Economic growth?

to http://www.caricatures.org.uk    If we have a strong economy why are we still having cuts to services?  

We have been turning a corner of economic recovery since 2013 by virtue of the Conservative ‘long-term economic plan’ under the stewardship of George Osborne.   In the 2015 Summer budget he stated;   “…the only way to have a strong NHS, strong schools, and a strong defence is to build a strong economy – that’s how we were elected and is exactly what we will do.”  In the meantime since 2010 spending on the NHS has averaged 0.84 per annum which is a quarter of the average 3.6% rise and lowest since WWII  Kingsfund/2015, per pupil funding is to be cut by at least 6.5% which will leave school spending per pupil at the same level in 2020 as it was in 2010  ifs.org.uk/April/2017 and the defence budget has seen a 19% cut in five years.  Telegraph/2015

It has been a slow recovery but in the Spring budget 2017 Philip Hammond declared;

Last year, the British economy grew faster than the United States, faster than Japan, faster than France.  Indeed amongst the major advanced economies Britain’s growth in 2016 was second only to Germany. 

spring-budget-2017-philip-hammonds-speech

With our economy finally growing in apparently spectacular fashion it could be expected that the draconian cuts would be replaced with fiscal stimulus restoring our damaged public services back to pre-crash levels.   Yet there are more stringent cuts to come in all sectors.    David Hodge, Leader of Surrey County Council took the drastic measure of threatening a referendum to secure a 15% hike in council tax unless the local authority were given increased funding from central government.

Speaking to the council meeting, Hodge said “relentless” cuts had seen a £170m reduction from central funding since 2010. At the same time, increased demand for adult and child social care meant two-thirds of the budget went on these alone.  Even the 4.99% rise would require the council to make £93m in cuts during the 2017-18 financial year, Hodge said.  theguardian/2017/feb

There is a social care crisis in Surrey where support for adults and children requiring long-term care has fallen well below acceptable levels.  Hodge, who is the leader of the conservative group in the Local Government Association and a strong supporter of the conservative government felt compelled to speak out. 

“I believe we have a duty to look after people,” he [Hodge] told me. “We cut £450m already, we squeezed every efficiency and we can do no more. I am sick and tired of politicians not telling the truth. Surrey people have the right to know and I’m not going to lie.”  theguardian/2017/jan/crisis-social-care

Shortage of funds in Surrey has led to complaints of pot-holes in the road left unrepaired,  street lighting in many areas turned off at midnight to save on energy bills and charges were applied at local refuse centres leading to a spate of fly-tipping. Britain is the 6th richest country in the world and Surrey is one of the most affluent areas, yet there is apparently no money to pay for these essential services.

 So where is all the money?

Either central government are withholding funds from the ‘strong economy’ or perhaps the economy is not as strong as we have been led to believe.  In a report named  Two parliaments of pain: UK finances 2010 – 2017  (May 2017) the Institute for fiscal studies produced a thorough summary of economic indicators and concluded;

  • The financial crisis led to a sharp reduction in national income. Even more striking is the weakness of the subsequent recovery. Official forecasts suggest that GDP per adult in 2022 will be 18% lower than it would have been had it grown by 2% a year since 2008 – broadly the expected rate of growth at that time. This downgrade in expected income has adversely affected the finances of households and of the government.

Turns out Hammond’s statement is not reflective of strong economic growth but a distortion of the facts, as you can see in the graph below, with France, Japan and US being even more sluggish than ourselves.  Our growth in 2016 may have been second only to Germany but a significant difference is that the German economy is not running a budget deficit at all.  Norway has one of the most successful economies and this country is run by a left-leaning coalition elected via proportional representation.

The UK has the fifth-largest budget deficit out of 35 advanced economies

Figure 6. General government borrowing, 2016

 

 

In an attempt to reduce the deficit, the difference between the money taken in tax revenue and the money spent by government, Mr Osborne severely cut benefits to the most vulnerable groups but instead of using the saving to rapidly bring down the deficit, he gave it away as tax breaks.  This has elongated the recovery period giving more time for the government to salami slice public services and move public money into private hands through the marketisation of the NHS, transfer of education to academy schools,  and the contracting out of prison, military services and many others to private contractors.

The austerity agenda has been used to move money from poorest to the richest and constitutes a ‘race to the bottom’ to bring our living standards in line with those of developing countries. 

