Budget: spinning, not turning

Capitalism is in decline. If anyone doubts it, the budget should persuade them, writes Mike Macnair

budget-2009-comment-50p-tax-is-political-posturing-$7032220$300The media response to last week’s budget has been dominated by complaints about the proposed new 50p in the pound (50%) tax band for incomes above £150,000 a year. This is a significant symptom of the current shape of the British political order. But it is perhaps equally noteworthy how little actually changes from budget to budget, compared to the level of spin.

Both, in different ways, tell us that British capitalist governments’ room for manoeuvre is now very limited. We are living under a capitalism ‘revived’ by state-based artificial means, which is actually a symptom of capitalist decline – like similar regimes in the later phases of earlier class societies.

50p whinge

Since the ‘credit crunch’ began to bite, the Tory leadership has pursued fairly consistently the theme that Labour has worsened the UK’s position by irresponsible borrowing and public sector spending and that the Tories will bring in a new ‘thrift’ in government. The Tory leadership’s response to the budget was more of the same: Cameron called at the weekend for a “new age of austerity”.1

The basic appeal of this line is to the Tories’ core activist support and electoral vote: the self-employed, small business people and farmers who have to balance their own books; pensioners whose fixed incomes are eroded by tax and rate rises; and traditional rentiers. More broadly, the ideas appeal – like many Tory ideas – to the politics of nostalgia for a pre-capitalist patriarchal world of farmers and small-town artisans. The more generic version – that Labour is incompetent in dealing with the economy – is beginning to catch on in wider layers. Labour has been in office for more than a decade and it is normal to blame the government when things go wrong in the economy.

It is, then, at first sight surprising that the predominantly Tory press has been diverted off this line by what can only be called a sustained whinge from the media about the new 50p tax band. Columnists attacking it directly are backed by the journos finding some businesses, and some celebs like Michael Caine, to say that they will leave the country rather than pay, and some ‘experts’ to announce that the new band will reduce the total tax take due to increased evasion and avoidance.2 The Blairites have joined the chorus, with Tony Blair himself letting it be known that he opposes the idea and Stephen Byers speaking against it.3

The overall effect has been to drown Cameron and Osborne’s message of ‘austerity’ and ‘thrift’ in a chorus of complaint about the ‘return of old Labour’ and the ‘politics of envy’.

Very few people have incomes above £150K to bring them into the new 50p band: around 350,000 out of the UK’s 49 million over the age of 16, or 0.7%, and less than 1% of people eligible to vote.4 Some of the most prominent in the last period have been the ‘City boys’ who are widely held responsible for the crisis.

Hence the media whinge looks on its face like very incompetent electoral politics, and exactly what Brown and Darling were hoping for when they made the proposal. That is, that the Tories will smear themselves as opponents of the rich bearing their fair share of the costs of the crisis. While the Tory leadership itself has been aware of the trap and avoided premature commitments to reversing the change, the Tory press has been less restrained.

So why is it happening? The simplest and most cynical answer is that some senior journos on the national dailies and other ‘media people’ are grossly overpaid (like the City boys), so that the 50p band will actually hit them personally. To say that this answer is cynical is not necessarily to say that it is wrong. But there are more fundamental issues at stake.

Overpaid journos

In the first place, to say that media types on upwards of £150K per year are “grossly overpaid” seems an odd statement. We live in capitalist society, so surely pay is simply fixed by the labour market (or rather the particular branch of the labour market)? And aren’t these media types bringing in readers/viewers/listeners, and with them advertisers, and thereby helping their employers to make large profits, from which the employers can afford the large salaries?

