Though Cowards Flinch

In 2009 George Osborne said:

The fact that people in the City give us money, even though we are promising tougher regulation, is a sign that many people in the City understand that there needs to be change.

Osborne once sold himself as the Chancellor who would be progressive and tough on banks, carry out well needed reform, and still walk away with votes from the city, because he was decisive, on top of things, and they recognised the need and public thirst for change.

So what, 2 years on, was the change the bankers could believe in?

Britain’s biggest banks are to be given until 2019 – longer than had been expected – to implement radical reform of their operations to prevent another taxpayer bailout of the system.

Of course, George Osborne welcomed Sir John Vickers’ findings, or what the Independent Commission on Banking have admitted were “deliberately composed of moderate elements” – but, given the almost universal agreement that high street and speculative arms of banking should be separated (apart from Bob Diamond and a few others), one wonders why the ICB stopped short of a recommendation for a full break-up, plumping only for a ring fencing of the two activities.

(On the subject of Bob Diamond, he met with the Chancellor on the 1st of this month to request he delay banking reforms, possibly repeating previous threats that he’ll take Barclays and leave the UK. Just saying).

As an Independent leader article put it: “ring-fencing still leaves open the possibility of banks stealthily dismantling the internal demarcation over time.”

I guess with (not so) tough measures like this, it’s obvious why big shots in the city are bankrolling Osborne – they want a man who can get things done for them.

The rise in service sector machine labour is likely to shrink the numbers of employed, and is a problem that has been coming for years.

In economic recovery, while the rest of Europe races ahead of the UK, we wait for the government to admit their little plan is not working – some of us await the day they renege on their ideas completely and take a more sensible route to reducing the budget deficit while ensuring jobs and growth.

Though in fairness the need to provide better jobs is not a recent one. Thatcher dreamed of leading a country in battle; the empire was over so the battleground was in the economy. She destroyed industry without providing a plan for the skilled workforce, reducing whole towns to misery and depression – many not yet recovered.

Council tax in affluent areas was slashed, Britain was a haven for the rich, and a place in the doldrums for the poor. While budding Del Boys were fed a delusion about being Middle Class, the country was handed over to the city to make heroes of suited gamblers with the nation’s assets at stake.

But at what price for the rest of society? The once skilled workforce were told to get on their bikes or get stuffed. Those lucky enough to live in towns with an existing service sector were fodder for a new branch of labour, low-paid, un-unionised, and de-motivating.

And so it remains, only those jobs are in jeopardy now, too. The service sector doesn’t owe the country jobs, it owes its management profits. It doesn’t owe its workforce a living wage, it utilises the unceasing amount of labour (for example in London last year companies recorded 32 people applying for every job) at the lowest possible cost.

It has been reported that the food chain McDonalds ‘is about to revolutionize the way customers order meals in its restaurants by introducing touchscreen terminals and swipe cards, replacing cashiers and the use of banknotes at its 7,000 fast-food restaurants in Europe’.

With such disregard of human labour (self-service checkouts are a commonplace in many supermarkets and cinemas today) it will be impossible for a cash-strapped public sector to rely on the private sector to fill in its place.

The service industry, which has always boasted offering unskilled work where skilled labour had all but ceased to exist in some parts of the country, has no duty to providing jobs, but to investing in new ways of increasing productivity and lowering overheads.

This might be an eminently sensible business model when the motive is profit alone, but the availability of cheap machine labour is coming at the expense of human labour – at a time when jobs are few and far between in all sectors.

It’s high time the government took a real look at what its economic policies are doing, and question what effect its actions are having on jobs, and re-think those it wants to entrust when the state is shrunk to next to nothing.

Budgets are not allowed to be bad news – ever – but there is nothing to be happy about at the moment. So instead the chancellor has to hide bad news in other ways. Great news that there will be 40,000 more apprenticeships, but what jobs on the other side? Fuel duty cut from 6pm tonight will be great for everyone, including small businesses, but a 3p rise in the VAT has meant that the 1p cut will be recovered.

