A budget for the 1%

imageIn a classic Tory move this week’s budget reaffirmed this government’s commitment to the wealthiest earners in the UK by dropping the 50% tax rate to 45% writes Susan Pashkoff. We see a continuation of lower corporate taxes. Instead of a coherent tax on wealth based upon housing valuation combined with income to try to control for increased valuations in certain areas, they pass a stamp duty upon transfer of houses of valued over £2 million to 7%. To close some tax leakages, they have articulated a 15% stamp duty if housing valued over £2 million is purchased by companies (this will clearly not affect housing speculation on houses purchased by companies at a value less than that amount; possibly 4000 houses a year are sold at the £2 million value). Moreover, if these houses are not sold, there is no stamp duty earned.

Based upon the delusion that it is the wealthy that create economic growth, the government has covered businesses and the wealthy while destroying incomes of the poorest due to the austerity measures. The raising of the threshold of tax for the working poor while at the same time destroying child benefits and tax credits and increased VAT also limits the value of the limits to not paying income tax. What is also being played down is the threat that an additional £10 billion cuts targeted to come from “welfare” benefits is due to be rolled out in 2016. There is no doubt that the policies in today’s budget have increased the difficulties for pensioners who have lost allowances, meaning a decrease in retirees’ incomes.

Consistent with their belief that growth derives from the wealthy rather than from the majority has led to no policies to enable job creation, no relief for those whose incomes are being squeezed, and literally nothing resembling an industrial policy which they are leaving to the private sector. It has been clearly demonstrated that supply-side growth is a fantasy, yet this government persists in creating poverty chasing the dream of trickle-down economics. As a matter of fact, government policies undermining the public sector have yet to be felt; expected total direct job losses of 710,000 which are not being met by private sector hiring even at lower wages and benefits. Those on benefit were not helped today; in fact, they were totally ignored in this discussion except for a reference to the additional cuts in welfare benefits in the future. While the government babbles about working Britain, they are, creating rising unemployment. This decrease in incomes brought about by rising unemployment, increased indirect taxation (e.g., VAT, fuel duties), attacks on the incomes of the poorest cannot enable further economic growth nor will it stimulate private investment irrespective of how low they drive wages. The fantasy that if we create a flexible labour market (read as a low wage labour market) we can compete with emergent economies has let them to forget some basic economic realities; business invest, increase size of firms, and hire people if they perceive that there is higher possibilities for profitability demonstrated by current and expected demand for goods and services produced.

The additional threats in the budget to National Trade Unions collective bargaining and the institutionalisation of pay differentials between regions which are demonstrably clear between private and public sector and especially for women received scarce mention in media coverage.

Is this a budget for business? Well it certainly favours them. What is more doubtful is whether it will create short-term and intermediate term economic growth. Lower taxation for business and/or tax relief does not guarantee investment which is necessary for economic growth. In fact, we have seen quite clearly that historically job creation does not arise simply by lowering corporate taxes or favouring certain industries. Perhaps they are hoping to combine this with lowered regional wages which again is consistent with their perspective on what creates economic growth.

Corporate Tax Policy:

The continuation of beggar thy neighbour corporate tax policy with corporate tax being lowered to 24% this April and to be reduced to 22% by 2014. (to compare with Corporate tax in US, Ireland, Germany, etc. See here).

Tax breaks for the pharmaceutical industry, high tech, IT and film industry, i.e., so called creative industries. Targeted tax reliefs for so-called creative industries; even in The City these measures are said not to increase growth in the short-term, but may have long-term effectiveness in strengthening these industries.

A policy beloved of neoliberalism, Enterprise zones are to be the vehicle upon which economic growth is created . These zones which were introduced earlier in the UK in the 1980s had rather mixed results as an understatement:

“The enterprise zones will offer a business discount rate worth up to £275,000 over five years for firms that move into the area over the course of this parliament. The government said it will also help develop "radically simplified" planning processes, and pledged to introduce superfast broadband in the area.

The chancellor also said he would consider enhancing capital allowances for plant and machinery in the zones and announced that, for at least 25 years, all business rates growth within the zone will be retained by local authorities to support their economy ().”

Do these so-called enterprise zones create jobs or are business that were going to do this anyhow simply shifting locations so as to take advantage of the guarantees offered in an enterprise zone? Evidence suggests that results are mixed, that jobs that are created are very expensive (due to tax breaks), show a quick boom, but are certainly not long-lasting. Moreover, the transfer of jobs within the country to take advantage of tax breaks means that these are not job creating; but job transferring. According to Andrew Sissons of the Work Foundation , only 25% of jobs created in enterprise zones in the UK were new jobs rather than transferred jobs sometimes from within the same county.