At one level these arguments are simply false in free-market terms. A recent article by John Thanassoulis in The Economists’ Voice argues that the bankers’ bonus culture was a ‘market failure’. The traders in stock and other financial markets would naturally seek the employers offering the largest share in the profits they generated by their market judgements: ie, the best bonuses. Banks were in competition for these traders with hedge funds; but hedge funds, because of their specialisation, did not need to carry the same capital base as banks, so could afford more risk. Hence, in order to remain competitive with hedge funds in the financial markets, the banks were forced to offer traders bonuses which incentivised the taking of ever-larger risks; this led to the banks carrying risks they could not afford. Shareholders, being dispersed and lacking relevant information, could not practically force the banks’ management to take on less risk. Since free-market incentives here create irrational results (‘market failure’), Thanassoulis argues that regulation of financial pay schemes is justified.5

I give this argument not to support it, but simply to make the point that the mere fact that there is a jobs ‘market’ in a ‘labour’ sub-sector does not imply in itself that the prices paid in this sub-market are justified in free-market terms.

In Marxist terms the point is somewhat different. The basic value of labour is the average cost of reproduction of unskilled or semi-skilled labour. Above this, there is a value premium on skilled labour, which reflects the socially necessary cost of reproduction of sufficient labourers having the relevant skill. This value premium includes both the cost of training time and some sufficient incentive payment to induce enough people (mainly youth) to put in the training.

Above this, there may also be a price premium if the existing skills owners have enough control to limit entry. For example, the English legal professions, by insisting on apprenticeships as a requirement of qualification to practise (‘pupillage’ for barristers, ‘training contracts’ for solicitors) are able to create a bottleneck on entry which limits competition. The result is that legal fees and professional incomes are held well above free-market outcomes.

None of this would explain senior media types being paid above £150K. What is going on here is that a distribution of profit takes the ostensible form of wages/salary (this is openly recognised in Thanassoulis’s discussion of City traders). But then why should media organisations distribute profit to some favoured employees in the form of salary? It isn’t just media organisations, of course. The ‘fat cats’ of the newspaper cartoons are found in every large-scale business. They are almost entirely receiving profit in the ostensible form of salary; rather less frequently in the form of ‘consultancy fees’.

The immediate answer is that the tax system creates incentives for this form of distribution of profits. Most obviously, companies pay corporation tax on their income before distributing dividends to their shareholders. But, as far as the tax system is concerned, excessive salaries are not a distribution of profits, but a business expense which reduces the company’s tax liability. There are various other ways in which it is tax-advantageous for businesses to distribute profits in the form of salary rather than dividend. It also has the private-law advantage that dividends paid when the company is actually insolvent can be reclaimed by the liquidator in the interests of the creditors, but this is only very exceptionally true of salaries, pension pots, etc.

In a sense, this system is at the expense of the shareholders: even with the tax advantage, high salaries on the scale currently paid to management mean lower dividends. But in the modern world, who are the shareholders? Mostly institutions who hold shares as assets to back insurances, on behalf of pensioners and so on; a few large players; to a very much lesser extent, small private investors (again, largely pensioners). The managers of the institutions have every interest in going along with profits being distributed in the form of salaries; the large players will also hold directorships, etc; the small investors are both marginal and atomised, incapable of effective common action without backing from larger players.

The fact that the tax system works in this way is probably originally an accident. But it creates important social and political effects. In substance, excessive salaries buy loyalty. In terms of the ruling class, what is involved is the displacement of the individual capitalist (now almost invariably no more than a petty bourgeois) by corporate, institutional capitals. The human ruling group in society are now mainly managers who identify themselves with the corporate capitals they manage, since these supply them with a share of profits in the form of ‘salary’.

Overpaid journos are not in the same way part of the ruling group. Their overpayment is more like Thatcher’s immediate decision when she came to power in 1979 to raise police pay by 45%, to secure police loyalty for the conflicts she expected to follow.6 It is this media loyalty which is expressed by the mass whinge about the 50p band.

Loyalty to what, exactly? The answer is loyalty to the existing regime as it has developed: that is, to the corporatocracy – and to the major shift of increased inequality and reduction of the wage share of economic output that has developed since the 1980s, one of whose vehicles has been the reduction of top rates of tax. Overpaid media types may personally lose money through the 50p band. But what animates the great media whinge about it is just as much the fear that a cow that has been sacred since the 1980s – that the rich should pay less tax – might lose its sanctity.

