On first sight there seems little in Rishi Sunak’s budget to scare the horses. With tax threshold increases delayed and Covid support continuing for the time being, Sunak has avoided an immediate hit to families’ wallets.
Look below the surface though and what becomes apparent is that those on the lowest incomes will suffer the most once the measures outlined in the budget kick in.
The most glaring example of this is the cruel decision to reduce universal credit at the end of September by £20 per week, just at the time when unemployment is expected to rise. This will hurt the poorest families the hardest and shows the lack of compassion and empathy that is at the heart of Tory thinking.
The freezing of income tax thresholds may look harmless enough. The effect though will be massive – particularly if inflation takes off – and will hit the lowest earners the hardest as more and more workers get caught by the threshold and have to give up a fifth of the additional cash they earn. The wealthy on the other hand don’t get the personal allowance so freezing it has no impact on them.
Even raising the rates of corporation tax will end up hurting ordinary people. It may seem like a tax on the rich – hence its initial popularity – but ultimately the tax is paid by customers, workers and shareholders. It will therefore put upward pressure on inflation and downward pressure on pay and dividends.
The existing rate of corporation tax may be relatively low compared to other major economies but there are many factors that influence international businesses on where to invest. Leaving the EU has already made the UK a less favourable destination for businesses wanting access to the EU so this just seems like the worst possible time to remove a competitive strength.
There was precious little in the budget about helping the excluded 3 million entrepreneurs, and nothing on reforming the broken business rates system or helping exporters hit badly by Brexit.
Reforms to social care were also absent (despite Boris Johnson’s assertion 20 months ago that he had a ready-made solution), as was anything extra for NHS staff or carers.
If the Tories were serious about rebuilding our shattered economy fairly there would have been more about enabling businesses to flourish, encouraging exports, attracting inward investment, ensuring the economy is more resilient and able to withstand future shocks, investing in public health and protecting the most vulnerable.
As it is, Sunak may have kept the Tory’s manifesto commitment not to raise headline rates of income tax, national insurance or VAT but in doing so he has sacrificed the poorest members of society and risked damaging our national interest.
* Andrew Parkhust is the Welsh Liberal Democrat Economy Spokesperson, Chair of Flintshire Lib Dems and Senedd Candidate for Delyn
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26 Comments
Thank you for an interesting and important article.
Might it be time for Lib-Dems to eschew Neoliberalism and embrace and highlight Modern Monetary Theory?
The government should reverse their decision to raise the threshold for the top rate of income tax to £50k (supported by Labour, opposed by Lib Dems and Blairite rebels).
Can’t really see what sort of (? legal) businesses these Freeports hope to attract. And 8 of them means that it will be spread pretty thinly. We had them pre 2012 and it was mainly used as a distribution point for high value items to Europe but that seems more problematic with Brexit. Anyway they don’t seem an important employment generator to me. The concept needs to be spelt out in more detail. What is the targeted market?
@Steve Trevethan
“Might it be time for Lib-Dems to eschew Neoliberalism and embrace and highlight Modern Monetary Theory?”
1) Neoliberalism in common parlance is anything the speaker doesn’t like. You have to be more specific. Is it Monetarism you are critical about?
2) Handing over the money printer to the executive branch is a bad idea. Would you trust any PM over the past 10 years with it?
3) The government should not have the means to mostly finance itself without taxation. The Persian Gulf monarchies show why that is a mistake. A lack of reliance on tax revenue weakens the development of democracy, and a need for states to seek the consent of the citizenry.
4) Taxation ceases to be a tool for public spending and becomes to tool for social engineering. The affluent already are iffy about the idea of giving up their income for improving the lot of the poor (as seen by the past 50 years of low-tax and anti-welfare governments), imagine their hostility if the only justification is lowering the Gini coefficient. Therefore the other useful functions of taxation will be harmed.
@Alex B re: Freeports
I expect the typical Brexiteer didn’t know that the EU permitted freeports and that the UK had 12 prior to 2012. Nothing I’ve seen about these new freeports indicates that they are fundamentally any different to these old freeports. I expect that many promoting freeports also don’t know the UK government did away with them because whilst they were successful (for the investors) they didn’t greatly benefit the treasury and also had a negative economic impact on their immediate neighbours as they pulled in people and economic activity.