“However, of these 63,300 jobs, only 13,000 were estimated to be new jobs – in other words, 80% of jobs created by Enterprise Zones were displaced from other areas. Many of these jobs were displaced from within the same town – estimates range from 25% of jobs displaced from within the same town5, to 86% of firms relocations within the same county. Further, evidence from a survey of companies that located within Enterprise Zones suggested that only around 25% of new jobs were attributable to the Enterprise Zone designation ( p.4).”

Personal taxation policy:

Unsurprisingly as this has been widely discussed, the 50% tax rate to be lowered to 45% in April 2013. So income tax breaks for the highest earners supposedly because they do not raise enough revenue and also it makes the UK appear to be unfriendly to business and the wealthy. Lovely, so it is fine that the UK is unfriendly to the poor and unemployed. Impoverishing people is perfectly ok as long as business sees the UK as business-friendly; clearly poor and desperate people are seen by this government as a demonstration of their commitment to Domestic and International Business and International Finance. One of the main complaints is that hiring skilled workers from overseas is being hampered by the 50% tax rate. Rather than concentrate on the vast numbers that will be facing unemployment due to the introduction of austerity measures and trying to encourage job creation or actually do direct government job creation, we have a government whose sole concern is bringing in skilled highly paid workers from overseas. Businesses supposedly will not relocate here if those earning high incomes actually have to pay taxes. It is far more convenient to impoverish large numbers of people, force the relocation of the poor from the centre of London due to cuts in housing benefits, to target families than heaven forbid we tax the highest earners.

Another change in the budget is that child benefit to be eliminated for those earning over £60000; it is also to be phased out for those earning £50,000+. As soon as the higher earner makes over £50,000, the benefits will be phased out. So a couple with both earning £45,000 (combined earnings of £90,000) will keep benefits, while a couple with one employed and one staying home as a child minder earning £60,000 will lose child benefit. Again this affects the higher earners, so they are hoping that their voting base will not be too affected by their austerity measures.

In an attempt to show that “working pays” income taxes are to be eliminated for those earning less than £9,205. Given cutbacks to benefits, the loss of tax credits, child benefit and de facto decreases in income due to increased VAT and wage freezes, what needs to be examined is exactly how much the balance is between no longer paying taxes compared to the loss of benefits; in other words, how much have they given back compared to what they have taken away. The poverty level in the UK is 60% of median income; it needs to be asked if people earning so little should have been taxed in the first place as they are barely earning enough money to cover themselves and their families.

“The post-recession fiscal tightening is under way, and reforms to the tax and benefit system are playing their part: about 20% of the reduction in government borrowing by 2016–17 is planned to come from tax increases, and a further 14% from welfare cuts. Following indirect tax rises (in particular the rise in the main rate of VAT from 17.5% to 20%) in January 2011, totalling about £12.8 billion per year2 (about £480 per household, on average), and a net ‘takeaway’ of about £3.9 billion3 (£150 per household) in 2011–12 from tax and benefit reforms introduced during that year, a further net takeaway of about £4.1 billion (£160 per household) is planned for 2012–13 as a result of additional tax and benefit reforms. Note that the takeaway from these same reforms will rise substantially to about £9.8 billion (£370 per household) in 2013–14, once all the revenue from tax liabilities accruing in 2012–13 has been collected and once the full-year effects of changes to fuel duties and Child Benefit (in August 2012 and January 2013 respectively) are felt (Robert Joyce, Tax and benefit reforms due in 2012-13, and the outlook for household incomes, , IFS publications, p.4).”

Table 1. Projected cash-terms median household income in 2012–13: equivalent weekly amounts for different household types

Number of dependent children (aged under 14)

None One Two Three

Single £293 £381 £468 £556

Couple £438 £525 £613 £700

Source: Joyce, p.16;.

An obvious point is that those dependent upon benefit already are tax exempt; so all the ConDem government has done for the very poorest and most dependent (lone parent homes predominately run by women, disabled people, unemployed couples with children and children themselves) is to impoverish them; inevitably, the vast majority of the budget cuts are being felt by those that already do not pay taxes.

Perhaps the strongest response to the budget was the changes to age related personal allowance for those reaching 65 after 2013 whom will no longer receive the higher allowance rate. Age related personal allowance to be eliminated will affect those that are planning to retire.

This is confirmed by both the Telegraph and the Guardian:

“Pensioners will pay £3.3bn more tax by 2016 to fund the fiscal “simplicity” promised by Chancellor George Osborne in Budget 2012. That’s the Treasury estimate of how freezing age-related allowances will increase receipts at HM Revenue & Customs (HMRC). At present, everyone aged 65 or more is allowed to receive £9,940 a year and everyone aged 75 or more can receive £10,090 before they have to pay any income tax.

