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The End of Austerity?

October 31, 2018

The Budget was supposed to mark the end of the age of “austerity.” Theresa May had promised its end in her conference speech.  She also promised that there would be a large increase in NHS spending, delivering her mythical Brexit dividend.  Two tall orders for the Chancellor to deliver.

Austerity wasn’t much used as a word relevant to public expenditure prior to 2010.  An austere person would be morally strict and someone in a state of austerity would have a simplistic and limited view of life.  I guess living within your means is an austere viewpoint.  But by 2011 “austerity” was being used to describe the Coalition Government’s plans to stabilise the public finances.  When used by (mainly Tory) government ministers it meant tough medicine. It was more commonly used by Labour’s two Eds to characterise cuts in expenditure beyond what was necessary. Miliband and Balls paid lip service to the need to reduce the deficit but never supported any government measure to achieve it. Austerity has morphed into Labour supporters’ language to describe deep cuts across the state.  But the Budgets and spending reviews between 2010 and 2015 were much more nuanced, partly reflecting tensions between the Conservatives and Liberal Democrats.  There were also stark differences in the treatment of different departments and areas of spending.

The two parties in government agreed that the NHS would be protected and would have real terms growth in its budget. It was also agreed that retired people would not be adversely affected.  My colleague Steve Webb introduced the pension “triple lock” – meaning that the state pension would always rise by at least 2.5%. The Coalition also planned to grow both the green energy budget and the international development budget, meeting the 0.7% of GDP target for the first time.  Ring-fencing and growing these large areas of expenditure meant that unprotected areas of government faced swingeing cuts.

Britain’s austerity has been mild by the standard of other European countries’ belt tightening after the crash.  In 2011 I was on a parliamentary delegation to Ireland. We met Brendan Howlin, the Minister for Public Expenditure and Reform.  He was a minister from the Labour Party, the smaller coalition partner of Fine Gael.  The British Labour MPs on my delegation were told in no uncertain terms that Ireland had experienced real austerity.  Public sector salaries had been cut.  Surcharges had been added to income tax and pension contributions had gone up. Welfare benefits had been cut for everyone of working age.  By contrast, the British coalition government had simply frozen salaries for most people, apart from those on the lowest (<£21,000) salaries who continued to receive increases.  Benefits were initially frozen.  In the later years of the Coalition they were increased. The Lib Dem policy of raising the income tax personal allowance took a lot of part time workers out of the tax bracket and gave a tax cut to millions.  British “austerity” was nothing like the Irish experience, let alone the Greek version.  Howlin went on to become Leader of the Irish Labour Party.  I wonder what he thinks of Corbyn and MacDonnell?!

Since 2015 the Conservatives have governed on their own, without the restraining influence of the Liberal Democrats. The Lib Dems had made sure that the nation’s books were set on course for balance by a mix of expenditure cuts and freezes plus some tax rises.  Since 2015 there have just been cuts – full on austerity.  While the Lib Dems thought the state should live within its means the Tories clearly believe in a shrunken role for the state.

So has Philip Hammond ended austerity?  The answer depends on what you measure.  He’s delivered an income tax cut.  But again, there is a big difference from the Coalition years.  He’s raised the personal allowance to £12,500 – delivering the Lib Dem target set (by me in a conference motion in 2012) while in government. But he’s also raised the starting point for higher rate tax by rather more, to £50,000.  Basic rate tax payers will get a £130 tax cut but the threshold change is worth £860 to higher rate tax payers. The Liberal Democrats oppose the change but Labour back it. Labour now support the Tories on tax cuts as well as collaborating with them on Brexit.

In terms of overall government expenditure, yes he has ended austerity. Total government expenditure will increase in real terms and also per capita. The deficit this year is back at pre-crash levels of about £40billion and could be sustained at this level for a few years more.   But this is good news only for the NHS, which is to get substantial increases (without the Brexit “dividend”) from 2020 and for defence and overseas aid, which are protected. For all other departments, they continue on a downward trajectory, though no new cuts were announced. So if you are ill or work in the NHS, are serving in the armed forces or make their equipment, or if you take an altruistic interest in developing countries, then austerity is over.  But if your needs and interests are in education, welfare, law and order, justice and all the services provided by local government, austerity is certainly not over.

It doesn’t have to be this way. Austerity could be brought to a close, sooner than the Tory government plans and across other services that affect our lives.  Here’s some ideas of what could be done:

  • Set local government free – the funding of councils has been slashed since 2010. The grant from central government has reduced while at the same time local authorities have been effectively prevented from raising council tax beyond 2% (more flexibility has since been announced for extra council tax for social services expenditure) by the requirement for a referendum. I argued against this constraint while I was a minister at DCLG. Councils should be given the freedom to not only raise the rates of council tax but also to introduce higher bands for the most expensive properties. Over time local income tax should replace council tax as the main source of council revenue, though a small domestic property tax should be retained. To begin with a proportion of the nationally collected current income tax could be devolved as a grant to councils. Once the calculation and attribution of local shares of income tax is firmly established the rate setting should also be devolved.  Councils should also be free to establish local charges and taxes, for instance on hotel rooms, a common local tax in most other countries. Alongside the devolution of more revenues and powers, the structure of local government in England should be reorganised into all-purpose unitary authorities.
  • Replace business rates with a land tax – the uniform business rate is determined nationally, collected by councils, handed to the Treasury and a proportion is then handed back to councils by MHCLG. This is nuts. The Coalition increased the proportion of business rates that can be retained by all local councils, with up to 100% of the rates on new developments in some enterprise zones. It would be better for most councils to retain all of their local property taxes, currently amounting to £31billion. There should also be local powers of flexibility over the rate charged, for instance to encourage development in particular places or of particular types.  As more trading activity moves on line, the value of physical property taxes will decrease. A more sustainable source of local revenue would be a land tax, advocated by Liberals since the time of Lloyd George. Land tax would also encourage the bringing forward of dormant land for development, for instance for new homes.
  • Build houses – while growth in incomes has been patchy it is true that the costs of buying or renting your first home has soared. For young people high rents and huge deposits for purchase are the main sources of economic hardship.  Housing costs are also a major example of inter-generational inequality.  Building more homes is the only way to stabilise the market.  It will not be done by the private sector alone.  We will only build at the rate needed if there is a massive intervention by the state.  More homes for social rent should be built by local councils.  In government I argued for a relaxation of the borrowing constraints on councils for house building and £300million of flexibility was put in place between 2014 and 2016. I’m glad that the government has now confirmed that the cap will be removed, though details are yet to emerge.  Building more homes will not only ease the feeling of austerity for young people.  It will also be an economic stimulus.  I’ve written more about how we can increase the rate of house building – https://stephenwilliamsmp.wordpress.com/2018/03/09/how-we-can-build-the-new-homes-that-are-needed/
  • Raise and reform taxes on wealth – taxes on inherited wealth and wealth accumulation in Britain are very light. For the wealthiest and best advised people they border on being voluntary contributions.  This is not progressive.  Inheritance tax should be replaced with a simple accessions tax, with individuals being able to set inheritances against a life time limit before they start paying tax at 40%. With the exception of heritage assets, most reliefs should be abolished.  The Coalition raised capital gains tax from 18 to 28%. I would go further and set it at the individual’s marginal income tax rate, with a small annual allowance sufficient to avoid reporting of minor gains.
  • Guarantee stable funding for the NHS and social care with a dedicated tax – the NHS is set within a few years to absorb about 40% of all discretionary state spending, as other areas are relentlessly squeezed. While the growth of the NHS pushes other national budgets to the margins the impact at a local level is even starker. Social care is currently the responsibility of local government and now crowds out the funding for other local council services. The dependence of local government finances on a capped council tax and a rapidly diminishing central government grant will lead to the failure of more principal councils, following the collapse of Northamptonshire. The answer is to take the funding of social care away from local government and join it to NHS funding. I’ve written more on how to reform the NHS and give it secure funding – https://stephenwilliamsmp.wordpress.com/2018/01/13/how-to-reform-the-nhs-to-cope-with-winter-pressures/
  • Scrap fuel duty freezes – while serving as the Liberal Democrat Treasury spokesman between 2010 and 2013 I had to hold my nose each year while supporting the suspension of automatic rises in fuel duty. The freeze in fuel duty was intended to be a populist gesture, showing that the government understood the pressure on household budgets. It was supported most keenly at the top of government.  Number Ten probably feared a repeat of the fuel duty protests that briefly crippled Tony Blair’s government in the year 2000.  Rural MPs pointed to the high cost of petrol and diesel in remote communities. They were backed by the Lib Dem Chief Secretary to the Treasury, an MP from the Highlands. I thought the policy was nuts.  Fuel prices at the pump were erratic enough for people not to notice the impact of a few pence extra tax. A groundswell of gratitude to a benevolent government was highly unlikely. The duty escalator was intended to encourage people to switch to more fuel efficient cars or reduce their car use. Abandoning this intention under-mined the Coalition’s otherwise good green credentials. But my main objection was the sheer waste of tax revenue. Foregoing extra fuel duty cost the government more with each extra year.  Money that would have been better spent bringing forward the Lib Dem flagship policy of raising the starting point for income tax. Or avoiding some of the most damaging cuts in unprotected departments, for instance legal aid. Philip Hammond has continued this crazy policy.  It now costs the Treasury £6.5billion – about 2% on the rate of income tax. It should be abandoned and the duty proceeds used for investment in public transport. A radical government would replace it with road user pricing. I advocated this approach many times in Parliament and in my chapter on green taxes in The Green Book – http://green-book.org.uk/
  • Stop Brexit – uncertainty over Britain’s future relationship with the EU has already held back economic growth (Britain has dropped from a leader to a laggard among EU states) and stunted tax receipts. There’s a consensus among the vast majority of economists that all forms of Brexit, whether the softest possible (staying in the customs union or single market) or a no deal, lead to years of relative stagnation, putting more pressure on the public finances. The mirage of a ‘Brexit Dividend’ of £350m a week for the NHS will be dwarfed by the reduced tax take available for public services.  Balancing the nation’s books, let alone turning in the consistent surplus needed to pay down the accumulated debt, will be made harder and longer by any form of Brexit.  The only way to halt Brexit in its tracks is with a People’s Vote, on whether to approve the terms of exit or to Remain after all. Let’s hope MPs come to their senses and give the public the chance to stop Brexit and bring the end of fiscal austerity closer to reality.
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