Posturing over the pound

The debate about what currency Scotland could, would or should have has sprung into life now that the SNP's white paper proposal for 'keeping the pound' has been rejected by all of the major Westminster parties, and the Liberal Democrats too.

This represents a new stage in the debate, with the stakes ramped up for both sides. But if we sweep aside the political posturing, the debate over the last few days has revealed - to this disinterested observer - some interesting truths:

1. The establishment is worried by the prospect of a 'Yes' vote

The unity among the leaderships of the Tories, Labour and Liberal Democrats (and UKIP incidentally) reinforced by the unusual decision to publish the advice of a senior civil servant is a clear indication that the establishment is concerned about the prospect of Scotland seceding from the union.

You might argue that this consensus is a reflection that currency union is a bad idea (especially for Scotland), but Sir Nicholas MacPherson's letter and the statements of the three parties (working together for a No vote under the Better Together banner) go further than criticising currency union and contain some ridiculous scaremongering. The 'no' side - ahead in all the polls - is obviously worried though.

And it has good reason. If Scotland votes to leave and is refused currency union, it could quite legitimately reject the UK debt (a possibility acknowledged in MacPherson's paper). However, even if Scotland took a share of the national debt (based on population size) it would have a debt to GDP ratio of 81%, compared with 104% for the rest of the UK (according to an NIESR paper).

The Treasury paper implicitly acknowledges these possibilities but implicitly says the UK would get its way because "an extensive wrangle about [Scotland's] share of the debt would increase uncertainty and hence its funding costs". What it doesn't say is that is true too for the remaining UK ... and that's why they're worried.

2. HM Treasury believes the Euro is still bad for the UK

It believes that economic union is problematic without political union - and that economic independence is incompatible with currency union. In this it is right: witness how a technocrat was imposed in Italy and government policy imposed in Greece (and elsewhere) under Eurozone orthodoxy.

3. The SNP is economically bankrupt

The SNP clearly lacks the confidence to argue for an independent currency under a central bank of Scotland. Instead it wants a more familiar and convenient currency union with the UK, knowing that it will inevitably mean that Scotland would not be economically independent.

At best Scotland might get one seat on the Monetary Policy Committee of the Bank of England (given size of economy or population), and the interests of the Scottish economy would be totally marginalised (it is arguable that is the case now since the Bank of England largely operates in the interests of the City of London's square mile, but then why vote for independence only to accept the situation of pre-independence?)

As such an 'independent' Scotland under the SNP's vision would leave Scotland as a crown dependency, similar to the Isle of Man or Jersey. Given that Salmond's economic vision has previously been to turn Scotland into a tax haven, maybe that's the aim. Scotland as an outpost of the City of London?

4. The UK banks are still fragile, and if they crash again the establishment will bail them out again

The Treasury paper states "Scotland's banking sector is far too big in relation to its national income, which means that there is a very real risk that the continuing UK would end up bearing most of the liquidity and solvency risk". So the Westminster consensus still believes if banks fail they should be bailed out exactly as before. They have learned nothing from the greatest crash in over a century - their neoliberal ideology remains unshaken. The SNP does not demur from this, nor suggest the Icelandic route.

Conclusion

These points do not make the case for either a yes or no vote in the referendum. What they point out is that however Scotland votes, it will be governed by people unable to govern in their economic interests.

What is also reveals is that the referendum debate is likely to step up, with more vitriol and posturing, that will make independence negotiations more difficult if Scotland does vote yes.

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

Rising unemployment and failing Osborne

Today's unemployment figures were a timely update on the failure of the coalition's austerity policies. Unemployment has risen by 129,000 in the last 3 months to 2.62 million, while youth unemployment broke through 1 million for the first time ever.

First the stats: the unemployment rate (8.3%) is the highest since 1996, the numbers unemployed the highest since 1994. Youth unemployment is the highest on record, and female unemployment the highest since 1988 (Q: what do all those years and 2011 have in common?*).

The youth unemployment figure reflects a failure to create jobs - nearly a quarter of young unemployed people have been without a job for over a year. That is a grim statistic (read Danny Dorling's Injustice for the impact long periods of unemployment have on young people). With no strategy to create jobs, new cohorts of young people are going to be added to those figures in the coming months and years.

Female employment is rising faster than ever predominantly because of public sector job cuts. In the last two years 250,000 public sector jobs have gone - 110,000 in the last 3 months alone. Several areas have been particularly badly hit: the civil service has lost 8,000 jobs per month in the last quarter. But even in supposedly protected areas like the NHS and education 26,000 and 16,000 jobs respectively have gone in 3 months.

