Britain enters ‘economic equivalent of a Dignitas clinic’

Mark Drakeford says the Budget spells disaster for Wales

Yesterday’s budget was just about as bad as it could be for Wales. A combination of economic illiteracy and ideological ferocity produced a set of measures which will scupper our chances of economic recovery and, in a cruel irony of the ‘great society’, will cause untold grief and profound damage to those communities least able to withstand it.

To begin with the macro-economy. Right wing governments, right across Europe, bolstered by the neo-conservative bastions of the International Monetary Fund and the World Bank, are hell-bent on taking demand out of their economies, slashing their way through services and wages as they do so. Each relies on a mantra that cutting back on the excesses of the public sphere will liberate the shackled spirits of the private sector into an explosion of export-led growth. But, as the Guardian’s Economics Editor Larry Elliott has recently pointed out – who will buy these goods for export, when every economy is being deliberately steered onto the rocks of demand-contraction? The global nature of the post-2008 crisis means that this time the USA will not act as the consumer-of-last-resort – the engine which rescued the Canadian economy from its much-vaunted experiment of the 1990s.

George Bush Senior once famously described the similarly-derived policies of Ronald Regan as ‘voodoo economics’. The 21st Century equivalent is the economics of the lemming, in which the only contest is to be the first country over the top and into the water. In yesterday’s budget George Osborne has done everything he can to claim the position of lemming-in-chief. The problem for the rest of us is that, behind him, the economy will, perforce, be dragged over the edge and into a double-dip recession.

The lessons are easy enough to hand. One was the fragile recovery from the Great Depression of 1932 was sent into recession again by the return of economic orthodoxies in 1937. Another was the dismal 1990s decade for the Japanese economy, in which every incipient sign of recovery was choked off by public sector retrenchment, in pursuit of the chimera of private-sector-led growth.

Even without the Chancellor’s economic suicide pill, the British, and the world, economy was set for a fragile and halting recovery. The ingredients which have provided the engine room for such recoveries in the past are, this time, conspicuous by their absence. Previous recessions have been turned around by reducing interest rates (they are currently at 0.5 per cent), devaluation (the £ has already been reduced in value by 25 per cent in the last few years) or falling oil prices (the real prospect, this time, being the opposite, with further rises from the current $70 a barrel).

The British economy needed the attention of a careful and dedicated intensive care team. Instead it has been forcibly admitted to the economic equivalent of a Dignitas clinic, its life support machinery already being switched off.

The social damage from Osborne’s actions comes not simply from the profoundly mistaken strategy, but from the tactical choices made in its pursuit. It is not part of my argument to deny the need to address the structural deficits which occur when governments act to prevent recession from tipping into depression. However, this is not to fall into the self-serving trap which the Prime  Minister opens up on every occasion, when confusing and conflating the issues of debt and deficit.

The size of the structural deficit – the gap between expenditure and income which remains unfilled over the whole of the economic cycle – is a contested matter. Sir Alan Budd’s estimate of £80 billion is a reflection not simply of mathematics but of his view of the world. It is a distortion designed to deceive to suggest that the Office of Budget Responsibility is somehow a judgement-free-zone. Its figures are saturated –  inevitably and undeniably – with the economic outlook of an individual who has served every Tory Government since 1970. The figure of £80 billion, inflated beyond any previous forecast, is a product of that particular perspective rather than some ideology-free exercise in arithmetic.

This gap has to be filled by a combination of public expenditure reductions and tax rises. The problem is that that Chancellor has got the balance between the two elements wholly wrong. And when he has gone for tax rises he has almost always gone for the wrong ones. A report the Institute of Pubic Policy Research earlier this month demonstrated that £20 billion could be raised in extra tax taken from the financial services sector, without any damage to the sector itself. Other taxation measures of a progressive character could have included lowering the threshold for the 50 per cent rate of tax to £100,000 – producing an extra £2.3 billion annually – or setting minimum tax rates of 40 per cent and 50 per cent on incomes above £100,000 and £150,000 respectively, in order to bear down on the £25 billion lost annually to the Treasury from tax avoidance amongst the most well off.

Instead of a Robin Hood tax – or a ‘Tobin tax’, or a Financial Transactions Tax, to give it its more formal titles, the Chancellor has deliberately chosen to be a Robin Hood in reverse. A domestic version of the Financial Transactions Tax, set at 0.05 per cent and applied, through the existing Clearing House Automated Payment system on instant sterling transfers between UK financial institutions, would yield in the region of £38 billion every year. It is a form of taxation which united the TUC and Lord Adair Turner of the Financial Services Authority with Warren Buffett and George Soros. Last week the Office of Budget Responsibility concluded that the decisions already made by the outgoing Labour Government were sufficient to fill half the structural deficit, even at its own new inflated estimate. A Financial Transactions Tax of the sort described above would be sufficient, by itself, to eliminate the rest.

But this is not the course of action preferred by the Chancellor. His own ‘bank tax’ will raise only some 10 per cent of the yield of a Financial Transactions Tax. Instead, VAT, that most regressive of taxes will rise to 20 per cent, heaping the taxation consequences of the budget on the heads of those who can least afford to meet them. The richest 10 per cent of the population pay £1 in every £25 in VAT. The poorest 10 per cent pay £1 in every £7. The Centre for Retail Research recently concluded that the reduction in consumer spending caused by raising VAT to 20 per cent would cost 47,000 jobs and lead to the closure of almost 10,000 stores. The emptiest and cruellest of all the Chancellor’s claims came in the final paragraph of his budget speech, when he described his proposals as “progressive”. Nothing could be further from the truth.

And the worst is that the worst is plainly yet to come. Buried in the detail of the budget is the truly frightening figure of 25 per cent reductions in expenditure for mainstream UK Government Departments, other than health and overseas aid, and the future for them is by no means rosy. Cuts on this scale are unprecedented in any period. Thousands upon thousands of jobs will be lost. Thousands upon thousands of services on which people rely will be abandoned.

For that small coterie who make up the leadership of the Conservative Party none of this matters. They don’t use public services. They belong to a quite different class of ‘scrounger’, who have always lived off the fat of the land without having to worry about the need to work for it. But for the rest of us, the storm is about to break just as the captain has holed the lifeboats below the water mark.

What, then, of the Liberal Democrats? It must be a sorry day, indeed, for those who voted for the party in the belief that it was a radical, left-leaning force, dedicated to a fairer Britain and a belief in public services. Captured by the Conservatives, they are now simply held hostage  and conveniently at hand to be blamed as the full horror of the budget sinks in. It is both too late and too early for them to escape.

Why does all this matter so especially in Wales? The answer is easy enough. As far as the Tories are concerned, we don’t count politically, and we don’t matter economically. As a part of the United Kingdom where manufacturing still forms a significant element in our economy, the headlong dash to reduce demand will damage any prospect of export-led growth. As an area still characterised by low pay, the rise in VAT means that Wales will be subsidising the South East of England.

In fragile local economies, the reduction in consumer spending from a two year wage public sector wage freeze and other demand-reducing measures will mean the end of the line for High Streets painfully sustained over the last decade. As an economy where public sector jobs are often the mainstay of rural towns and Valley communities, the coalition decision to tackle the deficit by cutting public services, rather than raising money through taxation on those who can afford it, means a return to the worst days of the 1980s. We are certainly all in it, but equally certainly we are not equally in it together.

Professor Mark Drakeford was a special adviser to Rhodri Morgan when he was First Minister and will be Labour’s candidate in Cardiff West in the May 2011 Assembly election.

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