Money talks: the 2014 Autumn Statement

Sad ChristmasI am reluctant to pour cold water on anyone’s seasonal good cheer. The Yuletide festivities are a stone’s throw away and most people in the UK are not thinking beyond their post-prandial Christmas Day snooze on the sofa, when not even the shrill insistence of a Boxing Day sale advert will rouse them from their alcohol and calorie-induced hebetude. It’s a fine tradition to which most of us in fair Albion look forward and it is understandable that we should be disinclined to contemplate the grey dawn of another year. It is with considerable reluctance, therefore, that I must turn our attentions to Chancellor Osborne’s Autumn Statement. Aside from the tinkering and the political spin lie some decidedly uncomfortable home truths that will leave many UK citizens wondering if they should cancel Christmas for the next five years.

 

A Pyrrhic victory

It’s not all bad news, of course. The Office of Budget Responsibility has revised its growth forecast upwards for 2014/15 to 3%. This is one reason to be cheerful, especially given the stagnation of our continental neighbours. However, growth is expected to slow over the next few years to between 2% and 2.5%, though even this forecast could be optimistic. The outlook for the global economy between now and 2020 is rather gloomy: a struggling EU, upheavals in the Middle East, the Ukraine situation and the Ebola epidemic are contributing towards weakening demand for British exports.

A reform of stamp duty will please many….or, at least, it will please those who are in a position to buy a house. It makes no difference whatsoever to the millions of citizens who are not in a stable relationship, who earn a modest income and who have to share a house with people they don’t particularly like because even a small, one-bedroom flat is beyond their reach. Tinkering with property tax does not address the fact that so many Britons have no hope of owning their own home and struggle with high rents. On the plus side, enveloped transactions face an increase in tax, and not before time.

UK Budget SurplusThe Chancellor predicted a fall in government borrowing over the next five years, anticipating a surplus by 2018. Lest we forget, this is the same man who, in 2010, vowed to clear the current account deficit by 2015, yet here we are, running a deficit at 5% of GDP. Ours is the most indebted major economy in the world, despite years of cuts in public spending, steady growth over the last couple of years and falling unemployment. What the blazes is going on? We are a far cry from the profligacy of the Blair/Brown years, so why is Britain still not living within her means?

A number of factors are at play. While jobs are being created in the private sector, they are, for the most part, lower-paid jobs. Real-terms wages have only recently started to rise and have not kept apace with the rise in living costs. On the face of it, more people off the dole and into work makes government statistics look good, but low-paid work does not generate much in income tax receipts. A recent move by the Exchequer to raise the income tax threshold, though welcome news to many (including yours truly), only exacerbated the problem. Moreover, the proportion of people who are in full-time work and who are net contributors to the national coffers is shrinking. Britain, like so many developed nations, has an ageing population. The growing number of over-65s are either retired or counting the minutes until they retire. They are drawing on their pensions (many of them state pensions) and they place a greater burden on the NHS. Many of them require state-funded care. George Osborne has promised a cut in public sector day-to-day spending to just 14.1% of GDP by 2017/18 (the lowest since the 1930s). I have my doubts that he can deliver, considering how far-reaching and politically poisonous such severe cuts would be. The Conservative Party would likely take a hammering in future elections as pensioners, who are far more likely to cast their vote than their younger, more apathetic counterparts, vent their frustration in the polling booths.

 

Render unto Caesar

Have a look at the chart below. It lists the chief sources of government revenue and expenditure for 2014 (in billions).

Incoming     Outgoing
Revenue £650     Spending £730.50
Income tax £167     Social security £183
VAT £110     NHS £140
NI £109     Education £100
Corporation tax £42     Defence £40
Council tax £27     Debt interest £35
Fuel duty £27     Local gov. £35
Business rates £27     Public order £30
Stamp duty £11     Tax credits £29
Alcohol £12     Investment £28
Tobacco £10     Overseas aid £11
        Foreign office £2

 