Now the economics: With unemployment rising, and employment falling 300,000 in the quarter that means fewer people are paying taxes and more people are claiming benefits (though nowhere near the number who are entitled to). These people are in turn spending less (because they have less) depressing the private sector and reducing VAT revenues.

This is bad news for Osborne because, combined with flatlining economic growth, it means the government is receiving less revenue and paying more out in welfare than it projected.

Worse still for Osborne is that inflation is at 5.4% while wage increases lag at 1.7% - meaning living standards are falling (depressing demand, reducing VAT revenue, etc).

This leaves Osborne with a choice ahead of his autumn statement on 29 November: will he cut more to reduce expenditure or borrow to stimulate the economy in some way? If he cuts he'll exacerbate the problem, but if he borrows he'll be forced to abandon his 'Plan A' and admit he was wrong. So the question is whether the misery of millions is a price worth paying to temporarily shield Osborne's ego?

This is a big issue for Osborn, who based his economic policy on 'crowding out' theory. In the June Budget he promised to slash the bloated public sector which was crowding out private endeavour and depressing the economy. LEAP dismantled that argument in October 2010 'Osbornomics unravels'.

At that point Osborne was predicting economic growth of 2.6% in 2012, and jobs growth from the private sector. The jobs have failed to materialise (despite determined slashing of the public sector) and the Bank of England downgraded its 2012 growth forecast to 1%.

Osborne appears not for turning, so it's up to us to turn him out of office, but his motley millionaires turn the UK into Greece.


* A: Tory governments

Unemployment - a price worth paying for the Tories

Unemployment figures out today show that 2.57 million people are unemployed, the highest since October 1994 - the last time the Tories were in power. But they have surpassed themselves on youth unemployment which hit a new record, in percentage and numerical terms, which is now well over 20% and 991,000.

But the picture is actually even worse than these headline figures suggest. In addition to the 2.57m unemployed are 580,000 workers in temporary jobs who want a permanent job and 1.27m workers in part-time jobs wanting full time work - meaning that there are over 4.4m people looking for more work. The number of people working part-time who want full-time work has increased by 300,000 in last two years.

The Tories are seeking to blame this on a combination of the last Labour government and the current eurozone crisis, but public sector employment is down 240,000 in past year as the Tories' deliberate policy of cutting public service jobs has taken hold - surging ahead of downwardly revised OBR predictions.

As the public sector disproportionately employs women, it is no surprise that the level of female unemployment is up 5.4% in the last year, and is now at a 23 year high.

The message is clear: unemployment is a price worth paying to implement the Tories' ideological crusade to roll back the state, under the cover of a deficit crisis.

In defence of Gordon Brown (well, partially)

Last Thursday night I spoke about the economic crisis at a meeting of St Albans Labour Party, which seems in good health: a good attendance and a lively debate followed my presentation. Below I've integrated the first half my speech with some of the excellent points made in discussion.

Labour did not overspend

Despite the claims of Cameron and Osborne (and that rather politically naive and economically illiterate note left by Liam Byrne) the last Labour government was not profligate, it did not over-spend. In fact, as this graph shows, Labour actually spent less as a proportion of GDP than either the governments of Thatcher and Major.

Labour stuck to Tory spending plans from 1997-99 meaning that public spending did not start increasing in real terms until 2000. The UK had also embarked on an unprecdented period of seemingly stable economic growth that would last until late 2008.

Labour also had two decades of underinvestment in public services to make up for. The proportion of GDP spent on education, health and pensions lagged far behind the rest of Europe. Too many pensioners and children were in poverty, and Labour set ambitious targets to reduce (and even eradicate) poverty among these groups.

Labour's aim then, to increase public spending, was correct. It was necessary to build new schools and hospitals and to employ more and improve the wages of dedicated public servants.

But it was not just this period of economic growth that allowed New Labour to spend more: they also hit the utilities with a windfall tax to (partially) compensate for the fact they were undersold by the Tories' cheap sell-offs. Introduced in the emergency budget in 1997 it raised £5.2bn. Brown also sold off about half the UK gold reserves in 1999, raising over £2bn.

The decision to sell-off that gold has been heavily criticised - the price of gold has shot up since - but the question is what was it spent on? At that point our public services were in desperate need of investment - and Labour had manifesto commitments to bring down hospital waiting lists and reduce class sizes. At the time it seemed the right priority, and most people would agree.