Capital mobility

Like all effective ideology, the great whinge about the 50p tax band contains an element of truth. And this element of truth is that the new band will produce an increase in illegal evasion and the use of ‘legal’ ‘avoidance’ devices, and will produce at least some flight of capital. This, after all, was what happened in the 1970s (and had already begun in the 50s and 60s). The question this poses is how far the UK government – and other governments – are prepared to go to curb these devices.

Tax competition between states has been one of the dominant themes of the last 30 years. An important role in this competition is played by ‘tax havens’ or ‘offshore centres’: small states with small populations, incapable of defending themselves, which live by providing confidential financial services. Direct tax competition between large states is much less significant, because most such states have heavy expenditure commitments which they cannot abandon without collapse or revolutionary overthrow, and therefore cannot risk large-scale and rapid reductions in the total tax take.7

The fact that the tax havens – with the exception of Switzerland – are actually incapable of defending themselves is of some importance. It means that the system of tax havens and tax competition, which is against the interests of the large majority of states, exists because of the support of the US and to a lesser extent the US sidekick, the UK. Without that support, simply closing down the tax havens by military action would be low-cost and high-gain for most states. A significant number are British overseas territories: ie, remaining formal colonies.

The April G20 meeting promised some sort of crackdown on tax havens. But like all the G20’s promises, this was pretty vague, and the few countries targeted felt safe enough in making very limited moves towards cooperation with tax authorities in relation to illegal evasion – which is very narrow.

In this context the media whingers’ threat that the 50p tax band will lead to flight of the rich and of capital means one of two things. One possibility is that the whingers have not yet caught up with the brave new world post-credit crunch. The second, and far more likely, is that there is no brave new world. The G20 promises are mere posturing, like the OECD’s 1998 ‘Harmful tax competition’ report.8 The US and UK states, behind the political facades, continue to back the regime of tax havens and tax competition. Raising taxes on the rich will therefore continue to produce flight, evasion and avoidance.

That this is the case tells us something fundamental about the capitalists’ and their states’ perception of the world post-credit crunch. The immediate panic phase is over. While markets seemed to be in free fall and financial institutions were collapsing left, right and centre, there was all sorts of talk about a decisive break with neoliberalism and the post-1980s world order. As the bailouts and stimulus packages seem, for the moment at least, to have stabilised the financial institutions markets, this talk is coming to an end. We are moving – gradually – back towards ‘There is no alternative’.

This context limits the government’s room for manoeuvre. It cannot seriously tax the rich: that would require a reversal of global policy. Such a reversal would probably have the incidental effect of impoverishing the British state, since London is also – in some respects – an ‘offshore centre’.

It is going to have to raise taxes elsewhere and to make cuts. The problem is where these are going to come. The Budget report provides a long list of £35 billion worth of expected ‘efficiency gains’ to be made in “back-office functions” to preserve “front-line services”; but these are not seriously believed: such claims have been made repeatedly, not only by this government, but also by previous ones.9 Cameron’s promise of ‘austerity’ is mainly a promise of public expenditure cuts; but so far he and Osborne have been studiously avoiding saying what will be cut. This is partly a problem of avoiding political traps.10 But it is also a real problem of lack of room for manoeuvre in relation to government income and expenditure, which has affected Brown and Darling just as much.

Income

The media coverage of budgets has acquired over many years certain routine characteristics. It is all about spin. Government spin to sell itself to the electorate, and opposition spin to undermine the government.

Hence, it does not tell us real facts about government income and expenditure and the choices involved. It tells us about headline changes in tax rates (like the 50p band, or 13p on a bottle of spirits) or about government management of the economy – overall tax, borrowing and spending, and economic forecasts.

The Budget report does at least have some figures. They are buried in torrents of spin – the full report is 268 pages long and a high percentage of it is NuLabSpeak waffle. The categories are often misleading or insufficiently broken down. It is beyond both my skills and the available time to work out a proper breakdown and reconstruction. The Budget report does at least at an early stage provide outline pie charts of income and expenditure which are some use in indicating the nature of the problem (Figs 1 and 2).

