?

If we want that economy, an economy that acts in our interests, then we need greater economy democracy. Tony Benn said:

And you can see how that happened, we built the NHS, the welfare state, council housing, comprehensive education, and brought the utilities under public control. And sadly we can see how that has been reversed through privatisation - anti-democratically transferring power back from the ballot to the wallet, from the polling station to the marketplace.

For me anything too important to fail should be in public ownership - if we want an economy where people matter. And we need economic rights, individually and collectively. The right to a minimum income, protection from being made redundant - why on Earth are profitable companies allowed to make people redundant - taking away people's jobs to give bigger bonuses to directors or higher dividends to shareholders?

And trade union rights restored, so that we can protect our jobs, pay, pensions and fight for better working conditions.

I hope that's a good basis for discussion. Thank you.

• Andrew Fisher is LEAP Co-ordinator and author of the forthcoming book The Failed Experiment ... and how to build an economy that works

Autumn Statement 2013: Evaluating Osborne ... 15% successful!

Are the austerians right and the opponents of austerity proved wrong? Is Osborne's strategy vindicated?

Let's judge by his own standards. In June 2010, just as the ink had dried on the coalition agreement, George Osborne rushed to the House of Commons to deliver an 'Emergency Budget'.

"It supports a strong enterprise-led recovery. It rewards work. And it protects the most vulnerable in our society. Yes it is tough; but it is also fair."

With this rhetoric, Osborne opened his remarks. But the devil was in the detail of the accompanying forecasts. So how has he done 3 years on? We evaluate:

Osborne predicted that economic growth would be 2.8% this year - a target he may get close to (we'll find out next month), but that was on the back on growth of 2.8% last year as well (instead, in 2012 the economy grew by just 0.2%). The OBR predicts that growth will be 1.4% in 2013 (but this is still an underestimate)

Far from being back on track, the UK economy still lags 2.5% below where we were in 2008. So at best half marks for Osborne on economic growth. And that's before we factor in growing concerns about the sustainability of George's recovery. Half marks.

• Economic growth 0.5/1

That same June 2010 forecast predicted that average wage growth in 2013/14 would be 4.9%. With average wage 'growth' currently at just 0.7% there is no gentle way to put this, that was woefully wrong.

While this year the FTSE100 directors will see their seven-figure salaries increase by an average of 14%, for the rest of us there is no recovery. People's incomes have been cut in real terms. The ONS points out that the median household income has dropped 6.4% for working age households over the last five years. Fail.

• Wages 0/1

Unemployment has declined marginally in recent months, but is still high at 7.6% of the economically active population. That figure however conceals stubbornly high youth unemployment and long-term unemployment - failed by shambolic government programmes.

In 2010, Osborne told us unemployment would today be just 6.8%. So 250,000 fewer people should be unemployed today had Osborne hit his target. Fail.

• Unemployment 0/1

Given Osborne erroneously said he would deal with "our country's record debts" (they were nowhere near record levels) with austerity, one would assume he would have at least had some success in reducing our debt (or at least stemmed the rate of rising debt).

By now, predicted Osborne in 2010, our debt should be 73.7% of GDP. Instead it's 75.5%.

But much of that is because GDP is far lower than predicted, so not even half marks for getting close, so quarter marks.

• Debt 0.25/1

The reason the Chancellor is not reducing the debt, is because the deficit has not been closed at anything like the rate he predicted. By now the deficit should have been just 5% of GDP. Today Osborne announced it would be 6.8%. In cash terms they predicted £63 billion in 2010, but today it's £111bn - 75% higher than the 2010 forecast. So he'll borrow £198 billion more than he planned. Fail.

• Deficit 0/1

Overall 0.75 out of 5 (or 15%)

Are you really worse off? Er, yes.

Labour has recently made some headway with its message that there is a cost of living crisis - which has continued despite Osborne's recovery. This feeds a number of other important messages, including that this is a recovery for the rich, and that you're being ripped off - and so the energy price freeze fits into the same narrative.

The average non-retired household is today 6.4% worse off since the recession - that was the finding of a report by the Office for National Statistics out earlier this week. It showed that the average household income fell from £37,900 to £32,600, in real terms over the last five years.

In fact, the average household is £300 a year worse off than it was in 2002/03. There is therefore a 'lost decade' of stagnation for household incomes.