Labour reduced the debt

So Labour spent, as Brown himself would often say, prudently throughout its term in office. It also managed to reduce the national debt - as this graph shows.

When Labour came to power in 1997, the national debt was 42% of GDP. By 2002 it was below 30%. It increased very slowly between 2002 and 2008 to 36% (still lower than any year under Margaret Thatcher or John Major). Then, as the chart shows, the banking crisis hit and Labour left office in 2010 with the national debt at around 52% - lower than in Japan, the US, France or Germany.

Despite this George Osborne came to the Despatch Box for his emergency budget in June 2010 and told us Britain was on 'the brink of bankruptcy'. Where Brown had put a windfall tax on big business privateers, Osborne delivered an unprecedented cut in corporation tax and other business tax breaks, with welfare cuts.

But Labour did make massive mistakes

Having said that some criticism must be levelled at Gordon Brown and New Labour for the mistakes they did make. Their light-touch and continued deregulation of the banking sector meant that Britain was harder hit by the global financial crisis that many other countries. Our over-dependence on the finance sector and failure to have any strategy for manufacturing left us particularly exposed.

The Tories however cannot make any headway on this because they actually called for further deregulation of the banking sector, finance and mortgage markets. They too offered no industrial strategy.

Likewise Labour should also be criticised for their national accounts-fiddling approach to investment: PFI. This has dumped about £300bn of debt on public sector bodies for assets worth about £50bn. But, bad news again for the Tories, PFI was the brainchild of the Major government and Labour's only opposition to PFI came from rebellious backbench MPs like John McDonnell and Kelvin Hopkins.

Another colossal waste of money (though more pertinently of human life) was New Labour's wars in Afghanistan and Iraq, but again the only opposition was found on Labour's own benches. Likewise for the commitment to replace Trident.

Conclusion

Labour made huge economic mistakes - it relied too heavily on the finance sector and the growth of personal debt - but none of the Tories' attack lines that Labour spent too much or left Britain on the brink of bankruptcy are tenable.

The bank bailout was also a disaster - less the nationalisation of the banks and more the privatisation of public money. Intervention was needed and although botched it was better than the Tory frontbench which dithered between bailout support and letting banks fail (and along with them would have gone jobs, savings and much more of the UK banking system) - which in turn allowed Vince Cable to appear credible.

In opposition Labour needs to assess where it went wrong. The simple formula for 1997-2010 was 'if the Tories agree it's probably a mistake', as they were on banking regulation, PFI, wars and (eventually) the bank bailout.

Public sector pensions: the economic crisis debate in microcosm

It occurred to me today that the debate over public sector pensions is actually the debate about the economic crisis in microcosm.

Few deny we have a large deficit. Few would deny that the UK economy is in its most fragile state for a long time. Fewer still would argue that 'something' needs to be done about it. What that 'something' is the subject of vociferous debate.

For the Conservatives (the right, politically and economically) this is the time to wheel out the classic Friedmanite arguments. The crisis, so they allege, was caused by a 'bloated public sector', us 'living beyond our means', 'maxing out the nation's credit card' and 'not fixing the roof when the sun was shining' - from the ideological to the hokey.

Hence why the government states that public sector pensions must be slashed by £2.8 billion per year to pay for the deficit as they are part of that bloated public sector. They'll tell you that 85% of public sector workers have an occupational pension compared to less than 35% of private sector workers, that pensions are gold-plated, that "the pension system is in danger of going broke".


As we know from the Hutton report, the National Audit Office, the Institute for Fiscal Studies and the Public Accounts Committee (and this humorous interview with the witless Francis Maude) public sector pension schemes are not on the verge of implosion, and the pensions are not gold-plated, in fact they average about £5,500 per year. But why let the facts get in the way of a good ideological crusade against the public sector.

Next we come to the middle of the road. Some would call this the centre, but that gives it the illusion of reasonableness, careful impartiality and a thought-out position. Whereas the middle of the road is a completely illogical place to stand. Indeed, as Aneurin Bevan once said, "We know what happens to people who stay in the middle of the road. They get run down". In this group we find the hapless Ed Miliband, leader of the Labour Party, who I think it's fair to say bears a certain resemblance to soon-to-be roadkill; that caught in the headlights blank stare reflecting a completely illogical reaction to the current circumstance.


In Ed Miliband's case this is because the last Labour government, of which he and most of his shadow cabinet were members, re-negotiated public sector pensions - and as such made them entirely affordable. In fact as the Hutton report shows, the costs are falling. Nevertheless, Ed Miliband is determined to stand in the middle of the road and look stupid. So he condemns the Tories for not negotiating seriously, and also condemns the unions for striking against the Tories.