@William Francis “The affluent already are iffy about the idea of giving up their income for improving the lot of the poor”
This is a very interesting point, given the types of constituencies in which Lib Dems appear to be strongest and which it has been suggested the party should target.
“If the Tories were serious about rebuilding our shattered economy fairly …”
Curiously, particularly given that Lib Dems had some input into a few budgets in the last decade, YouGov report, “Rishi Sunak’s 2021 Budget is seen as the fairest in the last ten years: Overall, 55% of the public think the Budget was a fair one, with just 16% thinking it was unfair. This is the highest rating recorded in the 12 years we’ve been asking this question” (https://yougov.co.uk/topics/politics/articles-reports/2021/03/04/budget-2021-measures-prove-popular-britons).
You are right, Andrew, to talk about the Budget potentially hurting the poorest, as well as ignoring the need for social care reform. There are at least some of our Conference motions that will aim to assist the working and the disabled poor, and our colleague Michael BG is proposing amendments to strengthen their welfare provision. But we also very much need our Leader to endorse a Beveridge-2 type plan within a National Renewal Plan, and supporters of this we urge, please write to him to ask him to speak up for it in his Conference address, and then to push for a working group to draw up the necessary plan.
Ed Davey’s own Carers’ Campaign will fit easily within the wider provisions of the Beveridge-2 plan, as will reform of the social care provision, about which I heard Sir Andrew Dilnot speak again on Radio 4 this week. But most urgently, we need to campaign to have benefits increased for the increasing numbers of working-age people who can’t find sufficiently paying employment, and the Universal Credit extra £20 a week must be made permanent, not ended in September.
I’m not sure if it directly related to the budget, but Lib Dems might want to do something to make themselves appear relevant by backing the nurses, and other health workers in their campaign for a decent pay rise.
It’s not that hard surely? We’ve seen the Government hand out huge sums of money to their mates in the form of highly paid consultancies, and questionable public contracts, and who often have simply failed to deliver anything that can be defended as value for money.
But for the workers who certainly have, and on very much lower levels of pay, they are offered just 1%. This is not a fight that can be lost if everyone who clapped on their doorsteps last year shows their support. There might even be some votes in it too!
https://news.sky.com/story/nursing-union-sets-up-35m-strike-fund-after-news-of-1-nhs-pay-rise-12236607
The Sunak budget appears to be well received according to a Yougov poll https://www.cityam.com/budget-2021-public-support-sunaks-measures-according-to-yougov-poll/
Andrew’s criticisms are valid particularly with respect to making the UC uplift of £20 per week permanent. The squeeze on income tax brackets is an old ruse to substitute an inflation tax for rate rises and as Andrew indicates the key there is nominal wage rises.
Whether Corporation tax rates will actually go up as much as headlined we will have to wait and see. They could be stretched out longer if thought necessary.
There is an extension to the self-employed scheme as well as allowing losses to be carried back three years. Sunak has extended support to more self-employed people who had previously missed out on help. More workers who became newly self-employed during the coronavirus pandemic will be eligible for Government support.
Sunak told MPs more than 600,000 people – many of whom became self-employed in 2019/20 – will now be able join the more than two million people eligible for cash grants. So by no means all the excluded but some progress.
Business rates review has been put back to the autumn. Pubs, restaurants and other non-essential retail businesses have had rate relief extended by three months to June.
Brexit is turning out to be the bureaucratic disaster predicted and a social care green paper still seems to be sitting in the long grass.
Minimum wages are increase by 2.18% but public sector wage restraint has eroded the wages of civil servants,teachers, police officers, firefighters, council workers and armed forces workers over the past decade and the proposed NHS rise of 1% looks underwhelming.
The public sector employs 6m people around 20% of the workforce, so wage increases have to be paid for but at the very least need to be maintained above the rate of inflation. Quantitative easing has a deflationary impact on wages https://www.investopedia.com/articles/investing/021315/quantitive-easing-and-labor-market.asp, so normalising interest rates is part and parcel of redressing these growing inequalities.
” Neoliberalism in common parlance is anything the speaker doesn’t like. You have to be more specific.”