This decline in income triggered entitlement to extra benefits (e.g tax credits) so that benefits rose from providing 7.6% to 12.3% of gross income for the median household. This is fundamentally a redistribution in the cost of living from the employer to the state - as a result of pay freezes and pay caps. So when Labour talks about a structural welfare spending cap (not individual benefit caps which are disgraceful) it is alluding to this phenomenon, and pledging to deal with the structural issues - and advocating the living wage is a part of tackling low pay subsidies like tax credits.

The resonance that Labour has had with this line has rattled the Tories.

So, in a blatantly politically-driven misanalysis, HM Treasury has produced data that shows compensation for workers has stayed the same, but what they don't see is that employers are paying more in national insurance and pension contributions. The idea that wages have been cut to sustain or even increase profits is, apparently, a myth.

Sky's economic correspondent, Ed Conway, says the Treasury report explains:

"Overall compensation includes not just wages but also the social contributions made by employers, including pension contributions and National Insurance Contributions. Technically-speaking, these are forms of payment, except that because they don’t go straight into your pocket they don’t feel particularly obvious."

In fact a less kind interpretation of this Tory spin - still not on the Treasury website - is that because it doesn't goes into your pocket, it's not really payment.

So the Tory argument is that pay has gone down (Ed Miliband's cost of living crisis) due to NI contributions going up (all Gordon Brown's fault) and pension contributions going up (your fault for living longer).

However, the argument doesn't really stack up for several reasons:

1. Pension contributions have only gone up in real terms for funded pension schemes - which most workers don't have
2. Part of the reason extra pension contributions are needed are due to pension holidays taken by employers in the 1990s
3. Is the logic of the Treasury analysis of NI rise that a cut in NI would be passed on to workers in higher wages
4. If that's the case why have the cuts in corporation tax not been passed on to workers then? Because corporation tax has fallen from 33% to 28% under New Labour, and now down to 22%.
5. If we're all actually no worse off why - by official figures - are a million more of us living in poverty? Why are half a million of us using food banks this year?

(There's a more detailed and wonkish analysis by the TUC's Duncan Weldon here)

So was this just a political attack to try to blunt Labour's resonant cost of living line? If so, it's another sign of the civil service being used for party political purposes (and not the first time either).

But it's an indication that ahead of this year's Autumn Statement, Osborne has only spin to offer.

Should Osborne be praying for the economy to stall?

After three quarters of economic growth, George Osborne has already transitioned from cautious optimism to full-on self congratulation. "The UK has been singled out as an example of the improvement and there is recognition that we have stuck to our economic plan", he said last month.

Let's leave aside that he hasn't stuck to his plan at all (the deficit was forecast in 2010 to be far lower today than it is, and as a result of two flatlining years he is borrowing over £200 billion more than planned). Let's even underplay that even today's public debt figures £8.1 billion this October, down from £8.2 billion for October last year, are hardly impressive.

Nevertheless the level of UK economic growth in the last three quarters (nine months) has surprised and exceeded most independent forecasts. The Bank of England declared earlier this week that
the UK is in "sustained recovery".

Three consecutive quarters of reasonable growth (by historical standards) is fairly hard to dismiss. What economists now disagree about is not whether recovery has been sustained, but whether it  is sustainable.

There's a good analysis of this question by the Independent's Ben Chu here. The key point is that the recovery is driven (largely) by debt, which has been both encouraged (through schemes like Help to Buy) and enforced (through declining real wages, benefits and high unemployment). As the chart below, personal debt remains at crisis-era highs

The question therefore is can growth continue with debt at high levels and real incomes declining?  The unstable retail sales figures - with October registering a fall that confounded predictions - are a warning sign to the optimists.

So the question is whether the recovery will stall - due to people reining in their spending without any compensating surge in government or corporate investment - or will it continue to grow as people take on ever greater debts?

If the latter is the case, then the ultimate result may be a sharp crash, caused by unsustainable levels of debt. That scenario should make George Osborne pray for the economy to stall (while he devises a sustainable growth strategy - something some of his opponents have been advocating and outlining since 2010).

What's wrong with Help to Buy?

Those who can afford mortgage payments but don't have large deposits can get on the property ladder with #helptobuy launching today
— George Osborne (@George_Osborne) October 8, 2013

The flagship announcement from Conservative Party conference was the bringing forward of stage two of the Help to Buy scheme. To encourage mortgage lending by the banks, the government will guarantee 15% of the loan value.