Sadly for Labour this same half-arsed mess is mirrored in their economic policy. They too think the public sector got a bit too big, especially on welfare (Byrne, Miliband, Purnell, etc) and there's too much immigration (Glasman, Miliband, Rutherford). What to do then? Well they've moved away a little bit from the clearly right wing response of Alistair 'cuts deeper than Thatcher' Darling, and now think the cuts are too far and too fast. So they would cut less and slower, but nobody likes to mention what (except for welfare and immigration, to triangulate to the Daily Mail because voters will clearly not see the Tories as more active on those issues). Remember, middle of the road = stupid.

Finally, we have the left represented today by only a handful of politicians, but more importantly by the trade unions and a number of other democratic civil society organisations. They, like the right have a narrative. In short, 'the finance sector caused this crisis, those on low and middle incomes shouldn't be made to pay for it'.


On pensions therefore they point out the voluminous evidence produced by mostly centrist organisations (see above) that show public sector pensions are affordable, sustainable and fair - and make reasoned arguments to that effect.

On the wider economic question too, the trade unions have also put forward a clear alternative (see Unite and PCS for example) that also rejects the needs for mass public spending cuts as counter-productive for the economy.

And so the fight to defend public sector pensions is really about who was to blame for the economic crisis and what we do about it. Like 1974, it's the government or the unions. Which side are you on?

Asset sales, privatisation and the Tory agenda

The Coalition government is a coalition in name only, it is pursuing a Tory agenda. That agenda is the same as it has been for 30 years: an attempt to roll back the post-war settlement - removing welfare rights and cutting public services.

While most of the attention and opprobrium has rightly been aimed at the £80 billion of cuts announced by George Osborne in the Comprehensive Spending Review, there has not been enough attention and analysis of the privatisation agenda.

The level of privatisation already announced are mind-boggling, both in their scale and economic ineptitude. The CSR announced the intention privatise the Royal Mail, the Tote, Royal Mint, Ordnance Survey and air traffic control. Of course this agenda is not new, and in fact is most a regurgitation of what New Labour announced in the 2009 Budget (which LEAP rightly condemned).

These aren't referred to as privatisations, but as "asset sales", but why would a country in debt, according to Osborne on the "brink of bankruptcy", sell off revenue generating assets? Each of the Royal Mail, the Tote, Royal Mint and Ordnance Survey generate income for the Exchequer - vital in closing the deficit and paying off the debt.

But, as Irish comedian Jimmy Cricket used to say, "c'mere, there's more": under the radar there's a huge swathe of privatisation planned for the NHS (as this wonderful video shows), for education (through 'free schools') and in welfare delivery where nearly 10,000 Jobcentre workers are set to lose their jobs and more jobcentres close to fund the private sector to deliver workfare programmes.

The Morning Star also features on its front page this morning a new report from the influential ResPublica think-tank which calls for "the government to privatise swathes of hospitals, schools and libraries". It is, as the Star titles it, "The Ultimate sell-off"

As I told the Star, the Tories plan is "to relieve the state of the burden of providing high-quality services". But that is only one side of the story - the other is that they wish to transfer publicly funded assets to the private sector.

We should never forget, privatisation is the redistribution of wealth from the public to the private; from communities to shareholders. It increases inequality by removing access to services from the poorest and by increasing the wealth of the richest.

Tory manifesto: Keep them out of government!

The Tories unveiled their manifesto yesterday. Peel away the 'back of the envelope' people power puff, and what remains? The same Tory policies we'd all expected:

Redistribution of wealth . . . to the rich:

• Raising the inheritance tax threshold to £1m will cost the Exchequer hundreds of millions in lost revenue from relatively wealthy people. It is a regressive tax cut that benefits only a wealthy few
• Likewise cutting the proposed rise in national insurance, described as ("Labour plans to raise the Employees’ National Insurance Contributions (NICs) for everyone earning over £20,000 by 1 per cent") neatly obscures the fact that there is also a 1% increase for employers, which the Tories will also cut. While, due to the ceiling at around £35,000, NI is a regressive tax - cutting employers' contributions is redistributing wealth to business
• The manifesto also promises "we will cut the headline rate of corporation tax to 25p". Bear in mind when John Major left office after 18 years of Tory rule it was 33%, and Labour has cut that to 28%. This is a massive redistribution of wealth to big business
• Raising the stamp duty threshold to £250,000 is a tax cut for those buying their own home, but the manifesto says nothing about the 1.8 million families on council house waiting lists

Elsewhere there's the promise to freeze public sector pay in 2011, and "address the growing disparity between public sector pensions and private sector pensions" - which I'm guessing doesn't mean improving private sector pensions . . .