It’s word in the Oxford English Dictionary so, if you don’t know what it means, you might want to look it up. I’d also recommend the Wiki entry on the topic.
“Handing over the money printer to the executive branch is a bad idea. Would you trust any PM over the past 10 years with it”
You need to move with the times. It’s mainly done in a computer these days. Too late to be worried about “trust”. It’s been a long while since we’ve had a PM who has been unaware of their money creation powers.
“The government should not have the means to mostly finance itself without taxation” .
You may well think that but they do if they use their own currency. Maybe you would prefer we use the euro?
“Taxation ceases to be a tool for public spending and becomes a tool for social engineering. The affluent already are iffy…….”
All forms of public spending are capable of being described as “social engineering”. The affluent are always “iffy”! They are quite capable of looking after there own interests and don’t need any help from the rest of us.
“Neoliberalism is a policy model that encompasses both politics and economics. —
The policies of neoliberalism typically support fiscal austerity, deregulation, free trade, privatisation and a reduction in government spending.— There are many criticisms of neoliberalism, including its tendency to endanger democracy, workers’ rights, and sovereign nations’ rights to self-determination.”
https://www.investopedia.com/terms/n/neoliberalism.asp
Might the financial disaster of 2008 indicate that the banking industries are unreliable and/or inept and so putting faith in them to perform well for society is insecure?
M.M.T. theory connects the issuance of currency directly to inflation so pretty well everyone can “see the workings.”
Might much of the perceived and/or actual underperformance of recent governments be connected to the power of the finance industries as suggested by the lack of real reform post 2008?
M.M.T advocates the transparent and efficient use of taxation which is not currently the case with neoliberalism where we are led to believe that society functions best with minimal taxation and many are misled by the deficit myth. M.M.T seeks optimal taxation.
Advocates of M.M.T hold that four principal purposes of taxation are:
* the provision of governmental power without the use of force
* Inflation management
* Management of wealth distribution
* Behaviour modification
“Taxes are critically important but are not the sole essential for investment in the national economy.” ( From “The Deficit Myth by S. Kelton)
P.S. A tip of the hat to Peter M for both his contributions.
I think William Francis expresses a commonly held view when he says ” Neoliberalism in common parlance is anything the speaker doesn’t like. You have to be more specific”
This is a rather long and convuluted essay, but it makes William Francis point well enough https://www.aier.org/article/why-i-am-not-a-neoliberal/
Governments don’t in practice have the means to finance themselves without taxation. That is clearly the case in the eurozone, as well as those that must borrow in foreign currencies. Some governments that issue their own currency and have their own central-bank spend first and then tax. A government that is actually responsible for creating the money that is in use in its jurisdiction must first actually inject its currency into the economy by, for example, buying goods and services from people and businesses within it or making it available to the banking sector to facilitate inter-bank lending, so that households and firms have the currency they need to pay the tax.
That does not mean that such governments can just create more money to pay for whatever they want as Zimbabwe, Venezuela or Turkey have tried in recent years. They can create as much money in the banking system as they like through quantitative easing or other measures to lower interest rates, but once it is spent on real goods and services, this inevitably results in ever-increasing levels of inflation, as more and more money is pumped into the economy. Where a government has its own central bank and its own currency (but not otherwise) tax revenue is not raised to pay for government expenditure, as such, but to instead reclaim the money that the government has injected into the economy. In effect, the tax raised does in these cases cancel the money that the government created, and as a result the tax collected keeps the overall money supply available within the economy under control with the primary concern being the control of inflation. Tax revenue is then an indispensable tool of economic management.
The only real difference is that a currency issuing government whose currency is readily accepted overseas and in FX markets will generally have more fiscal space for borrowing than an emerging market economy that must borrow principally in a foreign currency. Crucially, however, its currency will only be readily accepted on FX markets, if it has and can maintain the productive capacity that underpins the value of the currency.
The needlessly low, and possibly deliberately insulting, pay “offer” to the nurses and those in similar occupations raises at least these powerful questions.
*Do we pay people according to a perceived and manipulated market price or according to a demonstrated “value to society” price?