RBS, Lloyds and HSBC are among the banks that have signed up to the scheme and today announced 95% mortgages - something that had largely withered post-crash as banks (understandably) became more cautious in their lending.

Home ownership has been a central plank of the Conservative narrative for over 30 years now - but this government has been the first post-war which has overseen a decline in home ownership. Home ownership peaked at 72% of households, but it has now dropped to 65%. The Daily Telegraph described it as "a national crisis".

Leaving aside the Telegraph's attack of the vapours, I'd argue there's a lot wrong with Help to Buy - including:

It doesn't help those in the most housing need
The real national crisis is not the nature of housing occupancy, but the rising homelessness, chronic housing waiting lists, and the soaring cost of private rent - exacerbating the cost of living crisis. The number of households living in temporary accomodation has risen 10% in the last year. These households need social housing (preferably council housing).

It won't build the houses we need
While stage one of Help to Buy (began in April 2013) applied only for new build homes, stage two applies to existing housing stock. Last year, the number of homes built in the UK was the lowest on record since the 1920s. But the scale of house building required to meet housing need, cannot be driven by the mortgage market.

It will increase house prices - making home ownership even more unaffordable
House prices are rising due to constrained supply. Increasing the availability of credit to borrow to buy housing can only push up house prices (increased competition for the same number of units). This will make home ownership even more unaffordable. As wage increases remain stagnant, the average house
price has risen to 6.74 times the average wage. For comparison it was only 4.21 in 2000, but reached 7.23 in 2007 at the peak of the housing boom - and we know what happened then.

It helps private landlords more than aspiring homeowners
Help to Buy is available to buy-to-let landlords. Capital rich and in no housing need, it is hard to make a case for a government subsidy for buy-to-let - though of course the Tories did it in the 1980s too. Buy to let mortgages are already subsidised through the tax system as mortgage interest is tax deductible. Help to Buy is therefore a further taxpayer subsidy to the rich. The return of 95% mortgages still means an  deposit of over £12,000 is required on the average house price - not inconsiderable (according to the MoneyMood survey, the average household is saving just £42 a month).

It will push up private rents
The cost of private rents have outstripped wage rises in recent years. If house prices are inflated and more homes become buy-to-let investments (see above two points), the most likely outcome is that rents will rise as well - increasing the risk of those renting falling into arrears or debt, while pushing them further away from the stated goal of home ownership.

It's a crap economic stimulus
We have argued that there is a strong case for public borrowing for growth, but what Osborne's Help to Buy scheme does is land the public with potential liabilities, with nothing to show for it. If these loans default, then either tax rises or public services are cut to ensure the banks don't take the hit.

It could cause another crash
While Ed Balls has been among those calling the recently more positive economic growth figures "the wrong sort of recovery" - something we have also alluded to, twice - Help to Buy could tip that 'wrong sort of recovery' into another crash. Increasing debt levels when wages are stagnant and the labour market far from stable (not to mention any risks from global instability), increases risk and the government could end up with considerable liabilities if defaults rise.

In short, Help to Buy does nothing to solve the UK crisis in housing affordability (of whatever tenure), may actually make it worse, and comes with not inconsiderable risks to the wider economy - and the Prime Economics website thinks the EU may even rule the scheme to be 'illegal state aid'.

This is a government with no housing policy, only a mortgage policy ... and a pretty crap one at that.

Osborne ‘slays Lloyds goose for quick buck’

Chancellor sells £3.2bn stake in profitable bank 

MINISTERS began reprivatising Lloyds yesterday, flogging off a £3.2 billion stake in the once failing bank.

Chancellor George Osborne hailed the sell-off as evidence that Britain was “turning the corner,” but economists raised concerns that the banking sector was merely returning to the light-touch approach central to the severity of the financial crisis in the first place.

Investors snapped up the stock at 75p a share – just above the 73.6p average the Treasury paid in the £20.5bn bailout the bank at the height of the financial crisis.

The taxpayer’s stake has been reduced from 38.7 per cent to 32.7 per cent, with no further sales for at least 90 days.

Mr Osborne said the sale eased the national debt by £586 million, based on a paper valuation of the shares on government books, though that figure is subject to Office for National Statistics approval.