Our collective housekeeping has been far from exemplary this year – indeed, public spending has been out of control since the 2000s. Depressing though it may seem, there is no question that austerity measures have to be taken. However, cutting back expenditure alone is not enough and may even be counter-productive. Think of all the people employed by private companies which rely at least in part on local or central government. It is not simply a case of stripping away dead wood; despite what some people may tell you, not every public sector employee is a shiftless parasite. When spending is cut, services like social care, transport, research and development and education suffer. Factor in the ‘ring-fencing’ of NHS and foreign aid (£151 billion) and you’re left with some agonising cutbacks that all other departments must endure. I do not see how Mr. Osborne can stick to such an ambitious target of austerity without provoking civil unrest. The government must consider ways of increasing state revenue as well as limiting expenditure. An increase in income tax, seemingly anathema to the Tories and their supporters, may not be pleasant but it is one of the more equitable solutions. And what of corporation tax? How many times must we hear reports of massive multi-nationals like Google, Amazon and Starbucks insulting the British public with their elaborate tax-evasion schemes? What, aside from a few token, headline-grabbing gestures, has the Chancellor done to close the tax loopholes and get the biggest earners to pay what is their due? According to OBR and Treasury projections, roughly £47 billion of VAT, income tax, national insurance and corporation tax will have been lost to the Exchequer in 2014/15. This is a fiscal black hole of Brobdingnagian proportions. There appears to be a worrying lack of political will in the Coalition government (or, at least, in the dominant Conservative faction) to tackle this very serious anomaly. Mr. Osborne seems to find it far more convenient to cut back on public services – services relied upon by the most vulnerable in society – and to target those on Jobseeker’s Allowance or sickness benefit.

 

“Hey! At least we’re not Labour”

"Sorry, folks! You're all screwed."

“Sorry, folks! You’re all screwed.”

David Cameron is trying to shift focus away from the immigration/Europe debate, in which he is hopelessly outclassed, to that of the economy, banking on our collective memory of the spendaholic Labour years. Indeed, it is true that there remains a deep mistrust, especially in England, of the Labour Party when it comes to fiscal management. George Osborne inherited an economy that was in a parlous state and it would take a lot to convince the electorate that Shadow Chancellor Ed Balls is better-equipped to manage the national coffers. The economy continues to be Labour’s Achilles heel, but do the Conservatives fare much better in this area? Whoever wins the general election in May 2015 is going to have to implement some sort of austerity programme, like as not. Ed Miliband is no fool and, in the event that he should become prime minister (it seems unlikely), he and his chancellor would be mad to repeat the mistakes of the past. It seems to me, though, that the Tory Party’s ideological antipathy towards state ownership trumps their commitment to bringing down the deficit. Consider the East Coast Mainline, an arterial railway link between London and the North that was taken over by the government in 2009 from National Express. Since that time, the service has generated £1 billion in profits and requires less public subsidy than any of the 15 privately-run rail franchises in Britain. Any profits generated by the service have been put back into investment. However, this was not good enough for the Conservative administration, who vowed to put it back into private hands and awarded ownership to Stagecoach and Virgin. It is a truly sickening state of affairs when an elected government holds its people in such contempt that it would sacrifice profit for the sake of ideology.

Consider, also, the government’s recent announcement of a £15 billion road-building scheme, the largest and most ambitious of its kind for 25 years. Aside from the inevitable (and understandable) opposition such a project will no doubt face in the coming years, is this a sensible use of state funds? Rather than relieve a few vehicular choke-points, would it not be a better idea to use this money to invest in Britain’s public transportation infrastructure? Would it not reap more dividends, and keep carbon emissions down, if the government spent money on extra train carriages and railway upgrades? Why has this scheme been announced with so little consultation, when the plan to construct an extra runway at either Heathrow or Gatwick has been kicked into the long grass for so many years? London Heathrow, an internationally-recognised airport, is crying out for a third runway. The extra capacity will, without a shred of doubt, be a boon to tourism and the manufacturing sector. The cost of building it, while considerable, will be repaid many times over. If the government really cares about the financial health of the nation, they need to look at ways to encourage growth as well as keep state spending under control. I am not convinced that the Tories, or their Liberal Democrat coalition partners, are up to the task.

State ConsumptionAt a time when growth and confidence are returning to the British economy, we should be witnessing an attendant rise in productivity and wages as well as a decrease in deficits and debts. In fact, the opposite is true. Chancellor Osborne’s buoyant outlook for UK Plc over the next five years hinges on a stable global economy. Taking into account recent world events and tumbling oil prices, I fear he is gambling our nation’s future on suppositions and assumptions. What if there is slower growth or even stagnation? How can the government balance the books if the hard times return? According to the Institute for Fiscal Studies, we face another £55 billion in cuts. A slash in public spending of that magnitude is going to cause a lot of people a lot of pain. I remain unconvinced that the current administration has the skill and the vision to implement more financial restructuring effectively so as to ensure long-term stability. Does the Opposition have a credible alternative? What kind of “different and fairer choices” would Ed Balls offer a nation in crisis? There are storm clouds on the horizon. I suggest you keep knocking back that mulled wine this Christmas, because it looks like 2015 is going to bring with it a lot of sobering news. Spideron out.

 

 

 

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