The IFS describes as “not true” the government’s assertion that last June’s emergency Budget would hurt the richest more than the poorest, adding that cuts will fall disproportionately on households with the lowest incomes.
“The tax and benefits changes announced in the emergency Budget are clearly regressive as, on average, they hit the poorest households more than those in the upper-middle of the income distribution in cash, let alone percentage terms,” the IFS research report states.

The budget will take more than twice the income from the poorest 10% of households as a share of their annual incomes than from the second-richest group (richest 80% to 90%) which has four times as much income a year after tax and benefits the report says. The richest 20% of households has 16 times the income of the bottom 20% of households before tax and benefits are taken into account.

While the poorest 10% of households which have incomes inclusive of benefits of £9,900 on average will see their take home cash drop by 5% by 2014, all other groups apart from the top 10% will see their incomes drop less.

The second top 10% with an average income of £43,600 will only see their income drop by 2%.

This analysis completely contradicts what George Osborne said in the emergency budget speech: “People at the bottom of the income scale will pay progressively less than the people at the top. It is a progressive budget”

The coalition has also stressed that its plans for cuts seek to avoid exacerbating child poverty. Yet the cuts planned by 2014 fall much more on families with children than on the childless and pensioners. The single beneficiaries of the budget the report concludes are childless households in the richest half of society. This to bed the lie Nick Clegg’s claim that what the coalition’s budget is setting out to do is create the opportunity for greater social mobility.

Poor families are being hit harder by the Budget cuts because they receive a larger share of welfare payments than other groups, while the new and higher personal tax allowances has no effects on the poorest groups, who do not pay income tax. The IFS calculations include the effect of post-Budget cuts in incapacity benefit allowance, housing benefits and tax credits.

As well as further limiting social mobility the cuts are likely to increase inequality. In the 1990s similar cuts to public spending where implemented to reduce public debt in Finland, Sweden and Canada. Income inequality increased after the cuts by 12% in Finland and Sweden and 16% in Canada. The three countries had some of the highest levels of poverty in the developed nations of the world.

We must resist this happening in the UK by resisting the cuts and putting forward an alternative way of running the economy that focuses on wealth redistribution, taking the banks under public control as well as ownership and providing everyone with free basic services to enable them to lead a dignified and fulfilling life.

The cuts alone will see about 1.4 million jobs go over the next four years – 750,000 in the public sector and 650,000 in the private sector jobs dependent on public spending. These are the estimates from the respected economic think tank Capital Economics.
Instead the UK is likely to be in a near decade long slump at the end of their term of office – if they survive the full term. Their projections for the UK economy this year and the next two years while more conservative than Labour’s old forecasts are still way above the consensus of City predictions. This means that the cuts will have to be deeper – approaching 40% – to meet spending targets.
At the same time as massive attacks on pay and conditions and public services they are giving every help to private industry – cutting corporation tax and reversing Labour’s employer’s national insurance rise and handing our government grants to selected target industries such as the ports.
But their plan is doomed to failure as the UK is the most mature capitalist economy in the world with the lowest rate of profit for manufacturing industry amongst the world’s major economies. Profit levels too are falling in the services industries as they start to reach maturity. Take these factors together with the fact that credit for individuals and corporations will be difficult to come by as banks face higher levels of capital requirements and also want to ensure they have sufficient capital to guard against further financial crises and further falls in property market.

What would be required for the coalition’s plans to come off would be a massive new investment in new industries that were competitive against the Chinas, Indias and Brasils of this world together with a big pick up in consumer demand. Both these things cannot happen because of the higher rate of exploitation in the developing countries and their less mature levels of automation. In the UK Consumer demand cannot pick up both because there will be little credit available and unemployment will remain at very high levels.
The only way forward for the UK which is ripe for change is to reorganise the economy under popular control and ownership to ensure that people’s real needs are met. It is the only way out of the slump that the coalition is recklessly preparing for us all.

Any party that forms a government in Holyrood after the next Scotties elections will be faced with the same constraint that while they may control how the budgets for health and education are spent but they do not control how much money they have to spend. This is decided by the Tory/LibDem Coalition. Similarly 75% of local authority budget comes in a block grant from Westminster. Only about 25% is raised through the council tax. We therefore have very limited means of raising additional tax through a rise in up to 2% on the basic rate of tax which is in itself not a redistributive tax or through a progressive tax replacement for the council tax such as the Scottish Service Tax put forward by the SSP. So the only way to put in place a redistributive tax system national and locally which is one of the cornerstones of raising the finances to avoid the cuts is by having full independence.