The Tory Chancellor said: “This is another step in the long journey in putting right what went so badly wrong in the British economy.”

But left economists warned that the fire sale would be bad for Britain in the long term. Left Economics Advisory Panel co-ordinator Andrew Fisher said: “Lloyds was bailed out by the state, and propped up with public money.

“Now Lloyds has returned to profit, rather than maintaining a long-term income stream, it is being sold off for private profit.

“This is slaughtering a goose that lays golden eggs for a one-off fry-up, even leaving aside the government’s criminal failure to use its public stake in the banks to change banking culture or invest in the public interest.”

And the Socialist Economic Bulletin’s Michael Burke warned that the sell-off was “a return to the system we had before.”

“It’s a drive by the government to bail out the most failing aspects of the private sector – that of light-touch regulation in the financial sector, while imposing austerity cuts for the rest of society.

“They’re selling off one of our assets instead of using the profits for regeneration.”

This article first appeared in the Morning Star

 

Big business is policing tax avoidance – what could possibly go wrong?

David Heaton's resignation from an advisory panel on tax abuse exposes the perils of hiving off tax avoidance enforcement

Prem Sikka

The privatisation of Royal Mail is making headlines, but another form of privatisation is attracting less attention – of UK law enforcement in vital areas, such as organised tax avoidance. Now it is business interests that decide whether Her Majesty's Revenue and Customs (HMRC) can go after those involved in abusive tax avoidance schemes, and this includes those who are close to the tax avoidance industry.

The flaws in the privatisation of law enforcement have been highlighted by the resignation of David Heaton from the government's flagship general anti-abuse rule (Gaar) panel. The panel is supposed to tackle tax abuses but Heaton was freely giving tips for dodging taxes. Heaton is a partner in accountancy firm Baker Tilly and is also a recent chair of the Tax Faculty at the Institute of Chartered Accountants in England and Wales. Baker Tilly is no stranger to tax controversies as the firm's revenues are dependent on novel interpretations of tax laws. In January 2011, the UK government raised VAT from 17.5% to 20% and the firm urged companies to do their billing in advance and thus avoid the hike. In recent years, Baker Tilly has expanded its revenue-earning capacity by absorbing organisations chastised for designing aggressive tax-avoidance schemes.

The Gaar legislation came into effect on 1 July 2013 and is part of a trend of giving business a key role in law enforcement. Originally, it was intended to enable HMRC to challenge "aggressive" tax avoidance, but was soon diluted to focus only on the most abusive forms of tax avoidance. The flaws were noted by Lord MacGregor, chair of the House of Lords economic affairs sub-committee on the finance bill, who said that: "There is a misconception that Gaar will mean the likes of Starbucks and Amazon will be slapped with massive tax bills. This is wrong and the government needs to explain that to the public. Gaar is narrowly defined and will only impact on the most abusive of tax avoidance".

The Gaar legislation contains a "double reasonableness" test and requires HMRC to show that the tax avoidance schemes under scrutiny "cannot [reasonably] be regarded as a reasonable course of action". An avoidance scheme will be treated as abusive only if it would not be reasonable to hold such a view. So, if a dubious practice is widespread and established then it may well be considered to be reasonable.

HMRC is further shackled in that it can't easily go to the courts to enforce Gaar because it needs permission from a panel of experts on whether the arrangements in question constitute a reasonable course of action. The panel members are unpaid and this inevitably favours businesses that can bear the cost of seconding staff. In addition to Heaton, other members of the panel are Patrick Mears (chair), a senior tax partner at law firm Allen and Overy; Michael Hardwick, a consultant at law firm Linklaters; Brian Jackson, vice-president for group tax at Burberry group plc and previously tax partner at KPMG; Sue Laing, a partner at law firm Boodle Hatfield; Gary Shiels, a business consultant; and Bob Wheatcroft, a partner in accountancy firm Armstrong Watson.

There is no representation from NGOs and others who routinely expose tax avoidance. If matters reach a court, then judges need to take into account the opinion of the Gaar advisory panel given to the HMRC. The legislation says little about the public accountability of the panel.

George Osborne courted public opinion by saying that he found tax avoidance/evasion "morally repugnant", but the government's sense of morality is to appoint foxes to guard the henhouse. No doubt, members of the Gaar panel are devoted to serving the public interest, but their conception of the public interest is likely to be informed by their business and professional interests, especially as their profits and bonuses are dependent on serving clients. So who is safeguarding the interests of the ordinary people?