They also promise to cut the bulk of the deficit over a Parliament (i.e. going further than Labour). So, like Labour, it's cuts, cuts, cuts - but with some more redistribution to the rich and powerful sprinkled on top.

Know Your Enemy

With the General Election to be called for 6th May, the dividing lines are becoming increasingly clear.

Business is clearly backing the Tories to deliver the attacks it wants. The traditional Tory allies are backing their people again, with an attack on the moderate increase in National Insurance over the bank hoiday weekend. It was the usual suspects: the BCC, CBI and a ragtag of non-dom, billionaire executives who avoid tax as if as of right, and then complain about the tax burden.

Just as the Sun decided it would back the Tories, when they were leagues ahead in the opinion polls, big business likes to back winners.

As LEAP has pointed out, New Labour has embraced the neoliberal economic orthodoxy in its 13 years. Even now, it is not talking about making the rich pay.

However, Labour has increased the top rate of tax to 50% and is proposing to raise NI (a progressive tax). The fact that the Tories are unashamedly lining up with the bosses against even these moderate measures - and with the Murdoch press - has not served them well in the latest opinion poll in today's Guardian, with their lead reduced to just 4 points.

Does this show that Tory support for big business is damaging them (down to 37%)? If so, it should tell New Labour that being Labour might be popular. If Labour is to win it needs a decisive break and to start putting people before its rapidly deserting wealthy friends.

Lord Ashcroft's non-dom disclosure

No party should be comfortable with the financial backing of a peer who uses non-domicile tax status to avoid paying UK tax


Prem Sikka

Lord Ashcroft casts a long shadow on the next general election. According to the information released by the Electoral Commission, he has donated over £5m to the Conservative party and its associations. A large proportion of this money is targeted at marginal seats in order to swing the election for the Conservatives. The donations have been made by Bearwood Corporate Services, a UK-registered company ultimately controlled by Lord Ashcroft. However, the company has been making losses for years. Its most recent accounts for the year to 30 September 2008 show that the company had an accumulated loss of £3,928,665.

Ordinary folk make political donations out of income already taxed in the UK. But Bearwood did not have sufficient income to cover political donations. Most of the cash donated to the Conservative party has therefore come from Lord Ashcroft's operations in Belize. He enjoys lucrative tax breaks by basing his business empire in this Commonwealth member in Central America.

Now, ahead of a Freedom of Information statement by the Cabinet Office, Lord Ashcroft has acknowledged that he is non-domiciled in the UK for tax purposes. That means that he pays income tax on his personal income and gains arising in the UK, or foreign income and gains remitted to the UK. Unlike most other citizens, the law permits him to arrange his personal affairs in such a way that his worldwide income, subject to double taxation relief, is not taxed in the UK. Despite this, the Conservative party secured a life peerage for him, which therefore gave him a role as a legislator in the Houses of Parliament. In that capacity, he can speak and vote in the House of Lords on all legislative matters, including taxation, yet as an unelected appointee he cannot be removed, no matter how dissatisfied people may be with him.

Lord Ashcroft's statement sets out the March 2000 undertakings he gave to William Hague MP, the then leader of the Conservative party, that he would "take up permanent residence in the UK again" by the end of that year. Now, some ten years later, he says that this meant as "a long-term resident". It is time to make the entire correspondence between the Conservative party and Lord Ashcroft public.

Labour may wish to make political capital out of Lord Ashcroft's revelations, but it too has a less than unblemished record of appointing major party donors to positions of legislative power and cannot escape public censure. Lord Ashcroft is quick to see the opportunity to deflect criticism – pointing out that two of Labour's biggest givers, Lord Paul (recently made a privy councillor by the prime minister) and Sir Ronald Cohen, both long-term residents of the UK, are also "non-doms".

However, Labour donors have been known to be non-doms, while Lord Ashcroft – until now – maintained secrecy about his tax status. For years, the Conservative party also refused to make any clear statement on the issue. Labour donors have not given anything approaching £5m; nor have they targeted marginal seats to influence the outcome of the next general election. Still, the Labour party also needs to come clean. No political party should be allowed to ennoble donors in such a way that might give even the impression that political office is for sale.

