The numbers behind Osborne's statement clearly show the failure of the Government's strategy
The never-ending austerity unleashed by the government is once again evident in the latest budget presented by Chancellor George Osborne. The austerity programme has failed to deliver the promised sustainable economic growth and a spin of jam tomorrow can’t easily cover the fault lines.
Just four months ago, the government said that GDP growth would be 2.4 per cent in 2016, 2.5 per cent in 2017 and 2.4 per cent in 2018.
Now, it is revised down to 2 per cent, 2.2 per cent and 2.1 per cent respectively. The public debt is revised up and the government now says that it will be 83.3 per cent of GDP, rising to 83.7 per cent next year and then fall to 82.6 per cent. So far, none of the forecasts have actually materialised.
Conservatives know the constituency they must serve. Capital gains tax is to be reduced from 28 per cent to 20 per cent. The corporate tax rate was 28 per cent in 2010 and will decline to 17 per cent in 2020.
But companies have not exactly been rushing to curtail their tax avoidance strategies. The revenues from tax reductions have evaporated in dividends and executive pay, and have not delivered economic growth.
The economic productivity has remained elusive. In 2010, the government expected productivity to increase by 22 per cent over the next decade and after yesterday the expectation is closer to 14.5 per cent.
Economic growth depends on people’s purchasing power, but wage freezes have depleted that. In 1976, wages and salaries accounted for 65.1 per cent of GDP, today workers’ share stands at 49.4 per cent (see page 85 of the Quarterly National Accounts, Quarter 3 2015).
Another £1.4 billion of welfare spending cuts will mainly fall on people with disabilities and further erode the purchasing power of many citizens.
There are a few crumbs for ordinary people, such as the increase in personal tax free allowance. For example, from 2017 income tax would be payable on income after £11,500 compared to £11,000 from next month.
This would save £100 a year in income tax for basic rate taxpayers, but would do nothing for those on the basic state pension or many women unable to work full-time.
There is good news for 600,000 small businesses who will be exempt from business rates, a benefit of some £6.7 billion over the next five years.
But how will local authorities mange without this source of income? As no new settlement with local councils has been announced the prospect is that of higher council tax, social care charges and cuts.
Some other giveaways look enticing until you look at the details. For example, the limit on the Individual savings Account (ISA) is to be increased from the present £15,240 to £20,000 in 2017. The income from this is tax free.
The Chancellor has also introduced a new Lifetime ISA (LISA) which, from 2017, will be available to adults under the age of 40. They will be able to contribute up to £4,000 per year, and receive a 25 per cent bonus from the government. Funds, including the government bonus, from the LISA can be used to buy a first home at any time from 12 months after the account opening, and be withdrawn from age 60.
Now this presupposes that ordinary people earn enough and have adequate savings. The available statistics show that 13 million adults (26 per cent) saved nothing over the last 12 months. Eight million adults (17 per cent) have never saved at all.
Just last week, it was reported that that 50 per cent of UK adults do not have any savings or investments and are struggling to put away money. Two out of five UK adults also do not have any long term assets to fall back on, such as pensions or property. So the tax relief, which by 2020 could be £850 million year, is loaded in favour of those with money. No doubt, rich parents will be stuffing their children’s account with £4000 a year.
Conservatives often portray themselves as the tax cutting party, but that is not always the case because it has shifted taxes to labour, consumption and savings.
Remember the higher VAT and National Insurance Contributions. The documents now published by HM Treasury show that tax burden will increase from 36.3 per cent of GDP in 2015-16 to 37.5 per cent in 2019-20. Even then there is a £55 billion hole in the government’s figures. How will that be addressed?
The household silver will continue to be sold and the government plans to raise £25 billion by selling its stake in Lloyds Banking Group and RBS. There is perennial promise to clamp down on tax avoidance and government says that this will raise £12 billion.
HMRC has lost 40,000 staff in the last decade. So who will be challenging giant companies and super-rich people?
The government’s economic strategy has failed. It needs to abandon austerity and invest in infrastructure and new industries.
Prem Sikka is Professor of accounting at the University of Essex
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