Neoliberals would defend the current arrangements by arguing that government needs people who know the practices and are thus best suited to be the guards. If that logic had any substance then those falling on hard times or suffering because of the bedroom tax should be deciding who can reasonably be prosecuted for, say, benefit fraud. But that is not the case. The government has mobilised the full might of the state to tackle benefit fraud estimated to be around £1.9bn a year, but the same does not apply to tax avoidance/evasion running at between £35bn and £100bn a year.

This article first appeared on Comment is Free

MP calls for RBS sale 'at all costs'

by Luke James

A privatisation-mad Tory MP today demanded that profitable parts of the publicly owned RBS bank must be flogged at all costs.

Andrew Tyrie (pictured), who chairs Parliament's commission on banking standards, wants to let privateers cherry-pick parts of the bank and make the taxpayer shoulder bad debts.

Splitting RBS into good and bad banks was just one option given in a recent report by the cross-party commission.

But even austerity-obsessed Chancellor George Osborne is believed to be unenthusiastic about the prospect.

Mr Tyrie has now urged the Chancellor to examine the "future structure" of RBS as "a matter of urgency."

In a letter to the Financial Times laced with bankers' jargon, he argued: "Formal accounting conventions should not be allowed to get in the way of what is best for the economy."

Left Economics Advisory Panel co-ordinator Andrew Fisher said the misplaced debate centred on "what is the best way to privatise RBS."

He explained: "Tyrie argues the taxpayer will get more in the sell-off if the public first absorbs the toxic debts as a 'public bank.'

"Osborne worries that the public bad bank would worsen his deficit figures and that the toxic debts aren't too bad anyway."

But Mr Fisher said: "Labour should be calling for a publicly owned bank that can invest in new infrastructure to create jobs, reduce unemployment and operate in the public interest - something neither side of the Osborne-Tyrie pantomime cares about."

This article first appeared in the Morning Star

Nine million more struggle to pay bills

by Luke James

Austerity-Addicted Chancellor George Osborne has left nine million more people in financial difficulty compared with seven years ago, Money Advice Service revealed today.

The independent body found that 26 million people across Britain are now living on the brink of financial ruin - a massive 35 per cent rise since their last survey in 2006.

Failing Tory economic policies have sent hourly income plumetting by 6 per cent and sparked a "live for now" attitude to cash among the population.

For example, more than one in five of the 5,000 people surveyed would rather have £200 immediately than £400 in four months' times.

A Treasury spokesman claimed the government had helped households meet the rising cost of living by raising the personal tax allowance and freezing fuel duty.

He said: "We recognise that times are still tough for families, but Britain is holding its nerve, we are sticking to our plan and the British economy is on the mend."

But Labour shadow Treasury minister Catherine McKinnell said the figures bust George Osborne's "out of touch claims that people are better off."

She said: "This government's failed economic policies mean prices are rising much faster than wages. And their unfair choices have seen hard-working people hit hard while millionaires get a huge tax cut."

Ms McKinnell said Labour would help families "with a lower 10p starting rate of tax, paid for by a mansion tax, and take action to tackle soaring rail fares and energy prices."

TUC general secretary Frances O'Grady added that only "strong growth underpinned by decent jobs and higher pay" would end the "longest real wage squeeze since Victorian Times."

Separate figures showed there had been a 3 per cent rise in the number of people being force to declare themselves bankrupt over the last three months.

And the Left Economic Advisory Panel's Andrew Fisher warned: "As personal debt starts rising again it is clear that the squeeze on living standards also creates a huge economic risk if loan and mortgage defaults rise, threatening the banking sector again."

This article first appeared in the Morning Star

Tory home loan bribes 'unwise'

 
by Richard Bagley

Tory Chancellor George Osborne revealed his latest desperate "big idea" for housing today that will see more of our cash used to bribe banks into lending to people who can scrape together a mortgage deposit.

He plans to gamble £12 billion on high-risk 95 per cent loans where the state will act as a guarantor.

That means we will pick up the tab for some of the loss in case of a default.

Mr Osborne claimed following talks with construction firms that the extension of the Help to Buy scheme was "about getting behind those who aspire to own a home."