Allowances are usually increased each year in line with inflation. But Mr Osborne said the age allowances will be frozen from April, 2013. Treasury documents make it clear that keeping them at £10,500 and £10,660 respectively will raise revenues by £360 during that tax year, rising to £1.25bn a year by 2016; a total of £3.3bn over the next four years. […]The burden will fall on pensioners with below average incomes. At present, the age allowance is clawed back where income exceeds £24,000 at a rate of £1 lost allowance for every £2 of income above that threshold. As a result, pensioners aged less than 75 receive no age allowance if their income exceeds £28,930 while those aged 75 or over lose all their age allowance where income exceeds £29,230 .”

According to the Guardian:

“The loss for existing pensioners will be £63 a year and £197 for new pensioners. Higher figures were produced by independent pension advisers. In his speech Osborne made little of the announcement, and will realise that he is going to be criticised by pensioners’ groups. The Treasury argued that overall pensioners have been relatively well protected since the coalition came to power.”

According to Martin Lewis this is a “back-door tax rise for pensioners … freeze tax allowances when earnings go up, you pay more tax. Those retiring will get no age related allowances until others catch up; hence that means more tax for pensioners.” Essentially the older you get, the higher your allowances … you can earn e.g., £10,000/yr without paying tax; for those currently retired, tax allowances are frozen while others catch up due to the new allowances; for new pensioners, they will not have those tax allowances and hence will be paying more tax.

Household Composition

Equivalised household income per week

Before deducting housing costs

After deducting housing costs

Couple with no dependent children



Single adult with no dependent children



Couple with two dependent children aged under 14



Single adult with two dependent children aged under 14



Three adults, no children



(From: Choices of Low income threshold, The Poverty Site, http://www.poverty.org.uk/summary/income%20intro.shtml)

So, is this a job creating budget? No, tax cuts for businesses have not been shown to be job creating. Job creation is more dependent upon expected increased demand for goods reflecting possibility of increased profitability. In the absence of that, job creation is not forthcoming. Additionally, considering the numbers of jobs expected to be cut in the public sector, the private sector seems both incapable and unwilling to replace jobs lost. Moreover, job creation must be given priority; if more capital intensive techniques are used in free enterprise zones, then job creation will be far more limited than may be the case using directed investment.

Given that estimates are 710,000 jobs are to be lost at all levels of the public sector due to the cuts, there is seriously no possibility of the private sector (even with the fact that wages are lower in private as opposed to public sector) replacing job losses. Supply-side economic policies are not growth creating, as such they are not job creating. It is far more coherent to either directly invest in green manufacturing, use direct government jobs creation, and/or to protect incomes of the poorest directed towards consumption of good’s produced domestically (e.g., food).

To add insult to injury, the proposals for Regional Pay will institutionalise low wage areas and is certainly an attempt to destroy national trade union’s ability to collectively bargain over wages. Creating areas of deliberate low wages (which again given disparities between regions in terms of private and public pay and gender differentials which are substantial) will not automatically bring businesses running to those areas; they honestly cannot compete with emergent economies or third world countries. These differentials will be then be institutionalised, which will certainly be used to lower wages in other areas under the rubric of competition. Moreover, low wage areas and regional negotiation are deliberately part of the attempt to completely undermine social subsistence levels of wages; invariably, due to high levels of unemployment and low wages, we will be seeing much higher rates of exploitation compared to other parts of the UK. So while they stand a chance of shifting work to those areas, work will be incredibly exploitive and the low wages will be used as a lever to undercut wages throughout the country. However, even with these low wages, they are not at the levels of emergent and peripheral economies and as such this “competition” is only being used to impoverish the British working class.

All this budget will do is increase wealth and income inequality. Moreover, that is what it is designed to do. This government believes that increasing this inequality is what will enable economic growth along with providing incentives to businesses through tax breaks and a low wage flexible labour market. According to those that think Say’s Law holds, savings of the wealthy will create investment and that will enable economic growth. History has demonstrated the failure of this piece of economic ideology; oddly the ConDem government has not heard the news … odd because this was demonstrated conclusively during the Great Depression and every time that deregulation, free-market stupidity is advanced as economic policy.

  1. You mention the proposed cut of £10 billion to come from welfare.

    Will the introduction of the universal credit system next year produce savings from welfare, and how will this be achieved? By requiring claimants to pay for any housing costs from the unified credit benefit?

    • these additional cuts in welfare that they have mentioned in the budget is on top of what has already been cut. People already are slated to pay for any housing costs from the unified credit benefit; that means that you are only entitled to £500/month. They probably will continue to force local councils to cut services as well as lower the amount that people are eligible to receive. The manner in which they plan to do the next series of cuts will certainly affect those not only in the lowest brackets; it is possible that they will extend means testing for other benefits that people receive as well as other measures. So, I am speculating here as I am uncertain what they will be going after specifically. But I wanted to clarify that the benefit cap is already being introduced and that people’s housing benefits are already included in the cap which also includes disability, sickness, unemployment, and child benefits.

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