*Do we continue to accept the lie that there is not enough money to pay people of proven worth properly and promptly?
* Are we willing to work for and, if needed, fight for, a state which is straightforward, honest, clean, accountable which will act openly and transparently in the general public interest?
* Ditto a state that will protect and invest in our futures and those of our descendants. “That is not just about the N.H.S, of course. It is about free education. It is about cradle to grave care. It is about climate change”.
http://www.taxresearch.org.uk/Blog/
@ Joe,
“Governments don’t in practice have the means to finance themselves without taxation. ………That does not mean that such governments can just create more money to pay for whatever they want”
There is really no fundamental disagreement on these points even though you might like to suggest otherwise. There are, though, some disagreements of detail on how the first statement should be interpreted.
Taxation is necessary to provide a stable value for any currency. This is generally agreed too. Those of us who reject neoliberal concepts also reject the notion that it should be related to what a government might choose to spend beyond noting that the greater the spending the more downwards pressure there will be on the currency’s value and so the greater need for higher taxation. But many neoliberal notions such as that current spending must always be financed out of general taxation make little or no sense.
Having said this, there are other legitimate reasons for the imposition of taxes. We might want to use them to discourage individuals smoking or drinking too much for example. A speeding fine can be considered a form of tax. It’s a tax to ensure that we are all safer on the roads than we would otherwise be.
@ Joe,
“Quantitative easing has a deflationary impact on wages……” ??
I’ve read the link you provided in support of this assertion. It doesn’t provide any evidence for it. It is simply an opinion given by some of those who don’t much care for the idea of QE in any case.
Their reasoning seems to be that there is a correlation between wage stagnation and the introduction of QE. However QE was introduced after the worst economic shock since the Wall Street crash of 1929. There was no QE after that and wages more than just stagnated then. They actually fell. So if we take our lesson from history we can argue that wages would have stagnated to even greater extent but for QE.
QE has already done all that it could do in that it has reduced longer interest rates to nearly 0%. Further QE won’t have any additional effect unless they start to creep up again. Interest is just like rent paid on land values. Except it’s a rent on monetary values. You should be happy that one form of rentierism has been denied to the rentier class!
Peter Martin,
all current spending is rarely financed out of taxes due to the vagaries of the economic cycle. Economic planning involves forecasting expected growth and budgeting for planned expenditures. Those expenditures have to be financed via a combination of taxation and borrowing. Borrowing will take the lead in a recession as it should. The deeper the downturn the greater the level of borrowing required. That remains the case whether you view it through the lens of Keynesian demand management, emergency employment and business support or sectoral balances.
Taxes can only be expected to finance current spending when the economy is operating at close to capacity. That capacity is based on OBR forecasts of a stabilised rate of growth which in the medium term looks set to be around 1.5% per year.
In my opinion, it is mistake to think that Quantitative easing or money creation will enable improved standards of living. It is an emergency measure to counter deflation but in doing so it has massively inflated asset prices and engendered low growth and wage stagnation, just as it has done in Japan for decades. I place no faith in continuing such measures beyond the immediate crisis.
In commenting on Katherine Pindars article today, I suggested what I think Libdems should be advocating:
– a Guaranteed Minimum income based on the current level of the Universal credit basic income for over 25’s of £95 per week.
– skiils training and job guarantees to address structural unemployment coupled with regional investment in renewable energy projects countrywide. This infrastructure investment would be deficit financed.
– fundamental tax reform as outlined in the Mirrrlees review to address necessary investment in child care, education and skills, health and social care
– reform of the Land Compensation Act 1961 to provide for a public sector land bank that acquires housing land at existing use prices and captures planning uplifts for the public benefit.
– an index-linked cash ISA that provides an element of inflation proofing for retirement savings.
If that is Neoliberalism then sign me up.
Steve Trevethan,
I certainly agree with Richard Murphy’s points about what we value and the need to ensure that Nurses are properly rewarded.
On QE he then writes: “And it’s also true this new money does eventually end up as part of the savings of the already wealthy, because it pushes up asset prices (hence house price increases and a buoyant stock market despite Covid) and so taxes on the wealthy do need to increase to control that trend.” Then he asks “But is there any risk of inflation in normal prices as a result of this new money being created? I don’t think so. There’s a reason. It is that there are millions unemployed and underemployed in the UK right now. And that means there is no upward price pressure from wages.”
