Naturally the increase in the top rate of income tax to 50p is to be welcomed. It is something the left have advocated for years. It should have been introduced a long time ago.
One of the most regressive features of the tax regime introduced by Thatcher was the shift of the burden of taxation from progressive graduated direct taxation tax to indirect taxes such as VAT. It was one of the failures of this government not to have reversed this. However, definitely better late than never. The changes in taxation on the higher paid ‘only’ bring in £2 billion a year but that is £2 billion that will not have to be paid by the worse off.
But unfortunately one swallow is very far from making a summer. The overall wrong character of the policies pursued since the bank bailouts of last autumn has now come home to roost in the gigantic government borrowing requirement. This year alone the shortfall of government revenue compared to expenditure is projected at £172 billion – around one eighth of GDP. Public sector borrowing is projected to run at over £100 billion a year for the next four years. Furthermore the projection of major economic recovery next year has no serious basis in fact so the actual result may well be worse.
Socialist Economic Bulletin repeatedly warned that huge quantities of taxpayers’ money would be wasted in propping up private bank shareholders when their institutions were clearly bankrupt. Furthermore this huge losses in wasted money has not even halted the decline in bank lending and tightened credit conditions have helped strangle the productive economy .
The estimate of the International Monetary Fund that losses by international financial institutions will exceed $4.1 trillion is actually a statement that, taken as a whole, the private banking system of the world is now insolvent and sustained only by taxpayers.
This is why the likely cost to taxpayers of the UK bank bailout package is likely to be at least £60 billion. That loss will devastate public spending for very many years to come. In other words the social protection of ordinary people in Britain, who were not responsible for the financial crisis, has been sacrificed to the protection of bankers who created the mess in the first place. Such policies are bound to be deeply unpopular.
And that unpopularity will increase. As the Financial Times rightly put it: ‘all the chancellor has done is to pencil-in slower public spending growth without saying what services will be cut, which hospitals will not be built, what schools will be closed.’
Instead of these gigantic financial losses what should have occurred in Britain is that the failed banks should have been nationalised, as was done to Northern Rock, and the money that has been wasted on propping up bank shareholders should instead have been used to finance lending to consumers and consumers and public investment.
The political consequences of this mistake are clear. Years of battle lie ahead over public spending and taxation. Cameron is preparing to attempt to dig the Thatcherite bankers out of the hole they have dug by a massive assault on the poorest members of society – that is the real meaning of his call for huge public spending cuts. Meanwhile, unless there is a reversal of the policies that have been pursued since last autumn, which was to transfer funds from ordinary voters to the bankers who created the problem, Labour’s popularity will not recover sufficiently to win an election.
The left has now urgently to agree its policies to engage in the huge struggle over public spending that is to come. It is literally madness, as well as electoral suicide, that confronted with the biggest squeeze on public expenditure since the 1930s the country is wasting its money on multi-billion programmes such as Trident and attempting to sustain a level of military expenditure in GDP far higher than its competitors.
It is also clear that the projections for relatively rapid economic recovery next year, after the severe fall in output this year, are pie in the sky. There is motor force for spontaneous recovery exists – consumer expenditure will be depressed by unemployment, investment will decline against such an economic background, and a squeeze will take place on public expenditure. As with every other economic forecast made by the Treasury in the financial crisis its projections for next year will be too optimistic.
It is clear that in such a situation the public sector will be required to kick start the economy. The construction industry is in such a state of collapse that only a huge public house building programme together with nationalisation of major sections of the industry can revive it. This is in complete contradiction to the misguided attempt to cut back the role of the public sector that is explicitly projected by the Tories and is implicit in the budget.
Privatisation and deregulation was tried and its consequences are clear in the economic disaster which has unfolded in the last year. Strengthening the role of the state in the economy, not weakening it, is what is required to overcome the consequences of the debacle of Thatcherism.
The political consequences of the budget, and of the financial crisis, have only just begun to work themselves out.