Thursday, 13 November 2014

Why Osborne hasn't (and won't) balance the books

Andrew Fisher, author of The Failed Experiment ... and how to build an economy that works, explains the abject failures of Osbornomics

To say George Osborne's economic strategy has been an abject failure is uncontroversial. It is not just the more left-ish sections of the press commentariat who believe so, even The Spectator (in-house journal of the Tory Party formerly edited by London Mayor Boris Johnson) is scathing.

Its new editor Fraser Nelson pointed out in a new blog this week that the UK now has the largest deficit in Europe (see graph below), and he also regularly reminds people that despite Britain being "on the brink of bankruptcy" (George Osborne, 2010 Emergency Budget), this government has borrowed more in four years than Labour did in the 13 previous.

At the 2012 Budget George Osborne predicted that between 2010/11 to 2016/17 that a buoyant economy would mean Income Tax receipts up 33.9%; National Insurance up 36.1%; VAT up 40.7%; and Corporation Tax up 14.9%.

However the reality is on course to be dramatically different (see chart below, courtesy of Luke Thomas - though a Ben Chu original).

It's important to understand why this is happening. Although the reasons are inter-related, let's look at each tax revenue stream independently - starting with the worst-performing and working our way up:

Corporation tax receipts - whether measured from 2008 or 2010/11, they have fallen. This is unsurprising for three main reasons:
  1. George Osborne has cut corporation tax from 28% (in 2010) to 21% this year (and it's due to be cut to 20% from April 2015). Lower taxes unsurprisingly bring in less revenue.
  2. Corporations are avoiding tax on an industrial scale (as the recent Luxembourg leaks show). This government, like its predecessors has done little to fundamentally change that fact - and doesn't want to.
  3. In many sectors companies are having to cut profit margins to maintain the loyalty of hard-pressed consumers (see below).
Income tax and capital gains receipts - although they are back where they were since 2008, they are - in fairness to Osborne - up almost 10% since 2010/11. However this is a long way off the 33.9% that was forecast by 2016/17. Furthermore monthly ONS data on the public finances this year shows little sign of any pick-up in 2014. Given it's taken three years to get just a 10% rise, a further 20 percentage points seems unlikely in the next 18 months. So why is this?
  1. Real wages are falling, down 10% since 2008. So because people's incomes aren't rising, neither are tax revenues. We have an increasingly low pay and insecure labour market. This is the key reason (and more on that in a future post)
  2. The government has also cut income tax - most gratuitously on the richest 1% (cutting the highest rate from 50% to 45%, but also raising the income tax threshold in real terms which benefits higher earners as well.
  3. Imagine how much worse this would be without the extra £billions from migrant workers, had the government succeeded in capping net migration to the tens of thousands. 
National Insurance receipts - while these are up 12% since 2008, and up 10% under Osborne, this is unimpressive progress towards the 2016/17 target of 36.1%. With "record levels of employment" as Osborne frequently proclaims - and no mitigating tax cuts or threshold rises in this case - why is the record still one of failure?
  1. As for income tax receipts, real incomes are falling and so workers are earning less and paying less than was forecast
  2. Again, as above, this would be even worse had the government succeeded in capping net migration to the tens of thousands
VAT receipts - the unalloyed success of Mr Osborne's tax policy? No, it's the exception that proves the rule. I don't just mean that in the glib cliched way - here's why:
  1. The government increased VAT from 17.5% to 20% - in itself a 14.3% rise - so it's not a surprise that revenues rose too.
  2. The consumer economy has held up well, thanks to rising personal debt levels after the initial paying down of debt post-2008 (deleveraging, in economist-speak). This is reflected in the graph above: VAT receipts dipped dramatically after the crash, then started rising again, mirroring personal debt.


So with the deficit rising again this year, it's unsurprising that the FT had more bad news this week:
"the annual savings needed to meet his austerity targets are set almost to double to £48bn, Financial Times analysis shows"
Of course this figure should only be used illustratively never implemented. A rational response to Osborne's abject failure would be to say "austerity didn't work, it's counterproductive, and this shows the sort of damage that would be inflicted on public services by doing so".

Two conclusions arise from this: despite the evidence austerity isn't working Osborne believes it will in the future and is therefore stupid, and/or is using 'austerity' as cover for dismantling public services; secondly, by saying he'll stick to Tory spending plans Ed Balls is a political coward scared to stand up to the austerity orthodoxy, and/or is happy to see public services dismantled too.

Regardless of whether you think our politicians are stupid, dishonest or malevolent, one clear conclusion shines through: their policy - austerity - hasn't and won't work. It has to be stopped.

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