I’m not so sure he has this quite right. There is no shortage of spending power in the economy for the reduced supply of goods and services available and savings have been rising dramatically during the pandemic. The deflationary effects of unemployment may become the case as the furlough support tapers off in the summer. However, other deflationary trends that have been present for many years may begin to be reversed at the same time.
Offshoring has been deflationary. Hiring cheaper labor from less developed parts of the world to build a lot of our products and services is cheaper than paying our own citizens (with higher hourly rates and more environmental/safety regulations at the workplace) to make those products and services, and helps reduce the cost. This of course has ramifications down the road, especially for the working class whose jobs are more affected, but while it’s happening, it’s a deflationary force.
High levels of immigration are deflationary. The agriculture industry, for example, has been supported by low cost immigrant workers. Cheaper oil and commodity prices until recently have been deflationary. Wealth concentration is deflationary as the wealthy have a lower propensity to consume. Aging demographics are deflationary. For most people, their peak spending years are their middle years, when they are raising a family. As they age into their golden years, many of them downsize their property, and spend less money elsewhere.
Nurses pay offer…
It looks more and more like Government incompetence.
As was discussed on LDV a few weeks back, it made sense to make a one off “tour of duty” payment to NHS staff who worked on the CoViD wards, just as we did for army personnel who did a tour of duty in Afghanistan. This would have closed the issue. Instead the Government decided to link the future pay increase by saying it was in recognition of their outstanding commitment etc. during the last year.
@ Joe,
“If that is Neoliberalism then sign me up.”
It probably isnt! From a Lib Dem POV it’s more like the “put a penny on income tax pay for” mentality that scares off voters because they do see that there too many pennies needed for too many things. From a Tory POV it is thinking that the way to cut the size of the state is to cut the deficit by slashing spending and raising taxes to “balance the books”. The books still don’t balance and the sat
cont/
The books still don’t balance and the state becomes dysfunctional rather than shrinks. Neoliberalism isn’t a coherent political philosophy, but more as a set of interconnected misplaced and incorrect ideas which have become commonplace and, until recently have rarely been publicly challenged.
From a Labour POV it is going along with a lot of nonsense because the voters don’t think it is nonsense.
I tend to agree with you on Richard Murphy. There is a higher inflation risk than he allows for. But a risk isn’t the same thing as saying we know for sure what will happen. If the economy does look to be in danger of overheating after the lockdown then it will need cooling down, but it doesn’t need that at the moment.
Richard Murphy seems to have a downer on the present Govt because of Brexit. He views everything in terms of that. So even when they do get something right, such as the vaccine program, he can’t acknowledge it. He’s quite a prickly character. Anyone who makes the case that the priority should be to giving out as many first doses as possible is accused of “democide” and banned. I was banned some time ago for pointing out that his MMT views were inconsistent with EU imposed neoliberalism.
He gets some things right, but he isn’t of the same mind set as most MMT opinion.
Peter Martin,
Public services do need to be paid for with our labour. We pay tax for those services from the income we earn primarily from selling our labour services in an economy as close to full employment as we can get it. Taxes accounts for Approximately 34% of national income across the economy or around 1/3rd of our working time.
An era of low interest rates has made capital cheap. The hurdle rate for lending it or investing it is low. So, investors and banks have been willing to provide equity and debt financing to businesses with no plans to be profitable for a very long time, like Tesla (TSLA), Uber (UBER), and so forth. Even fast-growing Netflix (NFLX) is free cash flow negative year after year and literally issues junk-rated debt to fund new content. As long as the stock price keeps going up, investors are happy and executives get paid in these unprofitable business models. And as long as companies have not had to make a profit on the products and services, even after a decade or more in operation, the prices of their products tend to be cheaper than they would be in a funding scenario that requires them to make a profit. Bear markets eventually test investor patience for structurally unprofitable businesses, if stock price appreciation is the only source of financial payback.