In his last budget, Osborne assured that the richest would reap 80% of the rewards from tax and benefit changes.  guardian/2017/huge-tax-giveaway-for-rich-as-poor-are-hit-george-osborne-tax-benefit-budget-changes   Although the rich pay a higher proportion of the total tax bill the poorest 10% pay at a higher ratio to their earnings at 42% while the richest 10% pay at 34.3%  (ONS)

Today’s figures also show that average income for the richest fifth of households is £84,700 – more than 12 times greater than the poorest fifth (£7,200).  huffingtonpost/poorest-tax-richest-statistics-ons 2017

One reason for the ratio shift is a move away from progressive income tax, based on ability to pay, into regressive taxation such as higher VAT where everyone pays the same amount.  Although Theresa May states there are ‘no plans’ for further tax rises she has not ruled them out.  ‘No plans’ simply means no plans this side of the general election.

Lack of democratic control. 

When private companies take over public services they become private monopolies not marketplace choice.  The public services become unviable as they lose one contract after another and fall away losing experienced staff and public assets to the community.  Private monopolies are not subject to market forces as they have no competition.  They are not controlled by the democratically elected local council but are increasingly funded directly from central government.  They are not subject to the Freedom of Information Act 2000 so do not have to release information concerning their costings, policies or programmes.  In fact, they use  ‘commercial confidentiality’ to keep information secret right up to a court hearing.  Which makes them virtually unaccountable to members of the public and campaign groups.

 It has been said that public services are inefficient, leaking money through lack of managerial control.  There is an idea that private companies are lean machines who strip back waste and deliver more cost effective services.  Without full access to the data, it is difficult to know the true efficiency of any private organisation whereas the public sector accounts are laid bare by a requirement of law.  Not a level playing field.   Private sector companies work for shareholders who take a cut of public funds in dividends.  The primary duty of a private company is to deliver to shareholders, not the public.   Once all the public services are disbanded there is nothing to prevent the private monopolies from tightening the screw and demanding increased funding to deliver essential services.  We have seen this already in the privatisation of the railways.  Under private franchise, the subsidy paid by the taxpayer in 2015 reached £3.8bn and from this £183m was paid out to shareholders.    This is a direct transfer of public money into private hands.  Virtually the only franchise to pay more into the treasury than they received in subsidy were East Coast who were nationalised at that time.  They paid £23m into the treasury in 2013/14 but despite this boost which would have helped cut the deficit they were later privatised.  actionforrail./private-rail-operators-using-public-subsidies-to-fund-pay-outs-to-shareholders/

 

 

TUC General Secretary Frances O’Grady said: “The ORR has once again shown that a public service railway will always be dependent on taxpayer support. But the private train operators treat it as a cash cow, gobbling up almost £4bn in public subsidy yet charging the highest rail fares in Europe while paying almost £200m out in dividends to their shareholders.

“The financial performance of East Coast proves to be another embarrassment for the government. This is an operator that takes a fraction of the subsidy of other inter-city operators like First and Virgin, while paying back more to the government than it receives. It makes a mockery of the government’s hasty privatisation, demonstrating their contempt for the interests of the taxpayer and fixation with an out-dated free market ideology that is failing the rest of the rail industry.”  actionforrail/private-rail-operators-using-public-subsidies-to-fund-pay-outs-to-shareholders/

To make a mockery of the ‘take back control’ mantra, most of the rail franchises are owned by foreign companies who benefit from low fares at home, while those in the UK are the highest in Europe.  South West Trains which serves lines into Waterloo is to be taken over by MTR, a Chinese company.

First MTR will take over from Stagecoach, which has operated the South West Trains franchise since the UK rail network was privatised in 1996.

The Rail, Maritime and Transport (RMT) union said the Chinese company – which also has the contract to operate trains on the Crossrail route in London – was set to make “a killing at the British taxpayers’ expense” as it joined the Dutch, German, Italian and French national rail operators in running private franchises in the UK. MTR is majority-owned by the Hong Kong government.

guardian.March/2017

Although this operator will pay £2.6bn in premiums over the next 7 years South West Trains were able to deliver a £16m dividend for its present owner Stagecoach in 2014 on the back of rising ticket sales and government subsidies.  There is increasing demand for this service and the longer platforms at Waterloo will enable the new owners to put on extra carriages at little cost outlay. Not only is it money on a plate but the terms of the contract mean that the taxpayer takes the risk should revenues fall due to Brexit.

He said that the £2.6bn contract represented a “disciplined” bid, and that the operator would be compensated should Brexit lead to economic decline. The terms of the deal will reduce payments should GDP and employment in London fall. “It does allow us to balance off some of the risk for Brexit. Though plainly the risk is here for us.”

guardian.2017/march

Southern Rail’s attempt to remove guards from trains is a visible sign of how costs are cut by private companies to the detriment of the public who depend on guards for safety, disabled access and information.  Once Southern rail break the union resistance the other operators will follow but it is unlikely that any of the cost saving will be returned to the public in reduced fares or to the treasury in higher premiums.

The trickle down effect. 

