Kenneth Clarke's first budget as Chancellor of the
Exchequer, to be unveiled next Tuesday, has been the subject of more
speculation than any other budget in the past decade. This is partly a matter
of the novelty of having a budget in November combined with the autumn statement
on public spending – but it is also the product of a widespread public feeling
that the economy is in a mess, and that what Clarke does next week will
determine whether the mess is cleared up or whether it gets worse.
Britain has been in recession for nearly four years now, and
signs of recovery are still faint. For all Britain's recent successes in non-EC
export markets, there is still a strong possibility that the deepening European
recession will scupper hopes of a sustained upturn – just ask those Nissan
workers now being offered voluntary redundancy because no one in Europe is
buying cars.
In any case, if unemployment has peaked, it has only just
done so – and it still blights millions of lives. Even those in work suffer its
consequences: fear of unemployment is still holding back consumer confidence,
and the cost of keeping around three million people on the dole is horrendous.
Taking into account benefits and lost tax revenue, each unemployed worker costs
the Treasury nearly £9,000 a year, which means that the cost, for example, of
keeping the 500,000 unemployed building workers out of work is around £4.5
billion a year.
Meanwhile, everywhere you look there is work to be done:
crumbling council blocks, sewers and schools to repair, ancient tube trains and
buses to replace, railways and houses to build. The waste of unemployment is
obscene and absurd. Britain desperately needs a budget that lays the
foundations for a sustained economic recovery.
What is not required is what Clarke seems to be preparing – an
assault on public borrowing on two fronts, with cuts in state spending and
increases in taxation aimed at shaving some £3 billion off the public sector
borrowing requirement (which is currently running at £50 billion). The fragile
nature of the recovery makes it imperative that the Chancellor does nothing
to reduce the overall level of demand in the economy: state spending should be
kept at current levels or even increased, with the overall burden of taxation
increased only to fund an expansion of state spending on investment.
In similar vein, any tax or spending changes should on no
account be regressive: even leaving aside the persuasive moral and social
arguments for a more equal society, progressive redistributive measures have
economic benefits. They have a modest reflationary impact because poor people
tend to spend money rather than salt it away; and they help the trade balance
by putting a block on the tendency of rich people to buy imported luxuries,
rather than home-produced goods.
Yet all the talk is of Clarke increasing National Insurance
contributions (an income tax that hits the worst-off hardest) and direct taxes
on non-luxury items, while reducing benefit entitlements – all of which will
harm prospects for recovery.
Some of the measures, both long-term and short-term, that
should be taken next week have been elaborated by Gordon Brown and other Labour
spokespersons in the past year: tax breaks for industrial investment and for
training, a training levy, taxes on speculative share and money market
transactions, release of receipts from council house sales to allow new council
house building, lease-buying of trains, a windfall tax on privatised utility
profits, a stricter regime to prevent tax evasion, a redefinition of public
borrowing to distinguish borrowing for investment from borrowing for the
current account, and so on.
But other measures that are equally applicable in the
current economic climate seem to have been discreetly abandoned by Labour since
the shadow budget just before last year's general election. In particular, it
dropped plans for a top income tax rate of 50 per cent on those on £40,000 a
year and abolition of the ceiling on National Insurance contributions. Both
should be revived, although both need to be a lot better sold to the
electorate than they were last time.
And then there is a whole raft of proposals that never get a
look-in these days in Labour's top echelons. The most obvious is abolition of
mortgage interest tax relief – essentially a regressive subsidy to affluent
home-owners, which is retained by the government only for the most cynical of
political reasons. The savings from abolishing MIRAS should be ploughed
straight into building houses for those on low incomes.
There are others, too, from wealth taxes, through energy
taxes that do not hit the poorest as VAT on domestic fuel will, to disbanding
the British Army of the Rhine and using the savings on a massive employment
programme. In all these cases, the reason for Labour's lack of enthusiasm has
little to do with economics and a lot to do with fear of what the Tory press
will say.
Of course, there are limits to what a single medium-sized
nation-state can do to conquer unemployment and recession: the experience of
France in the early eighties shows that there is little mileage today in the
sort of one-nation Keynesianism that used to form the basis of all
left-of-centre alternative economic strategies. That is why a programme for
recovery in Britain would have to be matched with proposals for a European
recovery programme, initially based on the intergovernmental framework
suggested by Jacques Delors (unceremoniously blocked by the British last week),
but ultimately carried out by federal European institutions.
Nevertheless, it remains in the power of the medium-sized
nation-state to make a substantial difference – and it is a scandal that Clark
will deliver a package that does nothing (or worse) for recovery.