With sovereign debt a bond bear market eventually tests investor patience for structurally weakened economies that have run out of buyers for their debt and have to resort to QE to finance deficits. As this FT survey of the 18 biggest buyers of UK bonds writes:
“In this extraordinary year of gilt supply, the BoE has been the dominant buyer,” said Matthew Amis, of Aberdeen Standard Investments. “Without this significant support, bond yields would have risen significantly. Very simply, the gilt market could not have taken down the record £485bn supplied by the Debt Management Office to the market this year.”
If the only way you can get takers for your debt is to guarantee to buy it back off them immediately, then you don’t have the longer-term means of both financing public services and the infrastructure investment that is needed to restructure a sustainable zero carbon economy.
@ Joe,
“Public services do need to be paid for with our labour.”
You’re sounding very Marxist here! Of course it’s not just public services -it’s everything else too which is created as the result of the application of human labour to change our natural surroundings.
This is exactly why the Government should adopt a “do what it takes” approach to keep our economy running as close to full capacity as possible. We don’t need the savings of the rich to do that nor their taxes. They need us to work for them so that their wealth actually means something. In other words, they need us a lot more than we need them!
http://bilbo.economicoutlook.net/blog/?p=31604
PS You are right of course that we don’t run the economy flat out with no regard for environmental considerations. Just how we maintain a level of growth without ruining the planet is a huge challenge and it’s not one that the present system is particularly capable of meeting.
Karl Marx was a very smart man.
Peter Martin,
I would agree support measures for employees, the self-employed and businesses should continue and the Government should adopt a “do what it takes” approach to return the economy to running as close to full capacity as possible.
I think Keynes, in his prediction of a 15 hour week may not have given due consideration to the issue of distribution. Assuming that a rising tide would lift all boats equally as technology delivered rising standards of living. The problem will not be solved, however, while a quarter of the world lives in abject poverty, nor while a good slice of those living in developed countries are not sharing in economic prosperity or feel they need to spend longer and longer on the treadmill just to make ends meet.
I read Bill Mitchell’s blog. He, likewise, does not appear to give any weight to the drivers of electoral politics. The purpose of giving the BofE independence over monetary policy was to get away from the problems associated with reflating of the economy immediately prior to an election and dealing with the problems caused afterwards. Inflation has stabilised where this has been done.
With fiscal policy we have the checks and balances of parliamentary scrutiny of budgets and longer-term spending reviews. That requires setting out tax and spend and borrowing and investment plans together with forecasts for key economic indicators like inflation and unemployment.
There can be no effective accountability for spending plans that wait to see what happens to inflation and then seeks to raise taxes or cut spending if it rises above target.
Money creation can be used in either a fiscally left-leaning or fiscally right-leaning political environment. A left-leaning system would seek to increase spending and then increase taxes (but not before an election) when inflation rose above target pleading TINA. A right-leaning system would be more inclined in normal circumstances to use it to make big tax cuts and cut spending (after an election) to reign in inflation pleading TINA (as Trump did in 2017). Warren Mosler, one of the initial proponents of MMT, has called for full payroll tax holidays for both the employee and employer side during recessions or periods of slow growth.
I am of that view that post-recovery automatic stabilisers (including job guarantees)should be allowed to do the job of smoothing the business cycle and accelerated infrastructure investment should be the primary tool to stimulate aggregate demand when required. That serves to keep tax rates and spending levels reasonably steady throughout the economic cycle.
@Joseph Bourke
“The problem will not be solved, however, while a quarter of the world lives in abject poverty, nor while a good slice of those living in developed countries are not sharing in economic prosperity or feel they need to spend longer and longer on the treadmill just to make ends meet.”
Quite. And while the term ‘economic migrant’ is one of denigration – i.e. the level of opposition to those who try to better themselves by moving to where they might improve their situation – e.g. by taking on jobs which the locals don’t seem to want to (or might even be too lazy to) do for themselves – that is not going to improve.
And increasing levels of technology don’t seem to be helping – while it might have helped in the past, now it seems to be putting more and more power into the hands of the very wealthy and others not necessarily very wealthy but at least better off and leaving the poor by the wayside, increasingly unable to fend for themselves.
Still, why should we expect the UK Prime Minister to care – bearing in mind his comments when asked by Starmer about the cuts in UK aid to Yemen.