This is even more important as the cuts will fall heavier on Scotland because we have a higher proportion of public spending than other parts of the United Kingdom. The Conservatives in particular have little too loose in Scotland in terms of popular support and while they will look to make 25% to 40% of cuts in across the UK depending on how weak the UK economy turns out to be, the cuts in Scottish national and local funding will be in the range of 30% to 45%.

The other measures that are required to have no cuts can only be realistically taken in an independent Socialist Scotland. These include:
• tax corporations more;
• cutting defence spending;
• withdrawing from Iraq and Afghanistan; and
• Clamping down on tax avoidance.

Other measures that are required to avoid the cuts and regenerate the economy will be impossible to achieve except through the transformation of the Scottish economy to a socialist one. We would want full ownership of the banking system and to change the the bank’s business model from one based on private loans and speculation to one based on social rents and funding socially useful investment projects. But the banks’ assets are capital are stored virtually on computers. There will be an electronic flight of capital to England. But we can offer as part of the negotiations for economic independence from Westminster an exchange for our share of the national debt – about £100 bn by 2011 – 10% of the UK banks assets and capital which amounts to £60 bn in capital and £500bn in assets.

North Sea Oil
The next key building block of an economy under socialist independence is talking public control and ownership of our North Sea Oil. There are estimated 25bn barrels left of Scottish North Sea oil and at an average price of $US80 per barrel and at a cost of extraction of $US10 per barrel there would be generated revenues of £60bn a year for 15 years for the Scottish economy. This is equivalent to two thirds of the current Scottish Government budget. This revenue could be used to finance a national peoples’ bank that would fund social projects such as the construction and running of an integrated public transport system, a renewable energy programme and social housing. In the process as well as creating socially useful sustainable services, tens of thousands of jobs would be created for our young and old.

Scottish Currency
Scotland would need its own currency independent of either the pound or the Euro. The former is controlled by an unelected Bank of England committee made up of people who represent the interests of the City of London. The latter is controlled by the German and French governments who focus on controlling inflation with high interest rates and limit public spending through deficit targets – breaking these targets would mean severe austerity measures being imposed as is currently happening in Greece. We would back our currency with the revenues from North Sea Oil and align ourselves with other small countries’ currencies such as Sweden and create a defence fund to ward off international speculators.

Summary
The SNP’s solution, faced with a massive reduction in the budget from Westminster’s Coalition government, is to prepare for huge cuts in Scottish public spending drawn up by external consultants. Labour whether they were in power in London or Westminster would have faced the same situation.

Labour’s then chancellor, Alistar Darling, in his last budget and in the run up to the last general election announced proposed overall cuts in public spending for the next five years which came close to matching what the Coalition intend to cut. Local councils have already started implementing cuts or have announced planned cuts prior to real shrinkage of their central grants. Councils have to take such measures prior the coalition’s cuts because the SNP have frozen council tax – a measure that helps the better off more than medium and low earners – while council tax revenues and benefit payments have risen because of the recession.

Only the SSP in Scotland has put forward a No Cuts stance backed up with the concrete alternative way to run the economy based on transformation of society with Socialist Independence.
Just like the poll tax our stance will inspire the rest of Britain to come up with similar concrete solutions and the building of the type of political organisations and movements that can stop the cuts in England, Wales and Ireland.

There are three main types of pensions: private pensions received by those who worked for private corporations, public pensions for those employed in the state sector and retirement pensions paid by the state to those over a certain age.

The first two types are based on a pool of investments in financial assets that the companies or government contribute by paying regular amounts of cash. The state pension is based on money collected from taxation and paid into a big pot. This money is not invested in financial assets and is simply washed through the pot and paid out to those of retirement age.

Capitalism makes profits from the extra value added by human labour – whether manual or intellectual – to the production of goods or services. The only way a company can make more from the sales of goods or services is by increasing the added value that it keeps for itself. It can do this in a number of ways: cutting the labour force and make the remaining workers carry out the same work for the same pay; increasing the levels of productivity; reducing pension levels. Pensions are in effect a form of deferred wages – so by reducing pensions the employer is effectively cutting wages.