The issues relating to Lord Ashcroft and other peers do not end with the acknowledgment that they are non-doms. Since they belong to a law-making assembly whose decisions govern our lives, their business affairs should be open to scrutiny and subject to disclosure. If peers are to regularise their affairs, they would need to explain the details of their business empires, offshore trusts, tax avoidance schemes and everything else that persons domiciled in the UK are required to answer for to the Inland Revenue and other authorities.

Of course, Lord Ashcroft and other peers may voluntarily release this information. But I am not holding my breath. But let there be no doubt: there will be further instalments in this saga.

Attention! Deficit disorder

John McDonnell MP

From today's Morning Star

This week the Treasury confirmed that the government budget deficit had reached record levels of £11.4 billion last month.

This bombshell means the experts have had to revise their estimate of what the annual deficit could pan out to be. A whopping £190bn is their calculation.

Add to this collapsing tax receipts as the recession bites and the costs of having over 2.5 million people unemployed, and you're left with a major economic headache.

The big three parties are all in firm agreement that reducing and eliminating the deficit are central priorities for the coming period, whoever is in office.

The only difference between them is the timescale they have in mind.

In the Queen's speech this week Labour introduced proposals for a Fiscal Responsibility Bill, which would commit it to cutting the deficit by 50 per cent in four years, while Vince Cable and Nick Clegg of the Lib Dems are calling for Gordon Brown to launch into "savage cuts."

As part of his strategy to position the Conservatives as the party of economic responsibility, David Cameron is playing hardball. He's suggested that a Tory government would eliminate the whole deficit in one Parliament.

Cameron's recent speeches referring to the iniquities of big government are crude attempts to lay down some semblance of justification for plans to cut public spending and reduce public borrowing.

His big-government theme is reminiscent of the Thatcherite arguments of the 1970s and '80s, when the government pushed policies to "get government off people's backs."

A return to economic growth could reduce the deficit, but even if the current recession is coming to an end, few would predict spectacular growth over the next few years.

The Organisation for Economic Co-operation and Development is predicting no more than 1 to 2 per cent growth up to 2011.

There is residual anxiety that the shaky US property market could still tip the British economy back into recession at any stage during this period.

The only alternative available to reduce the deficit is to secure more tax revenues.

But neither Labour nor the Tories are willing to increase taxes or take any serious measures to tackle the large-scale tax evasion and avoidance which are sapping our public finances to the tune of £150bn a year, according to the Tax Justice Network.

This political consensus across the main parties holds out the prospect of public service cutbacks on a scale not seen in this country since the '30s.

According to the Budget figures for 2009, the government's total managed annual expenditure is £671bn.

Even if we allowed for the predicted 1 per cent growth in the economy over the coming years, any government aiming to wipe off £190bn debt within one period of office would have to launch a programme of cuts of £30-35bn per year for the five years of that Parliament.

This would mean cutting 25 per cent of all government expenditure.

People need to be made aware of what a 25 per cent cut in public services would look like.

Crudely, 25 per cent cuts could mean the axing of over:

7,000 GPs
4,000 NHS dentists
400 NHS hospitals
750 secondary schools
100,000 teachers
10,000 firefighters.

The Tories have made it clear that they want to cut the welfare benefits bill, particularly the dole and pensions.

Cuts on the scale required to make any real impact on the deficit would require a cut in unemployment benefit, already the lowest in Europe, to £48 per week and raising the state retirement age to 69 immediately.

This is what we are now facing as a result of an economic recession created by bankers, speculators, profiteers and their supporters in government.

All the main political parties have decided that we will pay for this crisis, not the the institutions or individuals that caused it.

Having used our money to stabilise the financial system, the government has stood back and allowed the speculators to return to business as usual. Bankers are in line to receive £6bn in bonuses this Christmas.

But even if the main political parties are not willing to consider an alternative to this insanity, many people are.

Ordinary people are still fuming at the bankers with their bonuses and the politicians with their expenses, who colluded to bring about this crisis and who are now colluding to ensure it is us not them that pay for it.

The role of the People's Charter is to fill the vacuum left by the bankrupt strategy of these political parties.

By setting out a straightforward analysis of the crisis, the charter provides an alternative view of causes of the unemployment and the threat to our public services that we are facing.

By setting out a common-sense set of basic policies, the charter offers a way of developing an alternative strategy to take the economy out of recession in a way that could transform the future of our society.