This budget was set to direct its nods in the right direction: in areas where growth is needed most, and abroad to places that may be put off by the UK having higher rates of corporation tax.

To the former Osborne announced 21 new enterprise growth zones, the first 10 in Birmingham, Solihull, Leeds, Liverpool, Greater Manchester, Teesside, the Black Country, Derbyshire, Nottinghamshire and Sheffield (one will also be planned for London, the location of which will be at the discretion of Mayor Johnson). That along with the 2bn funding injection for green investment banks, and money saved from decreasing business regulations for smaller businesses, looks set to curry favour with small and medium sized enterprises (SMEs).

The latter group, companies abroad looking to set up shop in the UK, have been incentivised with a reduction in corporation tax to 23% in the next three tax years – 16% lower than the US and 11% lower than France. Big business will profit from the reduction too, but the hike in bank levy will offset that reduction to those businesses affected by it, increasing as it will from 0.05% to 0.078% from 1st January 2012.

Ed Balls, the shadow chancellor, on the BBC, is however noting that oil companies may feel the need to pass their tax rise on to consumers which will raise the price in fuel anyhow.

Furthermore, Osborne said income Tax relief on Enterprise Investment Schemes will increase from 20% to 30% in April 2011.

But, of course, there will be losers as well.

As Will Straw spotted today “the OBR anticipates an additional 130,000 people will be unemployed in 2012.” Does the government expect SMEs to be able to cater jobs for all those extra unemployed people?

As George Eaton at the New Statesman said today, the Daily Mail have it that tax cuts “will benefit millions to the tune of £320″ which has been a figure taken from the rise in the tax threshold by £1000 (£7,465, worth £200 to basic rate taxpayers). However, again according to Will Straw, the real figure will actually be more like £120, and in any case “the entire tax cut will be swallowed up by the VAT rise, rampant inflation of 4.4 per cent and higher National Insurance.”

Sunder Katwala today spotted that in 2005 David Willetts, now Minister of State for Universities and Science, said the tax stream that is the most unjust for the poorest of society is not income tax, rather:

The poorest 20 per cent of households sacrifice 28.5 per cent of their income in indirect tax, of which the biggest single item is VAT.

If that is the opinion of a cabinet minister, why hasn’t a budget announcement aiming to protect jobs and growth done anything to safeguard the worst off?

Also, it is not clear how the government plans to protect non-earners such as many pensioners from losing out on the plans – confirmed today, but not enacted yet – to merge national insurance contributions with income taxation, though Osborne has pledged to go to consultation on this.

Lots of smiles and waving gestures have been shown to small businesses by the chancellor, but the many losers in his budget will realise that growth and jobs are still a guessing game for this government. As Brendan Barber has just said on BBC news, this budget announcement is trying to be “steady as she goes, but she is going down … we need a change in direction”.

(See also this from Bright Green Scotland on the budget: Retro Shock Doctrine as Thatcher’s Enterprise Zones return)

On Enterprise Zones: “They are a microcosm of the anarchocapitalist conditions Tories ultimately want to see applied to the whole country; they are laboratories, showrooms, and a grateful present to corporate masters.”

The Office of Tax Simplification (OTS) suggested a while back that George Osborne should merge income tax and national insurance. And it seems he may well do so.

Jim Pickard for the FT said on his blog yesterday that we can expect:

George Osborne will signal his medium-term intent to merge National Insurance and income tax. The idea is to convince the British public that they pay too much tax – preparing the way for a more low-tax future.

James Forsyth for the Spectator explains the scheming behind the plan:

if people were more aware of how much tax they really paid, they’d be more inclined to vote for low-tax parties [...] Equally, if income tax and National Insurance were merged, Labour wouldn’t be able to use increasing National Insurance contributions as a politically cost-free way of raising money to spend on the NHS.

So the merge would mean that income earned between £7,475 and £42,475, for example, is taxed at 32 percent and not – as it is today – that same figure only with two separate tax streams.

Logistically it is a way of cutting administration fees for NI contributions, while making the tax system easier and making contributions more transparent for people with payslips without calculators.