For many years the policy has been to feed the top with money as these are the ‘wealth creators’ and in time the benefits will ‘trickle down’ to those below.  In 1984 the Conservative government under Margaret Thatcher cut the main rate of corporation tax from 52% to 35% with further reductions to 33% in 1991/2.  These cuts were continued under (New) Labour falling to 30% by 2008. ifs.org.uk/2016  This is a significant shift in the balance of responsibility for supporting public services from corporations who benefit from the roads, infrastructure, education system, fire and police services etc – paid for by the state, to the individual who is required to make up the shortfall through a range of direct and indirect taxations.  Globalisation and technology have allowed international companies access to our market whilst paying very little, in some cases nothing, back into the treasury.   6 firms including Google and Facebook paid just 0.3% UK tax

Since 2010 corporation tax has fallen from 30% to 19% in 2017 with plans to cut it to 17% by 2020.  Most advanced economies have a corporation tax around the 30% mark and only Switzerland is lower at 17.9 %.  It can be seen that since 1984 corporations have benefitted from keeping a larger share of their profits in the expectation that these companies will invest and create jobs.  However, since the 2008 crash, 40% of new jobs are self-employed who now make up 15% of the labour force. guardian.com/business/2014   Many of these could be budding entrepreneurs who would take on more staff if they were given government incentives, yet these were the very people who were targeted for increases in NI payments the Spring 2017 budget.  The trickle down philosophy simply rewards those already at the top making it even harder for start-ups to get a hold in the marketplace.   

The myth that the conservatives are the party of fiscal responsibility.

We have been repeatedly told that we have a strong economy under the conservatives who are prepared to make the ‘tough decisions’ but the facts don’t match the rhetoric.  At the time of the financial crash in 2008 debt to GDP stood at 44% – the same level as under the conservatives in 1996. With over £1trn borrowed to bail out the banks debt to GDP was 67% in 2010.  The same level of debt as 1969, the swinging 60s, a time of optimism, not austerity.  The best way to reduce debt to GDP is to grow the economy with fiscal stimulus and this was the approach taken by the Brown (Labour)  which moved the economy back into growth by Q3 2009.  This increased every quarter reaching a full 1.0% in Q2 2010.  When the coalition took office mid-year their policies destroyed this growth and by Q4 it had flatlined at 0%.  This can be seen in the graph below.  Since then repeated cuts and austerity measures have stifled economic growth which at the latest quarter stood at 0.3%

We have been told that austerity is the only way to get back to a strong economy.  That the Labour Party would borrow recklessly to spend money on public services and restoring public sector pay and this would put us back into recession.  Yet borrowing under the conservatives has been higher than any borrowing under labour seeing the debt rise by £555bn since 2010.  This has brought the debt ratio to  85.3% to GDP ( Jan 2017) much higher than that inherited of 67% in 2010.  The difference is that the conservatives have borrowed not to invest in public services and infrastructure which would have grown the economy faster and provided assets for capital leverage, but to give tax breaks to the already wealthy.  Much of this money fails to be returned to the economy as taxed earning and spending but is filtered away into offshore accounts where minimal tax is paid.

In 2016 Richard Murphy, author of ‘The Joy of Tax’ analysed borrowing across both Labour and Conservative governments and found that the Conservatives are the party with higher borrowing whilst Labour have paid off more of the national debt during their time in office.  You can see all the facts and tables here. Richard Murphy taxresearch.org/2016

Spending fuels the economy, not jobs.

It is clear that jobs do not fuel the economy as we have the highest employment rate since records began in 1972 at 74..6%  ons.gov.uk/apr2017.    But low paid work does not provide sufficient disposable income to fuel the economy through spending.  Consequently, consumer confidence fell to -5  in April.  Here is a recent summary from Retail Economic.

Economic growth continued to be supported by the strong performance of the services sector. In particular, consumer spending rose by 0.7 per cent in Q4 2016, compared with the previous quarter, maintaining the strong momentum built up throughout the year. However, a more detailed breakdown revealed real household disposable income fell 0.4 per cent in Q42016 on the previous quarter. On an annual basis, growth was flat meaning it was the weakest since the final quarter of 2013.

Consequently, households were only able to fund the rise in spending by dipping into their savings. Accordingly, the household saving ratio dropped to the lowest since records began in 1963 at 3.3 per cent in Q4, from 5.3 per cent in Q3. While a large proportion of the fall would have been driven by the rise in inflation towards the end of 2016 – the impact of the deflator – it does raise concerns. Indeed, unsecured lending remained near a 10-year high in February (+10.5 per cent) and households remain heavily indebted.  On the face of it, the final quarter of 2016 seems to be built on shaky foundations. With the outlook of rising inflation and weaker wage growth expected to materialise, the consumer sector will come under intense pressure.  retaileconomics.co.uk/report-uk-consumer

This has also triggered a fall in house prices for the first time since 2012. bbc.co.uk/news/May/2017

The truth is that in this ‘strong economy’  wages have stagnated against costs, now compounded by rising interest rates and a fall in the pound.  Britain is the only large, developed country where wages fell when economic growth returned.   Wages are worth less than they were 9 years ago. The Resolution Foundation Report predict the worst decade for pay growth in 200 years.  Britain is in a race to the bottom, to bring us in line with developing countries.