Already endorsed by trade unions, the TUC and enthusiastically supported by the Labour Representation Committee at its annual conference last week, the charter is beginning to catch the wind at a time when an alternative to the sterile consensus of the main political parties is desperately needed.

The charter could be the benchmark by which people will decide how they cast their votes in the coming election.

John McDonnell MP is Chair of the Labour Representation Committee.

Tories fail the tax test

Prem Sikka

What is the Conservatives’ big idea on job creation? Make public sector workers redundant and reduce people’s welfare rights through cuts. However, they have captured press headlines. Shadow Chancellor George Osborne told the Conservative Party conference that, if elected, the Tories would offer tax breaks to new businesses for the first two years of their life by waiving National Insurance contributions on the first 10 people employed in any new business and create 60,000 new jobs. Conservative leader David Cameron has described the policy as the “biggest, boldest programme to get people working”. Predictably, the Confederation of British Industry agrees.

Does the policy make any sense? The Conservatives have not explained what exactly a “new business” is. Without details, tax policies cannot achieve their assumed goals.

We have all heard of fly-by-night operators who close one shady business and start another. The Conservative Party’s announcement must be music to their ears. They can all close one business and start another the next day to claim exemptions from employer National Insurance contributions regardless of their profits. Perfectly respectable businesses can also indulge in the same creativity by hiving off marketing, public relations and other activities to new subsidiaries – all to claim exemptions from national insurance contributions. Hairdressers, greengrocers, estate agents and corner shops can all do the same, too – without creating a single new job. The only people making any money will be accountants showing them how to lay the old business to rest and start the new one.

Every time any government or political party announces any special tax concessions to one section of business, they set off the avoidance industry in motion. In trade, these are called loopholes and are exploited by accountants and lawyers. The Tory proposal will do the same. They seem to have learnt nothing from past mistakes. Small businesses cannot create jobs on the back of a National Insurance holiday. Businesses need sustainable revenues and no one is going to take on an employee if trade is depressed. The idea that the Conservative plans will result in the creation of some 60,000 jobs is pie-in-the sky and simply unachievable. The Conservative Party has failed the first test of tax policy – that is, to design a policy that cannot easily be abused. They are planning to create another loophole.

Governments should stimulate the economy through more efficient and sustainable means. They can reduce business rates for small businesses. They can extend 100 per cent first year capital allowances, depreciation allowed for tax purposes, to all qualifying investment in plant and machinery. Currently, 100 per cent relief is available on capital expenditure on all plant and machinery (apart from cars) up to £50,000 a year only. The cost of extending the 100 per cent allowances for 2009-2010 would be around £5 billion. Her Majesty’s Revenue and Customs already has a well-established way of policing it. So there will be no new bureaucracy. The proposal would help to retool businesses and create jobs. It can result in orders for the dwindling manufacturing sector and build capacity.

The public sector is targeted by both Labour and Conservatives, but the private sector has singularly failed to create new jobs. Sacking people neither creates jobs nor provides the spending stimulus which our high streets need. Most of the additional jobs since 1997, nearly one million, have been created in the public sector and 75 per cent of these are held by women, mainly outside London. So any cull in the public sector will hurt women disproportionately and also blight the regions. Hardly any questions have been asked about the failure of the private sector to create jobs, even though it depends on the public sector for contracts in healthcare, education and many other areas

A key requirement for sustainable jobs is that people have spending power and that can only be achieved through progressive taxation that redistributes wealth. Ordinary people spend the largest part of their money on food, clothes, shoes and travel in British shops. This has a greater multiplier effect than billions thrown at rich bankers and others. Their speculation on the stock market and housing creates bubbles. At best, they might create some extra business activity for estate agents, accountants and lawyers, but the multiplier effect of their wealth is minimal.

Instead of public expenditure cuts that penalise teachers, nurses, cooks, care workers and security staff who have not caused the economic crisis or gained very much from the boom years, the Government should look at reforming the tax system. In 2007/8, pension contributions relief added up to £37.6 billion. 60 per cent of it went to those on higher rates of income tax and £10 billion went to just 1 per cent of the taxpayers earning more than £150,000 a year. By confining pension contributions tax relief to the basic rate of income tax, the government can release up to £22 billion a year.

Removing the artificial upper ceiling on National Insurance contributions can raise £5 billion. Currently, no National Insurance is paid on incomes above £844 a week.

Even the Conservatives know that speculators cause harm. Yet neither they nor Labour have enacted a Tobin tax on currency transactions. A modest Tobin tax at 0.005 per cent could yield up to $33 billion (more than £20.60 billion). To prevent leakage, this could be co-ordinated within the European Union and raise nearly $17 billion (in excess of £10.6 billion) or more, if higher rates are levied.