Strategically it is a way of making most people detest the 32%, instead of 20% + 12%, of tax they have to pay, and vote for the Conservatives, who are traditionally the lower tax party.

But there’s problems.

As Faisal Islam has noticed:

Savers and pensioners could share the burden of tax rises alongside workers. National insurance is a tax on hours worked, it is inherently biased in favour of wealth and away from working [...] 32p rate of tax on pensions and savings? Not a great vote winner [...]

At the cost of psychologically aiming to disincentivise tax and spend politics in the future, the losers will be those not currently being taxed on the hours they work – in reality earners, including high earners, will be taxed the same, just in one tax stream. Non-earners, like many pensioners, will see a pricey pinch in their tax burden.

This is a tax rise by any other name.

When Pesh Framjee, head of not-for-profit at the accountancy firm Crowe Clark Whitehill, realised that “If they merged national insurance into the basic rate of income tax, it would mean a huge windfall for charities,” he said:

It would be brilliant for the sector, but I don’t believe they would allow that to happen. The government would institute rules to prevent it.

Perhaps the government should institute rules to prevent non-earners being stumped by this mostly vain tax system reform. Even Tom Clougherty for the ASI sees the caveat:

Merging income tax and national insurance would be hard on pensioners, who currently pay the former on pension income but not the latter. Perhaps we should consider setting up a separate flat tax system for pensioners, like the ones in operation in Austria, Spain, Belgium and Cypress?

Include all non-earners and I’ll sign myself up.

Again with Osbornomics, this is a reform that looks well-meaning on the outside, but when you remove a few layers, you see that it hasn’t mitigated for all problems.

I’ve just been re-reading the Compass’ think-report entitled In Place of Cuts: Tax reform to build a fairer society. It postulates some very heavy hitting criticisms of two of the three major parties (formerly known as both major parties) on the level at which tax will be important in reducing the deficit until 2014-15.

It also makes some keen observations, very relevant today; namely, private investment’s dependency on aggregate demand from public investment and public consumption. Rightly the report notes that balancing the budget in the way the coalition is – in break neck speed – will shrink aggregate demand.

The report also puts forward some tax proposals that only few “orthodox” economists are pushing for today: they include a 50% tax rate for earnings of £100,000 – securing, to their estimates, a minimum of £4.7bn (compared to the saving made, introducing the same tax rate for those earnings at £150,000, which they estimate would be at a mere £2.3bn).

The report recommends a change of the definition “tax residence” and a tax on all financial transactions at 0.1% which would secure £4.2bn, among other measures set at achieving a total of £47bn – this revenue reducing the burden on cutting at the public sector.

As it is, cuts to the public sector mean 490,000 jobs will be cleared – just like that – and as many as that will shift in the private sector, for as Compass suggests, much of the demand comes from public investment and public consumption; take these away and the private sector suffers its own shrinkage.

Furthermore, take this many people out of taxation, then you reduce the amount of revenue drawn from that pot – not to mention the welfare payments that’ll have to be dished out as a consequence.

Most of this has already been spoken about, and indeed most people know this already. But what has been less spoken about is the severity of tax revenue being lost. As it stands, over the next four years the government intends to cut in the public sector and rely on taxation at a ratio of 80:20. But seemingly, that 20 will reduce in value as more jobs are lost, and, as is inevitable, the private sector becomes totally incapable of replacing them.

How long will it be before even 80:20 is no longer affordable on the grounds that the 20 is not drawing enough revenue? What’s more, when we cut at jobs and demand too hard, we fail to invest and grow – that’s obvious.

The context of Labour’s spending throughout its three terms was a previous Tory government who left behind a historically low level of spending and long term under-investment. With plans as they are, the Tory-Lib Dem coalition seems intent on doing the same thing to investment as it is cutting without growing (or only hoping, against ALL odds that growth will appear through magic).

At what point, really, do we just accept the Tories are anti-investment and anti-social?

I’m sure stranger, less logical, things have happened, but if we do invest and grow in the next five years, it will be a magical fluke. What’s for sure is there is no imagineable plan for growth that is anywhere near orthodox in its economic strategy – the mind truly boggles.