After years of austerity, Corbyn delivers a much-needed boost
The Labour Party’s proposals for reinvigorating the economy provide a much needed boost. The manifesto launched today redistributes, invests and provides help for the disadvantaged, thus creating the conditions for economic growth.
The current economic scenario is not encouraging, Inflation is rising and inequalities are widening. Brexit uncertainties have persuaded many companies to check investment in the UK. A necessary condition for building a successful economy is that people must have sufficient purchasing power as without that they cannot buy goods and services.
However, due to wage freezes, low national minimum wage, never-ending austerity programmes and zero-hours contracts, people’s purchasing power has been severely eroded. Between 2007 and 2015, the real wages of UK employees fell by over 10 per cent, almost the largest fall among major industrialised nations.
At the end of 2016 the share of GDP going to employees in the form of wages and salaries shrank to around 49.5 per cent (see Table D of the UK Quarterly National Accounts) compared to 65.1 per cent in 1975. The Bank of England has forecast further fall in wages and living standards.
In a comparatively rich country, 40 per cent of the working-age population has less than £100 in savings. Millions rely on food banks to secure their next meal. The poor also become victims of the payday loan industry and end up paying exorbitant interest rates. Personal debt now stands at record £1.529 trillion and ordinary person’s ability to stimulate economic demand and investment is severely eroded.
A change is desperately needed, but successive governments have been hobbled by ideological dogma and belief in the trickle-down economy. All that has happened is that wealth has percolated up, leaving a few crumbs for many.
Historically, the UK economy has been built jointly by the private and the public sector. However in recent years, for ideological reasons, public investment has been sidelined. Now the Labour Party is making a decisive break. Redistribution of income/wealth, decent wages and state intervention in the economy are no longer the dirty expressions. Indeed, they were the key to rebuilding after the 1929 crash in the US and elsewhere and are as relevant today.
This Labour manifesto promises an annual stimulus of £48.6 billion, that is the current expenditure. The investment is in education, the NHS, social care, the police, firefighters and border guards. Labour has promised to abolish all tuition fees and relieve the debt burden on many young people. The real value of state pensions will also be protected.
The manifesto restores Housing Benefit for under 21s and abolishes bedroom tax and employment tribunal fees. It lifts the one per cent cap on the wages of public sector workers.
The expenditure is matched by revenues of £48.6 billion. There will be no rise in VAT. There will be no income tax or National Insurance contribution rises for 95 per cent of workers. Labour will gradually reverse the recent corporation tax cuts and this will raise £19.4 billion.
Additionally, £6.4 billion will come from increases in income tax for the top five per cent of taxpayers. This will be achieved by lowering the threshold for the 45p additional rate to £80,000 of income and reintroducing the 50p rate on earnings above £123,000. An additional £.13 billion will be raised from a levy on companies (not individuals) paying out megabucks to few. There will be a 2.5 per cent levy on earnings above £330,000 and five per cent on those above £500,000.
A Robin Hood tax on speculative transactions will raise £5.6 billion and another £6.5 billion will be raised from various measures to eliminate tax avoidance opportunities. VAT on private school fees will raise £1.6 billion.
A novel feature of the manifesto is unprecedented transparency. Each pledge of expenditure and revenue-raising is carefully costed and shown line by line in the manifesto. Each line is then supported by further background papers.
In addition to the above, Labour has a programme of investment in social infrastructure and nationalisation of key industries, such as railways, gas, water, electricity and Royal Mail. This will be over a period of time. Contrary to the propaganda, some of this has little cost.
For example, railway franchises will expire and can be taken over by the next Labour administration. Currently, despite poor service, rail companies receive subsidies of six billion per year (including Crossrail) and these have roughly trebled in real terms over the last twenty years.
Most of it vanishes in dividends and high executive pay. So nationalisation can save large part of the subsidy. For others Labour will gradually need to borrow. Interest rates are rock-bottom and negative in real terms.
Pundits are already pouring over the details and Institute for Fiscal studies (IFS) has claimed that increases in corporation tax will hit wages and investment. This is nonsensical. The decrease in corporation tax was not accompanied by any increase in wages. So why will the reverse happen?
Despite higher corporate taxes in many European countries, workers enjoy higher wages, and their spending power stimulates the economy. UK companies are sitting on a surplus cash mountain of £500 billion and are looking for investment opportunities. That can’t easily happen unless people have sufficient purchasing power and Labour addresses that.
As some will still be looking for lower corporate taxes, it is appropriate to conclude with a quote from a Financial Times editorial:
“Companies’ main worry now is whether investments they make in Britain will produce a profit at all, not the rate of tax they would pay on them. A corporate tax cut would do little to attract investment until the UK is in a position to resolve the acute uncertainty over its future trading relations with the EU. It would, however, probably lead to lower tax revenues”.
Prem Sikka is Emeritus Professor of Accounting at the University of Essex
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