On the income side, the overall tax take in 2008-09 fell by £11.2 billion (2.25%) as a result of the crash, and is expected to fall by a further 8% in 2009-10. Around 45% of income is provided by income tax and national insurance contributions on wages, expected to fall by 4%, while income tax on savings is reflected to fall more dramatically as a result of interest rate cuts – by 75%. Financial sector corporation tax fell by 32% in 2008-09 and is expected to fall further, to 40% of its 2007-08 level this year. North Sea revenues are expected to halve with the crash in the oil price (pp230-232).

Among the property and capital taxes, capital gains tax rose in 2008-09 as gains were reported in advance of a change in tax regime, but is also expected to fall sharply. Inheritance tax fell by 25% and is expected to fall further. Stamp duty receipts fell by 50% with the collapse in the property market and are also expected to fall further in 2009-10 (p232).

Rates and business rates, which fund local government activities, are included in the pie chart at p12, but not in the analysis of the tax take. The most striking feature is that the projected tax take from domestic rates is larger (£25 billion) than that for business rates (£24 billion). Though the document does not discuss this, the reason is that the non-domestic rate multiplier has since 1990, when the uniform business rate was introduced, been set lower than the rate of inflation. The real value of the business rate take has therefore consistently declined, with an increased share of local government spending being loaded on domestic rates. The UBR is also (like domestic rates) sharply regressive: that is, Tesco pays very substantially less per square metre than a corner shop does.

Among consumption taxes, VAT receipts fell sharply and are expected to fall by a further 19%. Petrol excise duty fell due to lower demand for fuel, though less dramatically, and the government expects to recoup the loss by raising the duty. Excise duty on alcohol actually rose in relation to the 2008 projection: evidently people treat booze as a necessity rather than a luxury in a recession (p233). Overall, government tax income is therefore quite badly squeezed, simply by the recession.

Socialist Worker’s response to the budget is to call for the government to “Take all the cash from the super-rich”: “Britain’s 1,000 most super-rich individuals are still swilling around in £258 billion … All their money should be taken off them. This, along with stopping military spending, could be used to fund our jobs and services, and ensure that ordinary people do not bear the brunt of the recession.”11

This makes for a catchy and populist slogan, but is hopeless political economy. Even if the holdings of the super-rich were liquid cash, £258 billion is slightly more than half the annual state tax take of £496 billion projected in the budget. The holding of the super-rich are, in other words, small beer relative to the state budget.

Moreover, the money values of the capital holdings of the super-rich are not “money” which, if “taken off them”, could simply be spent by government on jobs and services. Part is notional values on antiques, jewellery, stately homes, etc, which are only really worth anything as long as there are super-rich buyers for them. The real values among them are capitalised valuations of expected income streams from capital assets – rent on land, dividends on shares, interest on loans – on the assumption that capitalism will go on functioning as it is.

Generalised expropriation would leave the state with the land titles and shareholdings, but destroy the functioning of money as money, so that there would be short-term hyperinflation. What would then matter would be maintaining and controlling the material surplus product. This would pose utterly different ‘accounting problems’ to those of the budget.

Progressive taxation and specifically a graduated income tax are important ideas for communists to be promoting now. The reason is not their effectiveness in raising revenue, but the challenge they pose to the capitalists’ sanctification of property and inequality. To that extent, the 50p tax band is genuinely a positive move, for all that it is a token gesture. But the project of the revolutionary overthrow of the state does not consist in demanding that the Labourites should soak the rich more than they are doing. It is primarily about the working class taking control of the allocation of resources. And this is at the end of the day in the first place about political democracy and democratic control of the giant resources of the state and the corporations, not about super-rich individuals.

Expenditure

The Budget projects expenditure of £671 billion: an overall deficit of £175 billion for 2009-10. Where is the money going? The pie chart on p12 divides it ‘by function’ into 11 categories, one of which is “other”; pp238-39 has slightly more detail on the division between income spending and capital spending and the budgets of particular departments. The functional division probably obscures important facts, but is as far as I can usefully get for present purposes.

