Friday, 28 January 2011

George's simple strategy for class war

Inflation is at nearly 5%, before the impact of the VAT rise. Meanwhile public sector workers suffer a two year pay freeze, potentially a real terms cut in income of around 10%. Private sector workers are averaging 2% pay settlements, and so are suffering a real terms cut too.

Osborne’s Budget and Spending Review slashed £18bn from welfare, while pensions will be reduced by shifting their uprating from RPI to the CPI, so those on welfare and pensioners are also facing cuts in their disposable income in 2011.

He’s announced over £80 billion in public sector cuts, while unemployment continues to rise.

‘Don’t worry’ says George, because the private sector is coming to the rescue – and to encourage them Osborne announced £24 billion in business tax cuts in the Emergency Budget in June 2010.

The Budget announced a 4% cut in corporation tax from 28% to 24%, a higher threshold for employer NI contributions and employer NI exemptions for new businesses, and a cut in the small business rate of tax.

This is the Osborne economic strategy: the public sector is too big, and is ‘crowding out’ the private sector. The Conservative narrative is that over-spending in the public sector caused the crisis and cutting it will allow the private sector to flourish – and the economy to revive.

Like George, this strategy is simple and discredited.

Leaked papers from his own ‘independent’ Office for Budget Responsibility (OBR) in June 2010 showed that if 600,000 public sector jobs were cut the knock-on effects would mean 700,000 private sector jobs would be lost. In the Comprehensive Spending Review, Osborne said that actually only 490,000 public sector jobs would go. However, the Chartered Institute for Personnel and Development looked at his figures and estimates that in fact there will be 725,000 public sector job losses as a result of the £80billion-plus cuts.

It’s not just the OBR that’s sceptical either. David Leigh, IMF economist, said “we should not kid ourselves. In the short term, tax hikes and spending cuts will reduce growth and raise the unemployment rate”, before adding “in today’s environment, fiscal consolidation is likely to have more negative short-term effects than usual”.

The Nobel laureate and former World Bank chief economist, Joseph Stiglitz, said in December that current policies meant “a slower recovery and an even longer delay before unemployment falls to acceptable levels”.

Unemployment rose to 2.5 million in December – it was the first rise in six months, and was swiftly followed by a further rise in January 2011. Long-term unemployment (those unemployed 12 months or more) is now at its highest since February 1997 and youth unemployment, at over 20% of 16-25s, is the highest on record.

Public sector job losses are only just beginning to feed through, yet there is no sign of private sector demand compensating.

The other problem for Osborne’s ‘don’t crowd out the private sector’ slash and burn policies is Ireland. The public sector has been slashed (services, jobs, pay and pensions), corporation tax is lower than almost anywhere else in Europe, and the economy is in a death spiral.

In fact, if you want to see what the future holds for the UK economy under Osborne’s economic theory you don’t need to look at a crystal ball, you need to look to the Emerald Isle.

This is because Osborne’s ‘crowding-out’ theory is just plain wrong. And wrong on two counts: the public sector didn’t cause the crisis; and secondly, and more importantly, cutting the public sector will not solve the economic crisis. If anything, it will worsen it.

I doubt that George fails to grasp this, but despite the negative consequences of his policies, especially for unemployment, corporate Britain is doing very nicely. Corporate profits are recovering nicely, especially in the banking sector where margins have expanded impressively, and the stock market is buoyant.

Due to the shortage, house prices have remained relatively stable (they have fallen around 40% in Dublin and over 50% in some US cities) even if the market is subdued, while executive pay is skyrocketing. Yes, 2011 will be a good year for the people that matter to George.

  • This article appears in the February 2011 issue of Labour Briefing under the heading 'By George, we've got it'

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