Historically, the type of pension paid out by private companies was a defined benefit scheme (DBS). These provided a guaranteed income based on the number of years of employment and on the employee’s final years’ wages.

These pensions were a guaranteed liability to the company which had to be matched by the pension funds assets in their current investments. This is done by taking the future liabilities and discounting them back using future estimates of interest rates to calculate their value today and comparing this to the value of assts held in the pension fund. As interest rates declined and stock markets fell, there was shortfall between the current value of future guaranteed pension payments and the current value of the company’s assets.

So companies have been moving to defined contribution schemes (DCS) which pay out at retirement the return of the investments a company’s pension scheme has made. They offer no guaranteed retirement income and shift the risk from the company to the employee. Their future retirement income becomes a gamble on the financial markets.
Normally companies in the same industrial sector will seek to take over weaker ones with lower profit rates and seek to implement these measures described above to increase the rate of profit. They will do this through a merger or acquisition using an investment bank as an adviser on the deal. They will pay for the new company by issuing new shares, using cash reserves or issuing bonds on the financial markets.
Investment bankers who worked on these deals learnt how these takeovers work – make workers redundant, make them work harder for less, reduce employees’ pension rights. At the same time interest rates as mentioned above were historically very low. This encouraged investment bankers and fund managers to set up private equity firms. They could survey companies that were ripe for takeover – the workers could be exploited some more – borrow money at low rates to buy the company and implement these measures. They could improve the company’s profitability and sell it at profit or sell its shares on the stock market. Even better if as in the UK you keep your profits offshore and receive tax incentives from New Labour to do so.

This is what has happened with Private Equity Capital schemes. They looked for companies with DBSs and bought them up in order to replace them with DCSs to reduce the workers’ deferred wages, their pensions, and increase profits.
Ironically the era of private equity capital may be coming to an end as interest rates increase; banks have a reduced appetite for lending on risky investments; and the recession makes the prospect of profits less certain.

But it is an essential tool that companies in the UK and other mature western economies have used to try and reverse the decline in the rate of the profit – this has been falling in the UK for last ten years with manufacturing net profit down to 7% from 15% and the services sector down to 14% from 20%.

A second major problem for private companies has been the decline in share markets over the last ten years. The FT-SE 100 index, measuring the performance of the largest 100 UK companies’ share prices, has declined by 22% in the ten years to the end of 2009. Adjusted for inflation this is an incredible 40% fall in value.

The bulk of pension contributions are invested in the ordinary share capital of private companies through the stock market, although there has been a big shift from share capital to government and corporate bonds because of the risk that share capital will not appreciate enough to match future liabilities. This is so particularly in the UK where the stock market’s weakness has reflected the general weakness of British capitalism.

A third major problem is a back door tax on pension funds that Gordon Brown introduced when New Labour was elected in 1997. He abolished a tax credit on the dividends received by pension schemes from owning ordinary share capital. This reduced a pension fund’s income by 20% on the ordinary shares it owned. Over the course of someone’s working life this is likely to reduce the final value of their pension by around 15%.

A further self-inflicted problem for pension schemes was that the Thatcher government allowed them to take a contribution holiday if the present value of their assets was greater than their estimated liabilities.

A final problem is us baby boomers. We are living longer than investment mathematicians estimated in the past. Our longevity means that companies and
governments are faced with many bigger future liabilities than was previously estimated.

For government run and privately run pension schemes, there is a huge gap between future liabilities and the value of the assets they hold to meet them. In the public sector this gap is estimated to be between £770 billion to one trillion pounds. This will be reflected in the annual deficit and public debt. The CBI is urging a switch from DBS to DCS to reduce this gap. The Brown government has stepped up this move and we expect whoever forms the next government to continue these attacks.

This is also a huge problem for private corporations; for the FT-SE 100 companies this is running at about £96 billion. It threatens the very solvency of many private companies – the UK Readers Digest bankruptcy was caused by this gap.

It is ironic that a financial system that is supported by our money – about 50% of the global stock and bond market worth £120 trillion is owned by non wealthy individuals through pension, insurance and investment schemes – is threatening our ability to have a poverty free retirement.