By order of size, the categories are as follows. The largest is ‘Social protection’, expected to claim £189 billion. This is another expression for the benefits system providing basic support for the unemployed, long-term sick and so on. The government is raising the total sum budgeted because it expects further large increases in unemployment. But at the same time it is attacking the existing unemployed through efforts to get people off the long-term sick and phoney workfare schemes.

A small note within this. A substantial element of the cost is housing benefit. The reason for the scale of this cost is two Thatcherite measures Blair-Brown have not repealed. The first is deregulation of the private rental sector (abolition of rent control). The effect is that the government, through housing benefit, supports private landlords under the pretence that there is a ‘market rent’.

The second is that local authorities are now required to charge ‘market rents’ for council houses. These are then paid … by the same local authorities in the form of housing benefit. The cost, in turn, falls largely on the central budget through government transfers to local authorities. Jobs are created for clerical workers and managers in housing management and housing benefit offices … by cycling money from government office to government office.

The second largest category is the health service, at £119 billion. Expenditure on the NHS has gone up dramatically in recent years. As with housing, there are budgetary problems attributable to New Labour’s neoliberal commitments and to its centralist control-freakery. These are expressed in the massive increase in NHS managerial costs over the last 10 years; in the amount wasted on league tables, etc, and on applications to special-purpose funds; and the enormous waste (and degradation of the end product) involved in the private finance initiative.

Third is education at £88 billion. PFIs are again relevant here and – because local government is involved – the waste of money and increase in costs produced by compulsory competitive tendering (CCT).

“Other” at £72 billion covers “spending on general public services; recreation, media, culture and sport; international cooperation and development; public service pensions; plus spending yet to be allocated and some accounting adjustments”. It would be helpful to have these disaggregated, especially since the Tory press is campaigning against public sector pensions as unduly generous: public sector pensions do not look like being on their own a really big-ticket item, and reducing them is likely to imply increasing other aspects of ‘social protection’ and ‘social care’ spending.

From here we fall abruptly to a group of items in the £20 billion-£40 billion range: defence at £38 billion; ‘public order and safety’ (police and fire services, etc) £35 billion; personal social services (mainly for the elderly) £31 billion; housing and environment £29 billion; debt interest £28 billion; transport £23 billion; industry, agriculture, employment and training £20 billion.

Cut where?

OK, if you were David Cameron and George Osborne, in charge after the 2010 election (I know this is a pretty repulsive idea), trying to make radical cuts in public spending, which sacred cow or cows of government spending would you slaughter?

The problem is simple. The actual evidence of CCT in local government, of ‘market reforms’ to the NHS, and of PFIs in the NHS, education and transport is that they increase the overall net cost to the taxpayer, while reducing the available frontline services. Their only benefit is profit creation for some construction companies and job creation for sections of the white-collar working class and the managerial middle class.

The compulsory insurance systems of medical care operated on the continent may provide better care, but they are actually more expensive per capita than the NHS was until recent marketising ‘reforms’. No-one (unless they had been paid off by a US health provider company) would wish to introduce the US fully private healthcare system. The unemployed are the obvious target, but in the first place their disposable income has already been squeezed very extensively, and in the second place to attack the housing benefit system would be to attack a significant part of the Tories’ base – the private landlords.

Further, almost any of the radical reforms that might be introduced to cut public expenditure would make the UK a less attractive place to do business: the employer would need to provide private healthcare or education systems, etc and/or – suppose that, for example, the unemployed were to be allowed to starve – to expect massive increases in property crime, communicable disease and public disorder. To make the UK more like a ‘third world’ country in terms of its welfare provision would thus make it unattractive to business, since it would then be in direct competition with actual ‘third world’ countries with their large peasantries and hence labour markets heavily skewed against labour.

Government – Labour or Tory – thus has very little room for manoeuvre. The Tories when they get in will certainly talk the talk of rolling back the frontiers of the state, and may try some pretty extreme measures (like the poll tax last time around). They will almost certainly make us all (except the very rich) worse off – and blame the ‘unfortunate necessity’ on Labour’s ‘poor stewardship’. But it is in the highest degree unlikely that they will actually roll back the frontiers of the state or actually reduce the overall tax burden. They will fiddle at the margins and spin to exaggerate the importance of what they are doing – like Blair and Brown.