It will cover houses priced up to £600,000 and will only help those wealthy enough to save a 5 per cent deposit.

With average house prices at around £150,000 in Scotland and Wales - rising to a whopping £454,000 in London - people in the two nations would need at least £7,500 in cash to qualify for the mortgages or over £22,000 in the English capital.

The government's obsession with fuelling the housing market even drew criticism from Bank of England chief Paul Tucker.

He described the scheme as "unwise" in the long term because of fears that it will help reinflate a housing bubble that has left hundreds of thousands packed into expensive private rented accommodation.

Construction union Ucatt general secretary Steve Murphy accused Mr Osborne of "fiddling round the edges of the housing crisis.

"If the government wants to begin to solve both issues then they need to be investing and building social housing which will get skilled workers back to work and will also provide homes for the millions of people who are currently in ina
dequate accommodation."

Left Economics Advisory Panel co-ordinator Andrew Fisher ridiculed the Chancellor's announcement.

"After three years of economic failure, Osborne's great new strategy for growth is a house price bubble," said Mr Fisher.

"The Help to Buy Scheme is an admission of political failure and of the continuing fragility of UK banks.

"This is nationalising the risk and privatising the profits again - a bank bailout by stealth."
He added: "The solution is not subsidies for the big construction companies instead of the banks, but for councils to borrow and build to meet local need."

This article appears in today's Morning Star

Is the UK economy on the up?

In the 2013 Spending Round in June George Osborne said he was taking decisions to "secure the recovery". Yesterday talk of recovery increased when the IMF revised its prediction for UK growth for this year from 0.7% to 0.9%.

However the same upward adjustment in UK growth is not replicated globally. Last April the IMF was predicting 4.1% growth in 2013, now it says just 3.1% will be achieved. This may be reflected in the UK by another set of disastrous figures for manufacturing and industrial production (down 2.9% and down 2.3% respectively in the last year), and a widening of the UK's already substantial trade deficit. So much for the economic rebalancing Osborne promised in 2010 ...

The extra 0.2% growth the IMF is predicting is not much to get excited about - especially when in 2010 Osborne's newly formed Office for Budget Responsibility was predicting growth would be 2.9% this year. However, the IMF revision is among a number of positive signals about the UK economy.

Last week the Services PMI - a survey of purchasing managers in the services sector (which accounts for 75% of the UK economy) - indicated growth at its fastest rate for over 2 years. The respected and independent National Institute for Economic and Social Research predicts that growth in Q2 of 2013 will be 0.6% (while Markit suggests 0.5%).

The prospects for George Osborne therefore seem to be looking up. However, all may not be what it seems. With no let up in the decline of household income, what is supporting this stronger growth in the services sector? As Duncan Weldon shows clearly and insightfully, household income is  falling, but household spending is rising - eating into savings that recovered after the 2008 crash, but are now declining again (see graph below).

What does this mean for the sustainability of the nascent UK recovery and for households? Well, as Weldon concludes, "a falling savings ratio really is underpinning our recovery. The 'new economic model' looks increasingly like the old one". This is even more so the case with the increasingly unreality of rising house prices, underpinned by the bubble-inflating Help to Buy scheme.

The overall households savings ratio masks the reality that for many households they are not eating into their savings, but in fact sinking deeper into debt (good news for payday loan companies like Tory funders Wonga). For many people - including the 500,000 that are reliant on food banks - there is a real crisis emerging. Many are struggling to pay rents - especially with tax credit and housing benefit cuts to those in and out of work.

With pay continuing to rise below inflation, and benefits similarly capped and being cut in cash terms for hundreds of thousands of households, the recovery looks very fragile. There can be no sustainable recovery through increased consumer debt. That way paves a renewed round of loan, credit and mortgage defaults - and with the state lacking the capacity to perform the sort of bailouts that were necessary in 2008 and 2009.

The economy may well be on an upward trend at the present time and this could extend into the latter part of the year. But while economic growth in 2013 is likely to far outsrip the OBR's modest 0.6% prediction, in 2014 growth of 1.8% looks perilous, as does 2.3% in 2015.

The upturn in the UK economy is built (again) on an inflating debt bubble, and the longer it inflates the more damaging the final bang when it bursts. As the manufacturing figures show, there is no evidence of rebalancing, no prospect of a revival in workers' incomes (through pay or benefits), and no substantial investment that could at least stimulate medium term growth and create jobs (in fact unemployment remains stubbornly around 2.5 million).

