Are The Cuts Necessary? And What Are The Alternatives?
by Chris Edwards in ‘The impact of national budget cuts, tax changes and local reductions in services on disabled people and their families in Norfolk’.
Are the cuts necessary?
The Demos report of 2010 is fairly thorough in its analysis of benefit changes on disabled people but it includes the following quote;
“we recognise that the government is facing an unprecedented deficit which needs to be paid off through a series of radical welfare and departmental cuts. We are not, therefore, suggesting that disabled people should be exempt from these cuts – we must as a society all bear the burden of the recovery from recession” (Demos Oct 2010, 16).
We do not agree with this conclusion. The government is facing an unprecedented deficit but it does not follow that we must all bear the burden. The burden was not created by the poorest half of the population – it should not be borne by the poorest half of the population. As Seamus Milne has put it; “… 2100 promises to be a year of social and economic misery, as the coalition’s cuts and the heaviest costs of the bankers’ crisis are loaded on to the poorest under the slogan “we’re all in this together”” (Guardian, 30 Dec 2010).
In the calendar year 2009, the UK recorded a general government deficit of £159 bn, equivalent to 11% of GDP. This is high by EU standards but by the same standards the UK has a reasonable debt-GDP ratio. The debt-GDP ratio is also low in UK historical terms being lower than at any time between 1950 and the late 1960s (Irvin et al 2010, 9, 14). Thus the flow is bad; the stock is OK. Nevertheless the running deficit is high and something has to be done, but what is being done is a grave mistake.
As Irvin et al point out, in 2010/11, the debt is 62% of GDP against 177% in 1932 with debt interest payments at 6.3% of public expenditure now, compared with 40% in 1932. Yet we are being told to take the same medicine.
As William Keegan observed in The Observer;
“They (Osborne/Clegg) have effortlessly altered the tenor of the debate from whether there should be drastic cuts at a time of relatively low economic activity to the question of how and where the cuts should be administered” (William Keegan, Observer, 12 Dec 2010).
This is in spite of the fact that at least two-thirds of the increase in the structural deficit is estimated to have been the result of the financial crisis of 2008 (Irvin et al 2010, 11). The cuts as proposed are not necessary and there are other ways of reducing the deficit without risking a double-dip recession and without causing much greater inequality.
What are the alternatives?
There were and still are alternatives to the spending cuts. Irvin et al 2010 suggest the following;
• a 50% tax rate on gross income above £100,000 a year (at present it is 50% on £150,000 or more) – this would raise £2.3 bn
• uncap National Insurance Contributions (NICs) so that they are paid at 11% all the way up the income scale – this would raise £9.1 bn
• introduce minimum tax rates for certain levels of gross income – this would raise £14.9 bn
• increase the tax payable (higher multipliers) for houses in Council tax bands E to H – this would raise a further £4.2 bn
• minimise personal and corporate tax avoidance by requiring tax havens to disclose information fully and by changing the definition of tax residence – this would raise a further £10 bn. In the Coalition Government’s agreement it was stated that “The parties agree that tackling tax avoidance is essential for then new government, and that all efforts will be made to do so, including detailed development of Liberal Democrat proposals” (Con-Lib May 2010, 3).
• introduce a financial transactions tax at a rate of 0.1% applicable to all sterling transactions – this would raise a
minimum of £4.2 bn and a maximum of £34 bn (assume £10 bn).
Such reforms would mean that there would be no need for spending cuts since the above comes to a total of £50.7 billion extra revenue for the Treasury15 and compares with the Coalition’s proposed mixture of cuts and tax rises of £40 bn. in 2011/12. Irvin et al’s proposals come to a similar reduction with their suggested restoration of the 10% tax band (£11.3 mn) offset by a suggested cut in heavy military goods (such as Trident) bringing the net effect back to about £40 bn. (Irvin et al 2010, table 1).
This pattern of tax changes is far less likely to cause a double-dip recession than the present mix of spending cuts and tax rises. It is also fairer and would go some way to reversing the inequality trend in the British economy. One indication of increasing inequality is the increase in the ratio of the income of the richest quintile to that of the poorest. This has risen from 5.3 in 1994/95 to 6.0 in 2008/09 (HBAI 2010, 25). Over the last decade, the poorest tenth of the population have, on average, seen a fall in their real incomes after deducting housing costs. In other words, after adjusting for inflation, their incomes are slightly lower than a decade ago (poverty.org website accessed on 15 Dec 2010)
Similarly, Stewart Lansley has highlighted the reduction in the share of wages in the UK’s GDP since the late 1970s and, over the same period, a growing inequality within earnings (Lansley August 2010, figures 1 and 3). As a result, to maintain living standards, households faced with a declining wage share have become increasingly indebted. The personal debt/income ratio has risen from 45% in 1980 to 157% in 2007 (Lansley Aug 2010, 4).
There is, Lansley also claims, a link between inequality, financial instability and economic cycles. He states that;
“The role of inequality in fuelling financial instability has long been recognised. Keynes made it clear that because of the lower marginal propensity to consume of the rich and their propensity for speculation, wealth inequality increases the risk of financial instability and economic collapse. In his book, The Great Crash 1929, J K Galbraith identified the ‘bad distribution of income’ and its impact on the pattern of demand as the first of five factors causing the crash and the great depression” (Lansley Aug 2010, 5).
As Galbraith put it; “The rich cannot buy great quantities of bread. If they are to dispose of what they receive, it must be on luxuries or by way of investment in new plants and new projects. Both investment and luxury spending are subject, inevitability, to more erratic influences and to wider fluctuations than the bread and rent outlays of the £25-week workman” (Galbraith 1992, 194, 195).
Therefore the argument is that reducing the deficit by measures which increase equality is likely to lead to greater economic stability. The measures set out by Irvin et al are just such measures whereas the measures taken by the Con-Lib government are likely to have the opposite effect.
This bias of the Con-Lib government is, perhaps, not surprising given that 16 of the 23 members of the Cabinet are multimillionaires. But perhaps that’s too much of an instrumentalist view.