Successive governments have tailored economic and tax policies to impoverish the masses

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

After barely six months in office, major questions are being asked about the UK government’s economic strategy. It seeks economic growth but evidence from the last 14 years shows that it can’t be achieved through austerity and cuts to wages and public services.

Four months ago, Prime Minister Keir Starmer promised that his government will not be “going down the road of austerity”. Three months ago, the Chancellor raised taxes in order “to prevent austerity and rebuild public services“. In November 2024, the Chancellor said she is “not coming back with more borrowing or more taxes“. This week, the Prime Minister said that the Treasury will be “ruthless” in cutting spending on public services. Cutting public services means cuts to wages of public sector workers, benefits for the poor, old, sick and disabled; less spending on  purchases from the private sector leading to further squeeze on jobs, wages and household budgets.

Cutting public spending is destructive. After 14 years of austerity the waiting list for hospital appointments in England has increased from 2.5m to 7.6m, the average real wage has declined to the 2008 level, leaving 16m Britons to live in poverty. The headline rate of minimum wage is to rise by 6.7% from April 2025, £12.21 per hour, but most of it is already wiped out by higher cost of food, energy, housing, council tax, water, broadband, transport and other essentials.

The promise of ‘ruthless’ cuts follow continuing erosion of household incomes. The government has continued with the Tory two-child benefit cap. This has been followed by cuts in winter fuel payment payments to pensioners below the poverty line. Despite promises of no tax rises for ordinary workers, real levels of income tax will rise because the government will adhere to the Tory freeze on annual personal allowance, fixed at £12,570 until 2028.

The government is boxed-in by its pre-election promises of reducing the public debt as a proportion of the economy by 2029, and no rise in the headline rates of income tax, corporation tax, capital gains tax, VAT and National Insurance for employees. It can’t deliver these pledges without an economic reset.

The priority must be to improve the purchasing power of the bottom 50% of the population. Without good disposable income people cannot afford to buy goods and services and that is a massive disincentive to invest in productive assets. The UK has been bottom of the G7 league for investment in productive assets in 24 out of last 30 years. It ranks 28th among 31 OECD countries. Therefore, a focus on redistribution and improving the spending power is vital.

For nearly 50 years, household incomes have been eroded by anti-trade union laws, zero hour contracts, fire and rehire at lower pay and other developments. Workers’ share of GDP, in the form of wages and salaries, has declined from 65.1% in 1976 to barely 50% now. The most recent estimate (November 2024) of the median annual wage is £29,664. Some 17.8m adults have annual income of less than £12,570 and reply upon benefits and charity to survive. In April 2024, it was estimated that for a minimum standard of living, a single person needs annual income of £28,000, and a couple with two children need to earn £69,400 a year between them. Last year, some 3.12m people used food banks.

Successive governments have hit the poor by adopting regressive taxation policies. The richest fifth pay 31% of gross household income in direct taxes; compared to 14% for the poorest fifth. The richest fifth pay 9% of disposable income in indirect taxes; compared to 28% for the poorest fifth. Altogether, the poorest pay higher proportion of income in tax.

Faced with shrinking incomes, people cut discretionary expenditure which reduces business activity. Around 7.9m people have no savings and more than 21m – almost one third of Brits – have less than £1,500 in reserve. The bottom 50% of the population has 5% of wealth, and the bottom fifth has only 0.5% of the national wealth. The inequitable distribution of income and wealth means that governments are increasingly reliant upon a shrinking proportion of the population for stimulation of economic growth.

The spending power of a large proportion of the population has been systematically eroded, and most people are in no position to stimulate the economy. The government has numerous policy choices. These include improving workers’ bargaining power by strengthening the position of trade unions, a higher living wage, triple-lock on social security benefits and a state pension which is not less than the national living wage. The spending power of the people at the bottom can be improved by abolishing VAT on domestic fuel, cutting the standard rate of VAT and increasing tax-free personal allowance by £1,000 a year, with the ultimate aim of aligning them with the minimum wage. People’s purchasing power needs to be increased by controlling profiteering, especially in energy, water, banking and other sectors. This will benefit not only households but also businesses. Too many businesses are weighed down by excessive rents, energy and water costs.

Businesses need to be run for the benefit of society and all stakeholders, not just shareholders and executives. Therefore, democratisation of industry is necessary. Unlike shareholders, workers have a long-term interest in the wellbeing of companies. All large companies must have worker-elected directors on their boards. Thus, giving them a say in how wealth generated with their blood and sweat is to be shared amongst stakeholders. Hard-pressed customers must be empowered to vote on executive pay at water, rail, mail, banks, insurance, internet, phone, energy and other industries to ensure that they are not exploited by companies exercising monopolistic powers.

Austerity policies and cuts in public services have increased economic inactivity. In November 2024, 6.28m individuals were waiting for 7.48m hospital appointments in England. People struggle to get access to dentists and family doctors. Some 2.8m people are chronically ill and unable to work. Around 16.1m people suffer from disabilities, and 23% of these are working age adults. Years of low wages and benefits, poor housing, and public service cuts have delivered a huge blow to household incomes and must be reversed by greater investment in healthcare.

Currently, some childcare support is available to entice single parents to work and fill the gaps, but it is inadequate and expensive. To enable more people to work, free childcare must be provided.

Any mention of improving people’s economic condition always leads to questions of how is it to be paid. Neoliberals never ask that question when the public purse is opened to help corporations and the rich. For example, after the 2007-08 financial crash, the government provided £1,162bn of cash and guarantees to bail out the banking industry. Another £895bn of quantitative easing was provided to support capital markets. Governments have bailed out banks and energy companies, provided subsidies to oil, gas, coal, steel, auto, rail, water, internet, arms and many other industries. Yet the same considerations are not applied to welfare of the people and services that enable people to work and generate wealth.

The government can create money to achieve equitable society and withdraw the amounts causing inflation through selective taxation from the parties making excessive gains. Governments must also focus on leakage of tax revenues. HMRC admits that it failed to collect over £500bn in taxes since 2010. Others say it is closer to around £1,400bn. This does not include taxes lost due to profit shifting by large corporations or money stashed in tax havens by the rich.

The government can eliminate regressive tax policies. For example, it needs to tax capital gains and dividends at the same rates as wages. By restricting tax relief on pension contributions to 20% for everyone, i.e. denying the 40% and 45% tax relief to higher earners, the government can generate surplus of £14.5bn. It can replace council tax by local income tax. There are numerous other alternatives ranging from windfall taxes, wealth taxes to financial transactions tax, but governments have got used to squeezing low and middle income families.

Improving the disposable income of the masses is the key to securing economic growth and building a sustainable economy. Low and Middle income families tend to spend money on everyday items and this has a greater multiplier effect on the local economies. Higher disposable income for the masses lifts people out of poverty and reduces pressure on the NHS, social services and benefit claims. Yet successive governments have tailored economic and tax policies to impoverish the masses. Such policies have neither delivered economic growth nor happiness, and must be abandoned.

Image credit – Keir Starmer – Creative Commons

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