So while Osborne will be cheering green shoots and patting himself on the back - most gratuitously at party conference in the autumn - the underlying problems of the UK economy remain unresolved, and any temporary respite may only be storing up greater problems for the future.

5 reasons why you can't take this government seriously on tax justice

At the G8, the Prime Minister, David Cameron, sought to make clamping down on tax havens the centrepiece of the summit. As Prem Sikka explains, the post-summit communique was 'high on vague promises, low on delivery'.

But even before the inevitable puncturing of Cameron's hubris, there were several reasons why this government cannot be taken seriously on tax justice* ...

1. Government minister says he wants the UK to be a tax haven

Last year, Cabinet Office minister Francis Maude said it was "a compliment" for the UK to be described as a tax haven, and added: "That is exactly what we are trying to do."

2. George Osborne slashing taxes for big business and the rich

If there's one hallmark of a tax haven, it's low or minimal tax rates. Corporation tax was slashed from 52% in 1979 to 33% by 1997. New Labour cut it further, to 28%, and Osborne has already driven it down to 23% - and aims to get it down to 20% by 2015. This is how he described it at the last Budget:

"A headline rate that is not just lower than our competitors, but dramatically lower.
18% lower than the US.
16% lower than Japan.
12% below France and 8% below Germany.
An advertisement for investment and jobs in Britain." 

Actually, it's an advertisement to for big business to pay less tax - undercutting both other nation's tax rates and shifting the tax burden onto the working poor (as we have previously shown). Of course, cutting the top rate of tax from 50% to 45%, also facilitated avoidance.

3. Many government ministers' wealth is based on tax avoidance and evasion

As Guardian investigations have proven in the case of Cameron's family fortune, and as Channel 4 Dispatches showed in the case of George Osborne, Andrew 'plebgate' Mitchell, and Phillip Hammond.

4. You can't collect taxes without the resources to do it - and this government is cutting resources

HM Revenue & Customs is the body tasked with collecting taxes owed, tackling evasion and clamping down on contrived avoidance schemes. Combined the tax gap (uncollected, evaded and avoided) is estimated at £120 billion ... every year.

Yet the government is slashing the resources available to HMRC - as this PCS infographic shows:

5. Treasury minister in charge of tackling avoidance and evasion is in denial

Treasury minister David Gauke seems to be in a constant state of denial and cover-up

• When MPs investigated and found senior HMRC bosses to close to business, Gauke described the claims as 'absurd'. The same committee also found HMRC was "too poorly resourced" (see above).
• He approved a plan to persecute an HMRC whistleblower who exposed the 'sweetheart deal' with Goldman Sachs
• He claims the UK tax gap is 'only £35 billion' (still substantial) when all serious estimates put it at £120 billion (see Richard Murphy's analysis here)

Of course Gauke did used to work for a legal firm that specialised in tax avoidance.

There's five reasons why this government cannot be taken seriously on tax justice. Please use the comments to add more!!

* For a serious look at tax justice, see the Tax Justice Network

Osborne's 45% tax rate has already cost us billions

When George Osborne announced he would slash the top rate of tax from 50% to 45% - he made some ridiculous claims about how the 50% tax rate (in effect for only one year) had not raised much money (see point 2 of this post).

It was clear that £16 billion of tax had been brought forward (mostly in high earners' bonuses) to avoid falling under the 50% rate.

Today it became clear that same thing seems to have happened in reverse: to avoid the 50% tax rate the bonuses of the highest earners have been deferred to fall under the 45% rate.

The Morning Star reports:

"Britain has been conned out of billions of pounds by scheming bosses who put off their bumper bonuses until after bankers' mate George Osborne slashed the top rate of tax"

Indeed. The evidence is clear from table in the ONS Labour Market Statistics released today which shows that compared with a year ago finance sector bonuses were up 75%, in construction up 63%, and in the service sector up 52%.

Given any pick up in the economy is only marginal - and in some sectors non-existent - then it is patently obvious that businesses have deferred bonuses (largely the preserve of the top earners) to collectively avoid billions in tax.

As I told the Morning Star:

"Just as bonuses were brought forward to avoid the 50 per cent rate when it came in, so now bonuses from last year were deferred to avoid paying it again."