The same factors that are currently dragging on the growth in living standards are likely to intensify. We project that income growth will slow to 0.3 per cent a year for the typical working age household over the next four years, once we account for housing costs. This overall weak growth also hides a division between growth for some and falling living standards for others. Our projections suggest that incomes will rise slowly for high income households, stagnate in the middle and fall at the bottom. Very significant cuts to working-age welfare of over £12 billion are a key component of what looks set to be falling living standards for almost the entire bottom half of the working-age income distribution between this year and 2020-21. The result is the biggest rise in inequality since the late 1980s.

resolutionfoundation./living-standards-2017

A number of factors have affected spending power

  • zero hour contracts have risen to  910,000 bbcco.uk/March/2017   leading to pay insecurity
  • many salaried jobs have been transferred to ‘self-employed’ contracts reducing pay security and entitlements such as sick pay
  • cuts to benefits and working tax credits have reduced the spending power of  the working poor
  • the ‘squeezed middle’ are struggling to fund their children through university due to hikes in student fees, whilst at the same time provide care for their elderly parents where costs have risen due to cuts in the public care fund
  • EU residents have no security in the UK until an agreement is reached on Brexit
  • Despite the lowest business rates in Europe investment has lagged since the financial crisis.  Many may wait out the uncertainty of Brexit, with some deciding to relocate in order to maintain access to the single market.

The Bank of England says it expects investment levels to stay weak in the UK, as it finds four in five publicly owned firms saying pressure to create short-term returns has dented investment levels over the past five years.

If investment had continued at pre-crisis trend the private sector’s capital stock would be around £240bn larger, Cunliffe [deputy Governor of the Bank of England] said.

cityam.com/Bank of England/Feb/2017

Hammond’s words ring rather hollow when you take account of all the facts and things do not look good for the future after Brexit.  The UK has a balance of trade deficit which currently stands at £3.7bn (Feb 2017).  This means we import more than we export and the weak pound pushes prices up  tradingeconomics.com/united-kingdom/balance-of-trade

Productivity, the level of production for each hour of work, has flatlined since 2008.  Rising productivity is the key to rising wages and improvements in living standards yet it has been sadly neglected as a performance indicator.

In the nine years since the low point in mid-2008, productivity has grown by only 4pc. By contrast in the nine years to the peak in late 2007, output per hour jumped by 20.7pc.

telegraph.co.uk/business/2017/04/05/productivity-last-overtakes-2007-level-decade-pain/

The tax gap, the difference between tax collected and tax due, stands at 6.5% or £36bn.  UK.government/HMRC-measuring-tax-gaps-2016  Although this has closed recently this is largely due to retrospective changes to tax law which has allowed HMRC to reclaim tax from ‘avoidance’ schemes which were legally operated at the time.  This has led to some high-profile celebrities receiving censure through the press and many individuals, who took advice in good faith, have gone bankrupt due to these ‘retrospective’ powers where the state can reclaim funds even if the case is won at tribunal.  David Kirk, an expert in tax law said the following about a retrospective tax on contractors loans in 2016.

Kirk concludes that many former contractors will be made bankrupt by this new tax charge, or if not made bankrupt will lose their homes. He also says the charge is deeply unfair as in many cases the tax was not payable under the law that existed when the loan was advanced (pre December 2010), so the taxpayer should win their case if they could get a hearing at the tax tribunal. Under the proposals such taxpayers will have to pay the tax on the outstanding loan even if they do win their case at the tax tribunal.   accountingweb.co.uk/tax/business-tax/retrospective-tax-imposed-on-contractors-loans

Dominic Raab the MP for Esher and Walton since 2010 has written widely on the subject of the economy.  He has also stated on many occasions that he has fought for a change to the Whitehall funding formula which sees Elmbridge receive just a quarter of funds it pays to central government.  It is possible to access Hansard references via a site called ‘Theyworkforyou’  There is only one reference to Mr Raab speaking on Whitehall funding formula which was a call to lower business rates in 2012.   theyworkforyou+funding+formula  Under the new deal with central government, Surrey will be allowed to keep 100% of business rates in the near future – indicating that this is a vital lifeline for the ailing authority.

Dominic Raab – voting record