Derivatives, the complex financial bets on the movement of interest rates, commodity prices and exchange rates turned out to be the weapons of mass destruction. The global GDP is around $55 trillion, but the face value of derivatives at December 2007 was $1,148 trillion. A simple 1 per cent tax on these could raise more than $11 trillion and a significant proportion of that would accrue to Britain, Tobacco, alcohol and gambling are taxed because they are considered to be harmful. The same principle should apply to financial instruments, as there is now plenty of evidence that this form of reckless gambling has caused havoc.

These are just some of the ways in which revenue could be raised to reflate the economy and especially help the less well-off. A 10 per cent increase in income tax personal allowances would cost about £4.5 billion. A 10 per cent increase in the state pension may be another £10 billion. Money would be available to waive university fees, prescription and dental charges.

Resources could also be used to build a greener economy and a more balanced and diversified economy that favours manufacturing, science, technology and lifelong learning. But instead we now have the obsession with cuts and gimmicks such creating jobs through National Insurance contribution holidays.

*Prem Sikka is professor of accounting at Essex University. This article first appeared in Tribune

The Tories - but where's the opposition?

Over the last few days David Cameron and George Osborne have finally elucidated the nightmare vision of what a Tory Government will look like: attacks on welfare, public sector pay freezes, raising of the state retirement age. The Morning Star spells it out in stark detail on its front page 'Tories aim to hit the poor hardest'

. . . and yet. Where have we heard all this before? The Tories say they will move 500,000 off incapacity benefit, but New Labour's stated aim is to move 1 million off incapacity benefit. They both say they will privatise welfare delivery and introduce workfare schemes - which is why the Tories supported New Labour's Welfare Reform Bill through the Commons earlier this year.

Darling and Osborne made almost identical statements on public sector pay freezes, and the Tories, who supported New Labour's Pensions Act to raise the state retirement age to 66, now say it should happen in 2016 rather than 2026.

It all reminds me of what Tony Benn - a dissident prisoner in the Callaghan (IMF cuts) Cabinet - wrote in his diary on 24th June 1977, "we have provided a blueprint . . . and we will have no argument against it". New Labour has provided a blueprint for the Tories and can have no argument against it. Tony Benn continued, "it is an outrage". Indeed.

It's also economically incompetent:

1) On its own terms, raising the state retirement age in 2016 won't save a single penny for another seven years, so it does not make sense as Osborne presented it as a solution to the deficit. It's also incredibly regressive, DoH figures suggest that someone in Social Class V has a life expectancy of 72; while social class I averages 79. This means the poorest will get 6 years of pension, the richest 13 years. Any raising of the state retirement age is regressive.

2) Cuts in pay and benefits will mean less being spent in the economy and undermine attempts to reflate. In a recession you need to put money in the hands of those who will spend - not take it away.

3) The deficit is not a problem (immediately) - the UK has less deficit then many other countries (as % of GDP) and should be investing in jobs and industry to give the economy a shot in the arm - and if cuts need to be made (or funds diverted from elsewhere) then Trident, ID cards, and the war in Afghanistan would be almost universally popular choices. This is basic Keynesianism, but instead we seem to have a austere monetarist consensus now for cuts towards a balanced budget.

There is now a massive gulf opening up on the left - and yet New Labour continues to move to the right . . .

Since Osborne and Darling want to talk up 'crisis' - while painting themselves as the saviours - then perhaps we need really drastic solutions: the appropriation of the 200 largest companies and their profits used to pay off the national debt?

For an alternative to cuts, see the LRC / LEAP briefing 'Cutting our way to defeat?'

And what of the Tories . . ?

With the opinion polls over the weekend showing that the Tories have now amassed a huge lead, it is only right that this blog starts looking at Tory economic policy

Or rather looking for Tory economic policy, as Prem Sikka writes in his open letter to David Cameron, posted on Comment is Free. The Tories seem quite content (and quite likely) to ride to power on the back of Labour unpopularity - but where are their policies?

The only sign we have of any emerging policy is from a backbench Tory private members bill, due for debate this Friday (but unlikely to be reached) to scrap the minimum wage. Imaginatively titled the Employment Opportunities Bill, Tory MP Christopher Chope's Bill proposes to enable employers to 'opt-out' of the National Minimum Wage. If you want to register your opposition there's a website been set up www.wageconcern.com.