The UK state retirement scheme already suffered when the Thatcher government broke the link between increases in earnings and the state pension. Governments around the world are trying to reduce the future burden on their ballooning deficits and debt by reducing the cost of state pensions. They mainly do this by increasing the retirement age. Here the Conservatives propose raising the state retirement age from 65 to 66. In Greece the proposal is incredible 53 to 67.

We are seeing a global assault by capitalism on all our pensions – private, public and state. This is part of their strategy for making working people pay for their crisis Socialists must seize the opportunity to unite private and public sector workers and the poor in a campaign to defend our retirement provision and work towards an alternative solution – one not dependent on the whims of the markets or of capitalism itself.

The danger is that this number becomes a panacea for dealing with the cuts. In my opinion it diverts attention from the real wealth redistribution measures which are required to solve the crisis in the interests of the working class and poor. The point is that this £130 bn is a running cumulative total which will be very difficult to recover in a retrospective tax. It would be a one off recovery and not solve our total debt and annual deficits.

Dealing with annual tax avoidance would only be a small part of the redistribution of wealth that is required. The best estimate of the annual amount that is avoided by individuals is £13bn and for companies this number is between £9bn and £12bn. These are the numbers that HMRC, the Guardian, TUC and the Treasury gave estimated. So anti tax avoidance measures would bring in about £20bn a year. Our total debt is approaching £900bn and the annual deficit is mounting up at about £160bn per year. We have also a shortfall of a trillion pounds in public sector pensions.

As we have pointed out before £375 bn of the debt has come from bailing out the banks through buying stakes in them and quantitative easing. Taking over the banks would secure £560 bin in capital and £5 trillion in assets which would help wipe out a large part of the debt and be used as a fund for a massive programme of job creation based on socially useful projects such as public transport, house regeneration and conversion, house insulation, hospitals, schools, sports and culture facilities and renewable energy.

A redistribution tax on individuals which hits the wealthiest 20% of society (who earn 16 times the income of the bottom 20%) would bring in £75 billion per year. Under Thatcher the top rate of tax was 83% and this has now fallen to 40%.

We would double corporation tax which has been halved under successive Tory and Labour governments. This would bring in another £50 billion a year in revenues.
We would also drastically cut defence spending to the level of a citizen’s army able to defend the UK/Scotland from attack. This would generate another £50 billion a year in savings.

Scarping Trident would not help the current debt or annual deficit levels but would save about £80 billion on future expenditure which if it went ahead would have to be found from further cuts in the annual budget.

These are the measures which should act as basis for an alternative programme to resolve the crisis in our interest and build a just society based on meeting human needs and not capitalist profits.

The scale of the attacks that that will be unleashed on the population are on a scale never seen before in modern Britain. The coalition is the most preferable vehicle because the severity of such attacks must command a majority of MPS and those who voted in the election to have any chance of being implemented. Even a majority Conservative government would have only had the support of 40% of those who voted and their geographical spread would have been limited. This coalition has 60% of the popular vote and a better demographic spread of MPs – albeit it is still weak in urban working class areas and Scotland, Wales and Northern Ireland.

The Lib Dems have conceded to the Conservatives on every almost every economic area- as we will show below – for a taste of the trappings of power. Their resulting unpopularity and the tensions and splits within the party as they face up to what has to be done in the autumn 2010 spending review and as they try to implement these austerity measures will severely damage it as a political force for a generation. This has the potential to open up the way for a rebranded Labour party in opposition under a fresh young leadership to be seen as the credible alternative to the Butchers coalition.

We will now look at all the economic areas within their “historic” agreement to see what the implications are for the majority of working people and the poor.

