Friday, 7 December 2012

The Road Not Taken

The real message of the budget is that the UK is now willingly embarked on a "lost decade", much as Ray Milland willingly embarked on a massive drunk in The Lost Weekend. The phrase was first used to describe Japan in the 1990s, when the economy grew by only 11.9% over 10 years. The UK's growth between 2008 and 2017 looks like it will be only 8.7%, and that assumes the persistently over-optimistic OBR have got their predictions for the next 5 years right. It would be easy to charge the Tories with incompetence, for having failed to meet their own targets for deficit reduction and growth, or even to accuse them of heartlessness, for using austerity as a cloak to further their dismantling of the welfare state, but I think there is a more depressing explanation for what they are doing. Ultimately, a budget reflects the government's assumptions about both the current condition of the economy and its desired future state. The latter looks ugly.

The changes to income tax continue the strategy marked out during this parliament of growing both the bottom tranche of the "tax free" and increasing the number paying the higher rate. The first of these increases the population whose right to have an opinion on fiscal policy is gradually undermined, while the second grows the constituency in favour of cutting the top rate of tax. Both measures erode tax morale. Together with the "strivers" rhetoric and the persistent pressure on benefits, the impression grows that not only are we not all in it together but that there is a deliberate intent to turn the nation into two antagonistic camps. The unnecessary vote on future benefits is less an attempt to get Labour to defend the "skivers" and more an attempt to neutralise their "one nation" pitch. Osborne's calculation is that privilege is best defended by those with very little against the threat of those with nothing, hence the iconic scrapping of the petrol duty rise. The climate can go hang if it delivers the white van vote.

The cut in the rate of corporation tax, together with the continuing failure to aggressively pursue tax avoiders (and acceptance of taxpayer discretion, a la Starbucks), indicates that the UK remains not merely "open for business" but open to multinationals seeking a low tax jurisdiction. In effect, the Tory strategy for tackling tax avoidance is to push rates so low that international businesses will willingly headquarter in the UK. The Laffer Curve nonsense, the idea that tax cuts are self-financing, shows no sign of going out of fashion on the right, despite the ample evidence that the only tax rate that will ultimately be acceptable to the rich is a flat rate of zero. Together with the refusal to countenance any form of property tax, this indicates that London is now in direct competition with Luxembourg.

The extra £5.5 billion of capital spending on roads, houses and schools is paltry, and largely funded by cuts to public spending elsewhere - i.e. this is not a net stimulus. The portion earmarked for housebuilding support will add only 50,000 new houses at a time when housing experts reckon we need 233,000 new homes a year. The infrastructure projects are heavily biased towards London and the South East, notably upgrades to the M25 and an extension of the Northern Line to Battersea to service the new yuppie flats to be built around the old Power Station. The upgrade of the A30 will probably benefit second home-owners in Devon and Cornwall more than the locals.

The insulation of the South East from the worst impacts of the lost decade will continue, leading to a return of the 80s-style contempt for the poor and the northern. Over the two years of the coalition government,  there has been no serious attempt to redress the regional imbalance or to make Finance less proud. If anything, the energy of the government and Bank of England has been focused on tenderly nursing Finance's wounds through cheap money and QE. The occasional photo-op in a high-end manufacturing clean-room simply reinforces the point that we cannot create millions of jobs servicing Formula 1 racing cars. The Tories have long since decided that the UK's future lies in accelerating the existing trends: making London the low-tax "offshore gateway" of Europe, and transforming the rest of the country into a low-wage reservoir of labour, able to compete on price with Slovakia and Korea.

In truth, this has been a long time coming. In both the 80s and the 90s there were windows of opportunity when the economy could have been rebalanced and the industrial base transformed. On both occasions we opted for the easier road, the get-rich-quick schemes of property speculation and financial services. This was in keeping with the chronic under-investment in industry that held the UK back in the 60s and 70s. Conservative administrations have repeatedly done what suited The City, which usually damaged industry's long-term prospects, while Labour administrations have repeatedly attempted amelioration, through nationalisation and tax-and-spend, without sufficiently radical structural reform. Osborne's claim that we are on a "hard road" is wrong. Once more we have taken the easier path. Property prices in London will be maintained, Finance will be coddled back to health, and while many will suffer as austerity continues, enough will not.

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