Austin Mitchell and Prem Sikka say the Government’s plan to address the economic crisis has some good intentions, but we all know where those can lead
LIKE good men and women fallen among thieves, the good intentions of Labour’s Treasury team have been negated by the bad advice of timid Treasury officials. The Government’s intentions are clearly admirable. The aim is to stimulate the economy by persuading people to spend. That, coupled with substantial reductions in interest rates, is intended to revive demand and help to boost the economy. However, the package is not based on social justice and fairness. It is also too timid and unlikely to achieve the economic objectives.
The 2.5 per cent reduction in VAT has grabbed headlines, but it will do little to support hard-pressed citizens suffering from the high price of housing, fuel, food and transport bills. Price reductions of 25 per cent and even 50 per cent have not lifted the gloom from Woolworths, MFI, Currys and car showrooms. A £1.25 reduction on a £50 suit will not entice many to spend. As Britain’s manufacturing sector has been sacrificed to the City, an extra 2.5 per cent cut might create jobs in China and suck in more imports, but will do little to stimulate this country’s economy.
The Government strategy presupposes that people have money to spend, but most people simply do not have the cash. The personal debt of £1.4 trillion is bigger than Britain’s gross domestic product. The unfair burden on utility bills and taxes has sapped the spending power of the low and middle earners. Households’ real disposable income tumbled by 1.1 per cent in the first quarter of 2008. The savings ratio is at a record low of only 1.1 per cent – the lowest since records began in 1959 – compared to 8 per cent in the 1980s. The median pre-tax income of a full-time worker in Britain is around £24,000, with considerable variations by regions and gender. In 2006/07, the top 20 per cent of households had an annual pre-tax income of £72,900, compared to £4,900 for the bottom 20 per cent. After taking account of taxes, tax credits and social security benefits, this becomes £56,100 for the wealthiest and £10,110 for the worst-off. The poorest 20 per cent of people lose nearly 40 per cent of their total income in direct and indirect taxes, compared with a national average of 35.3 per cent. The figure is 34.8 per cent for the richest 20 per cent.
This Government has helped pensioners more than any of its predecessors, yet pensioners are still badly treated. The single person’s state pension is 17 per cent of average earnings, compared to 57 per cent for the rest of Europe. After taking account of the state and private pensions, 62 per cent of pensioner couples had less than £10,000 in pension income. Half of single pensioners had income from pensions of less than £6,000. Each year, more than 25,000 pensioners die because they are forced to choose between food and heat.
Whichever way you look at it, the Government needed to put cash into people’s pockets. Ordinary people spend money on everyday things and the multiplier effect of this is far bigger than any tax cuts for the rich. The Government could have sent a £500 cheque to every household. If that is too revolutionary, it should have increased personal allowances for the current tax year – in other words, backdate the increase to April 6 2008, thus ensuring that people received cash in their pay packet. A 10 per cent increase in personal allowances would have cost the Treasury £3.8 billion for 2008-09. From 2009, the Government has promised to raise personal allowances by £130 above inflation to £6,475. In contrast, a commitment to increase the personal allowances at the rate of 10 per cent per annum would go a long way towards taking many low-paid people out of the income tax net. The cost of this would have been £4.65 billion for 2009-10 and £4.7 billion for 2010-11. A 10 per cent increase in the state pension would cost an extra £3 billion a year and a 25 per cent increase would cost around £9 billion. A doubling of the £250 winter fuel allowance would have cost around £2 billion.
The Government should have abolished the 5 per cent VAT on domestic fuel altogether, thus helping everyone meet the higher costs. With average annual fuel bills in excess of £1,000, most households would save at least £50. Northern Ireland and Scotland have already taken steps to abolish prescription and dental charges. In England, around 80 per cent of people in the 18-60 age bracket pay the full cost of their prescriptions. This is a tax on poor health and should have been abolished at a cost of approximately £1 billion.
Companies can get tax relief on their banquets, binges and expensive flights, but we provide little financial support to individuals seeking to enhance their skills and knowledge. Most students going to university start their adult life with huge debts and cannot fully participate in the economy for many years. University fees should be abolished.
All of the above would put cash into people’s pockets and address gross social inequities. Yet the Government has not done this. Some of its tax cuts (for example, VAT) will be reversed, but without a programme for addressing social inequalities. The proposed marginal rate of tax of 45 per cent and the related claw back of personal allowances, after 2011, on those earning over £150,000 has an element of progressiveness, but it is not enough. The artificial upper limit on National Insurance contributions makes its one of the most regressive taxes. The proposal to increase it by 0.5 per cent from 2011 does not address its inequities.
The pre-Budget report is a missed opportunity to reshape the economy and address deeply-rooted social and economic problems. The Government could have raised £8.5 billion by ensuring that the rich pay National Insurance on their entire income. Currently, more than 50 per cent of the £21 billion tax relief on pension contributions goes to around 3 million taxpayers, mostly higher earners. Restricting the tax relief at the rate of basic income tax rate only would have released £5 billion. Taxing capital gains at the basic rate of income tax rather than the artificially low rate of 18 per cent would have raised £1 billion.
This could be supplemented by a levy on the excessive profits of electricity, gas, water and mobile phone companies. Britain should renegotiate its £55 billion contribution to the European Union. The Government could have abandoned its obsession with national identity cards and saved another £9 billion. It should declare war on tax avoidance by companies and rich elites, which is costing the country around £100 billion each year in lost revenues.
Complex financial instruments – the weapons of mass disruption – have brought the economy to the edge of disaster. Companies have been gambling money through derivatives and credit default swaps. Some claim this enables them to manage risks and is a form of insurance. Either way, derivatives should be taxed. The global figure for the face value of derivatives is around $1,140 trillion. Even a modest 1 per cent tax on derivatives would raise more than $11 trillion and a reasonable chunk of that would accrue to this country. This could be used to fund public works, raise pensions and exempt the low-paid from taxes altogether.
The pre-Budget report does little to tackle social inequities or imbalances in the debt-laden British economy. There is no strategy for building manufacturing and weaning it off the credit bubble. There will be no real recovery until these issues are addressed.
Austin Mitchell is Labour MP for Great Grimsby and Prem Sikka is professor of accounting at the University of Essex