Public Spending and the Budget Deficit

In the chancellors TV debate the week before the first leaders TV debate both Osborne and Cable said similar things: an emergency budget within 50 days of the election and severe, fast cuts to “act quickly”. Cable was in favour of scraping Trident’s replacement to save money. By the time the election campaign had started both parties had toned down their message as it was unsurprising clear that cuts in public services were unpopular. The Conservatives would have no cuts in front line services while the Lib Dems would have no cuts in 2010/2011 to give the economy a chance to recover.
Actual Agreement: £6 billion of cuts in 2010/2011 and Trident’s replacement is to go ahead and a full public spending review to take place in the autumn of 2010 once all the Treasury’s figures had been looked at.
Osborne is set to announce the £6 billion of cuts this week which is far away from “we will make the cuts if the economy will take it”. But the longer term cuts that will come out of the autumn spending review which work will start on in late May are quite horrific. The Financial Times have estimated that by 2013/2014 based on all the coalition’s spending commitments and areas they have promised to protect this will amount to £57 billion a year or 22% of the non-protected part of the overall budget. It would be impossible to make these cuts in the non-protected part of the budget which means front-line services will come under attack as we already seeing. The estimate by Capital Economics, a respected mainstream think tank, of 750,00 public sector job losses does not look far off the mark. But even these numbers are likely to be on low side. This is because the Treasury under Alistair Darling estimated that economic growth in 2010 would be 1.5% and 3.5% and 3.8% in 2011 and 2012. This is way above the consenconsenconsensus in the City and the city’s estimates are likely to be far too optimistic. Growth for 2011 is likely to be flat with even the chance of more negative growth if we are dragged into a second recession on the back of the European sovereign debt crisis – we depend on Europe for 60% of our exports.
The severity may tear the coalition apart and no wonder then they wanted to put through the change to parliament’s rules that require 55% of MPs to vote against the government to call for a fresh election.

Taxation

On taxation there is only a commitment to try, depending on the state of the economy, and introduce higher thresholds for the lower paid. Tories’ plans to reverse the regressive national insurance tax on employees has been dropped and now only the employers increase will no longer take place. The Lib Dems have lost their “mansion tax” in return for the Conservatives not widening the band for exclusion from inheritance tax. There is no mention of VAT which most commentator think will have to be raised in 2011/2012. This is another regressive tax which hits the poor more than the wealthy.

Pensions

There is a commitment to protect the state pension so it increases in-line with the greater of average earnings growth or inflation. But to truly protect the level of purchasing power it should be kept in-line with inflation adjusted earnings growth. But the retirement age for men will go up to 66 from potentially 2016 and 2020 for women. This is a major attack on our retirement provison – particularly for women. Public sector pensions are also under fire. Public pensions will move from defined benefits scheme where the final pension is based on the number of years’ service and your average salary over the last few years of your working life to a defined contribution scheme (DCS). A DCS pension is based on the final value of the financial assets that have been invested in by the government body you work for. It essentially means that your retirement is a gamble on the financial markets.*

Conclusion

This agreement gives the Coalition carte blanche to attack the living standards and jobs of working people and the poor. It will result if it is implemented in the most austere set of measures ever carried out by a government in the UK. Even the likely scenario we have outlined here is an underestimation of what they will actually be implemented because of the likely double dip recession and the resultant further losses in the banking sector which globally is still exposed to £600 trillion of derivatives.

We need to start organising a fight back that links the public sector unions to the communities that will be hit by these austerity plans. But we also need to start forming a concrete alternative to these cuts that gives people hope and a reason to fight this butcher’s offensive.

*See our article on the bosses’ assault on our pensions.

The latest unemployment data released today, 21 April 2010, continues to see the recession bite hard.

Unemployment rose to 8% in February from 7.8% in January to 2.5 million people with those in employment falling by 89,000 over the three months. The percentage in employment fell to the lowest level since October 1996.

The stark failure of the UUK economy can be seen from the fact that the number of adults of working age who are economically inactive rose 0.3% to 21.5% or 8.2 million people over the quarter – the highest since 2004.

The young have been hardest hit by this recession with 930,000 unemployed in the 16 to 24 age group.

The government will say there are 33,000 less people claiming job seekers allowance but this masks the move from job seekers allowance to incapacity.

Britain’s Stagnating Economy – Growth Slows to 0.2%

The UK economy continued, in the first quarter of 2010, to stagnate along the bottom of what has been its biggest decline since the great depression of 1930s. Growth was half of what was expected and only a rebound in Business Services and Finance stopped it slipping into negative territory.

The danger of a double dip recession looms high on the horizon with the public sector cuts proposed by all the major UK parties. In addition the European economy, our major trading partner is threatened with a slump as the size of government deficits threatens any recovery and undermines confidence.

The sluggish growth is way below the optimistic outlook in the Government’s own forecasts. This means that revenues will be lower than expected and as consequence the cuts will be deeper than all the parties are proposing if they are to achieve their targets for reducing the public spending deficit.