Declining capitalism

The Budget report calculates overall UK GDP for 2008 at £1,275.3 billion – consisting of household consumption £830.3 billion, general government consumption £261.2 billion, fixed investment (both government and private) £219.5 billion, change in inventories £1 billion, exports of goods and services £350.9 billion, and less imports of goods and services £388.9 billion (p216). These figures are of limited value, but they give some partial indication of the sheer scale of the role of the state in the economy.

As an economic order declines, the state steps in to fill the gaps created by this decline and keep the old order alive, protecting the privileges of the old ruling class and holding down the subordinate classes. Classical antiquity was an economy of cities; the Roman empire created a system-wide state, but this state created and supported cities until it, too, collapsed.12 By the 16th century real feudalism, both in Europe and in Japan, was in decline. The result was not (except in the Netherlands and Britain) bourgeois revolution, but the creation of the absolutist state, regimes of state-sponsored feudalism, state-sponsored religion and state-sponsored guild corporations.

The real immobility of the budget and the dominance of hype about it on both sides of the political divide show that capitalism, at least in its heartlands, has reached this stage of development. Thatcherism-New Labourism is not a regime of healthy capitalism. It is a regime of state-based, artificial capitalism, like the state-based, artificial urbanism of the Roman empire or the state-based, artificial feudalism of absolutism or the Tokugawa Shogunate. The ship of state cannot turn from its course forward to increased dominance of the economy: it can only spin.

Under these conditions the problem is not to overthrow the decorative elite which signals to the state its own capitalist character – Socialist Worker’s “hyper-rich”. These people are merely ornaments. The problem is to overthrow the capitalist state and win real, working class, democratic control.

Notes

1. The Guardian April 27.
2. Celebs: see, for example, Daily Mail April 27; experts: The Sunday Telegraph April 26.
3. Blair: The Sunday Telegraph April 26; Byers: The Guardian April 28.
4. 350,000: estimate on www.thisismoney.co.uk/tax-advice/income-tax/article.html?in_article_id=483056&in_page_id=77&expand=true
49 million: from www.statistics.gov.uk/STATBASE/xsdataset.asp?More=Y&vlnk=1327&All=Y&B2.x=101&B2.y=14
It is right to use the figures for people above 16 rather than the smaller 31 million figure for the UK labour force (between 16 and retiring age) because, of course, certain people above retiring age (like Michael Caine) will have incomes above £150K. The number eligible to vote is somewhat smaller because of 16-18-year-olds and resident non-citizens.
5. www.bepress.com/ev/vol6/iss5/art2
6. The Police Federation’s point of view at www.metfed.org.uk/news?id=326 ; the loyalty point from a Tory point of view: Philip Johnston, ‘Thatcher kept the police onside’ – blogs.telegraph.co.uk/philip_johnston/blog/2007/12/07/thatcher_kept_the_police_onside
7. Most of what will be found by Googling “tax competition” is US-based rightwing advocacy for the merits of tax competition. www.taxresearch.org.uk/Blog/ takes an anti-tax competition line. A 2004 IFS working paper attempts to analyse the extent to which tax changes in OECD countries have been driven by forms of tax competition: www.ifs.org.uk/wps/wp0405.pdf
8. RS Avi-Yonah, ‘The OECD harmful tax competition report: a 10th anniversary retrospective’, University of Michigan Law and Economics, Olin Working Paper No08-013 (2008) argues for some substantial results from the OECD report, but these are really no more than promises about cooperation.
9. www.hm-treasury.gov.uk/d/Budget2009/bud09_completereport_2520.pdf , Table 6.1, pp129-132.
10. Martin Kettle: www.guardian.co.uk/commentisfree/2009/apr/26/conservatives-cameron-cheltenham
11. www.socialistworker.co.uk/art.php?id=17794 , posted April 28, dated May 2.
12. JHWG Liebeschuetz The decline and fall of the Roman city Oxford 2001.

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