"At a time when the coalition is failing to reduce the deficit and has jacked up VAT on all of us, this tax cut for the highest 1 per cent of earners is a disgrace.

"These figures show that Labour would be right to restore the 50 per cent rate and to do so without notice to prevent avoidance through income-shifting."

And indeed to his credit, one of the few sensible things that Ed Balls said last week was that Labour favoured "keeping the 50p tax rate" - and let's hope he meant 'restoring' too should Labour get back in office in 2015.

Laughably the Treasury "dodged the evidence", the Morning Star reports - and instead commented that the 50p tax rate was "not effective at raising revenue" - which is a spurious claim given the billions of income shifted forward and then back to avoid it ... something that would not have been possible had the tax been in place for consecutive years, without the announced reduction.

So there we have it, the rich dodge their taxes thanks to Osborne's forewarned tax cut, the Treasury dodges questions and denies the evidence that contradicts Osborne ...

Hype wars: Return of the FDI?

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

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

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

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

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

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

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

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

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

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

Borrowing for growth - some advice for Ed

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

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

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

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

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

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

Ed should have responded by saying this:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Unemployment - a price worth paying again ...

It seems a fitting tribute that on the day of Margaret Thatcher's funeral (sponsored by the society she denied existed) that grim unemployment figures emerged.

Despite her election campaign prominently featuring that famous Saatchi poster 'Labour isn't Working', deploring unemployment breaching 1 million under Callaghan's Labour, she oversaw unemployment rise for her first seven consecutive years in office, and breaching 3 million.

But back to today's figures: in the last 3 months, an extra 70,000 have joined the massed ranks of the unemployed (now at 2.56 million - higher than at any point under the last Labour government). Long-term unemployment (those without work for over 12 months) hit 900,000 - the highest level for 17 years. It's even worse for the young, the number of long-term unemployed 18-24 year olds (unemployed for over 12 months) is the highest since 1993.

Overall, since this government was elected, UK unemployment is up 88,000, youth unemployment is up 56,000, and long-term unemployment is up 101,000. Expect a further rise in unemployment next month too ...

The Economist backs Cable, but it's no lurch to the left!

Cable looks to the heavens for inspiration

In a further sign that Cameron and Osborne are losing economic credibility even among their own side ahead of the 2013 Budget, The Economist's editorial has come out in favour of Vince Cable's proposals which he outlined in the New Statesman earlier this week.

Although more clearly articulated, Cable's proposals and modest critique of Osborne's strategy are actually more right wing than what the two Eds' Labour Party is calling for. Call it 'austerity-lite-lite'. Vince has since been feted by many, including now the journal "read by more of the world's political and business leaders than any other magazine".

The Economist backs the case for extra borrowing, made by Cable:

"All in all, the present evidence does indeed – with qualifications – point to some weakness of domestic demand and a low risk of expansionary policies spilling over into significant domestically generated inflation."

As the editorial points out, "between 2009-10 and 2011-12 public-sector net investment plunged from £48.5 billion to £28 billion" a large part of the reason for the appalling construction figures.

However, like Cable, The Economist also advocates that some "expansionary policies" i.e. public investment, should be funded by cuts to pensioner benefits and that perennial punchbag, welfare. The Economist also supports Cable's call to remove the ringfence around NHS funding.

This highlights how Cable is still very much on the Orange Book wing of the Liberal Democrats. Austerity is failing, the markets are unhappy, and what Cable and The Economist reflect is the capitalist class scrabbling around for an ideologically compatible solution to the enduring slump.

The fact that the right is divided, and Cameron and Osborne increasingly isolated, is reason for joy, but Labour and the trade union movement should not be taking sides in this internecine squabble.

Instead the struggle goes on to stop austerity in its tracks - not simply find another route for it to get to the same destination.

The left should take some encouragement however that its analysis is being proved right and that the right is having to adopt some of our proposals. In the case of The Economist both for more borrowing to invest, and - surprisingly - for a Land Value Tax:

"One reason why companies sit on development land is because they do not pay taxes until the offices and warehouses are built. It would be much better to tax the land value: that would make hoarding expensive and force owners to sell to someone who can use the site. Once in use, the site value and the tax would rise—creating a virtuous circle, as the revenues pay for better infrastructure, making land more valuable."