A rationally planned alternative economy is required that meets peoples needs and puts to use the vast untapped resources of people and skills.

The Institute of Fiscal Studies* have found that Britain is more unequal today since records on income distribution started in 1961 and over the last thirteen years of the Labour government these inequalities have continued to increase. The average income before taxes and benefits of the poorest 20 of households was £4,600 per year while the equivalent income of the richest fifth of households was an incredible 16 times larger at £72,500**. A progressive rising income tax that hits the wealthiest in society the hardest could raise an extra £75 billion to cover any deficit in spending and have plenty left over to provide badly needed services.

At the same time over the last two years the government has pumped £375 billion into the banking system through bailouts and quantitative easing. Little of this has flowed back into the real economy. This figure is almost half the total public deficit. The UK banks have £560 billion in capital (cash) and £5 trillion in assets. At the same time UK banks for calendar years 2008 and 2009 have paid out £13.7 billion in bonuses. Taking these banks under full public ownership and control could wipe out the deficit entirely and act as an engine house for the creation of useful, jobs for young and old alike.

The alternative is to make the majority of the population pay for the crisis. As the Financial times pointed out on 15 April 2010 this is massive cuts. They found a short fall of £30 billion in all the three main parties target deficit levels and their proposed “savings”. This is the equivalent to 25% of spending on the NHS, halving the state pension or an extra tax of £1,100 per year on each household in the UK.

We say there is a rational alternative and that is to make the wealthy and bankers pay for the crisis of their making.

*Inequality in the UK, Institute of Fiscal Studies, 2009.

** Office for National Statistics, 2007/2008

The planned national insurance tax rise applies to both employees and employers. The tax on employees will reduce spending power in the economy with a disproportionate impact on lower paid workers. This is because there is a ceiling on employee national insurance contributions and the increase will make up a bigger portion of lost income for the lower paid. It is a regressive increase which favors the better offer as well as reducing demand for basic goods. For employers this represents an increase in their fixed costs and will discourage investment and lead to job losses.

Labour is proposing these increases to help pay for their ballooning deficit caused by the financial crisis which was much of their making.

There is an alternative to Labour’s tax hike on the poor but it is not what the Tories are proposing.

Instead the Tories are suggesting more public sector cuts as a counter to national insurance increases. Labour is correct this would be damaging for the economy as well as the provision of front line services. A study by Manchester University has shown that over 60% of the jobs created over the last 10 years have come about either directly or indirectly through public spending. Without public spending the UK economy with the private sector so dependent on banking and financial services would have completely collapsed

The alternative to what New Labour and the Tories are proposing would be a real progressive tax on the rich which would together with full control and ownership of the banking system avoid any need to for public sector cuts and allow for a real increase in services

Darling’s forecast of economic growth for 2010 was 1% to 1.5% and for 2011 3% to 3.5% and up to 3.75% in 2012. This is way above the forecasts by mainstream economists – for instance their average for 2011 is 2.1% which is still likely to prove to be too optimistic.

The main purpose of these wild numbers by Darling is so that the forecast level of the deficit and public debt for the next few years will be lower than if more realistic estimates had been used. New Labour can then put forward cuts in their manifesto which are way below what they would actually have to carry out in practice or what the other parties will be proposing. Of course there is an alternative to the cuts which we have outlined in other articles.

On taxation there are increases on petrol, alcohol and cigarettes which make up a larger portion of the income of lower earners – they end up paying a bigger part of their income in indirect taxes.

There was no change on the tax allowances which again means a real increase in taxes for the lower paid. Any increased income will be taxed at the highest tax rate that an individual pays. With inflation running at between 3% and 4%, any pay rises to compensate for this will be partly taken away through income tax because the tax allowance levels have not been raised in line with inflation.

There are no measures to force banks to lend to individuals or small businesses despite £200 billion of our money being put into the banking system through quantitative easing, only target levels of lending.

There is a one off tax on bank bonuses instead of a permanent one and a tax rate of 50% for earnings over £150,000 instead of a real progressive tax system which could raise an extra £150 billion for public services. No increase in corporation tax either which has been cut under New labour or a tax on bank profits to recoup the money we have ploughed into them.

In summary a budget which continues the habit of Darling making optimistic claims which fail to materialise with the less well off ending up paying for it and increased real taxation for the lower paid while the rich get off the hook again.