2017 12 Editorial – the Tory Budget

Faint-Hearted Phil

All budgets have political aims. In the short term, Chancellor Philip Hammond’s latest budget is designed to keep himself and the Prime Minister in their jobs, while placating their unruly backbenchers. In the medium term it has its eye on winning the next general election.

The Tory press were happy with Hammond’s “steady as we go” approach. Instead of the badly needed radical change of the sort offered by Labour, Hammond simply applied sticking plaster to the deep wounds caused by austerity and Brexit. Distributing small goodies across the board to ease the pain of their effects.

In his budget address Hammond said, “This budget will set out a vision for a post-Brexit Britain”. Indeed. A low growth, low productivity, low wage economy is what we currently have and what we can expect if the Tories continue to apply the same old policies. Policies that have resulted in the worst economic record of any government in living memory.

The economy is suffering from a chronic lack of investment. Businesses have been reluctant to invest while the economy has stuttered along for the past seven years. Brexit has added to business uncertainty. There is a crying need for a major boost in investment for the medium to long term. But the Tories are addicts of short term fixes and their handling of Brexit and the economy has given British business the same addiction.

In the eyes of the government the problem is the budget deficit. But balancing the economy should be the primary goal of government. Not balancing the budget. With low interest rates the government could borrow to invest heavily in the nation’s infrastructure as Labour proposes. Higher investment boosts productivity and hence wages, which are spent and expand the economy. Faster growth results in higher tax revenues and the deficit (the difference between income and expenditure) comes down. It is a simple matter to distinguish between capital and current expenditure. Former Chancellor George Osborne’s decision not to allow for borrowing to finance investment is one of the factors that has led us to our current economic decline.

The Tories blame Labour for the deficit, accusing the then Chancellor Gordon Brown of overspending. Yet when the Tories and their coalition partners took over the reins in 2010 the economy was growing. It was their decision to slash public spending to bring down the debt. (The debt was caused not by Labour, but by the reckless, speculative behaviour of the banks, which were bailed out with public money) Osborne has recently acknowledged that the Brown government acted correctly in the financial crisis. Jeremy Corbyn has always quite rightly refused to accept that Labour was responsible for the 2008 financial crisis. Osborne’s admission vindicates his position. Slashing public spending caused growth to slow down resulting in lower tax receipts and bigger budget deficits. After seven years of austerity and public spending cuts we are still not out of the economic mire.

The Office for Budget Responsibility has revised downwards its forecasts for growth over the next five years. Growth will fall from 1.5% this year to 1.4% in 2018, to 1.3% in 2019 and 2020, then rise to 1.5% in 2021 and to 1.6% in 2022. (An annual average of 1.43%). This will be the lowest growth among the advanced G7 countries. These are worrying figures, meaning lower tax revenues. And further cuts in public spending could occur, in addition to the £12 billion already earmarked from the previous budget.

With wages not keeping up with inflation, the “just about managing” will have to wait longer for Theresa May to ride to their rescue. The freeze on most benefits will continue. And tinkering with Universal Credit in response to severe criticism will do little to alleviate the hardship faced by recipients. The £3 billion cuts in Universal Credit by George Osborne have not been replaced. As a result of this and the harsh tax taper on earnings for those in work, thousands of families will be worse off. Despite the crocodile tears that Theresa May shed for the “just about managing” she has done very little for them. To make grand promises and then to fail to follow them through has done little for her popularity with the electorate.

Although he knows this, Hammond brazenly told MPs that, “We are listening and we understand the frustration of many families where real incomes are under pressure” His solution was to announce a modest increase in tax allowances and in the so-called National Living Wage. Yet real wages are lower than they were at the time of the economic crash. While average earnings over the next five years will continue to be less than they were in 2008. This is not a government that is listening. Nor, given the planned tax cuts for high earners and corporate business, not to mention raising the high earners’ tax threshold, is it a government that wants to build “a country that works for everyone”.

Hammond’s flagship policy announcement was the abolition of stamp duty for first time buyers on houses up to a value of £300,000, and up to £300,000 on a value of £500,000. But it will do little to solve the housing crisis. It could even make it worse by pushing up house prices and benefit those who already own their homes. The OBR has estimated that it will result in the sales of a mere 3,500 houses.

The government aims to build 300,000 houses a year by the mid-2020s. But won’t say how many of these will be in the affordable housing bracket. And a shortage of skilled labour, which Brexit may exacerbate, could hold back progress on the 300,000 target. Nor are the government willing to allow councils to borrow to build, as Labour proposes. The Right to Buy policy of the 1980s turned out to be a disaster as the public housing stock diminished and was not replaced by new build.

Building companies are holding onto land, partly as a result of tight planning rules which delay progress; but also in the hope that as housing demand continues to rise the price of land and profits from not building homes as well as building homes will soar.  A Labour government should reform the land market to cap profits made by landowners. Where planning permission has been granted, building companies should build homes or sell the land to councils at a reasonable cost.

Labour will borrow to invest for the long term, not for day-to-day spending. As the economy grows tax revenues will increase facilitating debt repayments. The so-called Northern Powerhouse initiated by George Osborne needs a real boost, not just Hammond’s meagre input of £1.7 billion to improve local transport in the cities of the north and midlands.

Improving transport communications in the regions will help business and facilitate travel to newly created jobs. There is a need for an HS2 scheme for the north, which links cities and towns from east to west. Hammond has gone some way towards this by earmarking £300m for improvements to rail connections between upgraded stations in the north and midlands. But this only partly makes up for the cancellation of several regional rail electrification schemes just four months ago. Compared with the level of rail investment for London and the South East it is pathetic, and northerners have noticed this.

Old industrial Britain, mainly in the north and midlands, is still suffering from the closure of factories, pits, shipyards and steelworks. They are the areas of Britain with higher levels of unemployment, poor health indicators, and real hardship from government cuts in welfare and local government. They are also the areas that voted to leave the European Union.

Labour’s top priority must be an industrial strategy that prepares Britain to meet the challenges of a rapidly changing economy. Labour’s plan to set up regional investment banks working with local authorities to regenerate cities and towns across the north and midlands will boost skills and jobs and aid investment in emerging businesses. Generating income to improve the living standards of the people should be a priority. Labour must prioritise these areas for investment and public spending.

Although voters like Labour’s policies on public ownership, the perception is that Labour continues to lag behind the government on economic competence. The Tories have persuaded voters that paying off the debt and cutting the deficit is the number one priority, and that Labour’s tax and spend policies would bankrupt the country. Labour has a mountain to climb to win voter’s confidence in its economic policies. With Brexit, Britain is heading into unchartered waters with an inexperienced and incompetent crew. What happens over the next few years may convince voters that a Labour government is what the country needs.