Wednesday, July 24, 2024

The Labour Party needs to take on neo-liberalism and the rich


The government has inherited lots of social problems but problems caused by neoliberalism can’t be dissolved by more neoliberalism


18 July, 2024


The King’s Speech heralded the new Labour government’s legislative agenda. Most of it had already been leaked and therefore provided little surprises.

A political party funded by corporations and the rich was not going to do anything radical and upset its backers. The government has reduced its policy options by promising not to create money, borrow or increase taxes on the rich. Such self-imposed constraints will in time become problematical but so early in its term of office, it isn’t going to do U-turns. At the same time, the faithful need to be told that ‘change’ is coming. So, the government makes populist noises and gives the impression that it is interventionist, but not enough to upset its backers. Here are a few examples.

All governments engage in populist rhetoric claiming that they will be tough on crime. Labour is no exception. Due to government imposed austerity, cuts in real wages and benefits, there is a spike in shoplifting. It is also the consequence of supermarkets cutting checkout staff to boost profits. Labour has promised to be tough on shoplifting, but there is little mention of crackdown on the causes of shoplifting and petty crime.

People’s living standards are being quashed by corporate profiteering by water, gas, oil, insurance, rail, mail, energy, banks and other companies. This pushes some very sane people into petty crime. A report by Unite examined 17,000 UK companies and found that their average profit margins have soared by 30% compared to the pre-pandemic period. Electricity and Gas supply companies were the worst culprits as they increased their profit margin by 363%. The government has no intention of curbing profiteering which erodes people’s income and increases pressures for petty crimes and shoplifting.

Opinion polls have suggested that people want to see railways renationalised. Labour has promised to bring passenger rail services in England and Wales into public ownership during the next five years, eventually morphing into Great British Railways (GBR).

To some extent rail nationalisation is relatively easy because 4 of the 14 national train operators are already state-controlled. The franchises to operate passenger train services are granted by the state for a period of 5 years and can be terminated by either side at three months’ notice. The plan is to bring passenger services into public ownership as and when the current franchise agreements expire.

The nationalisation of railways will provide integrated services and avoid duplication of administrative structures, resulting in lower costs. Train operating companies, mostly owned from abroad, make about £400m a year in profit. Elimination of that could result in lower subsidies and/or fares. However, freight and rolling stock companies (ROSCOs), the most lucrative parts of the rail industry, will remain in private hands. Just three companies (Angel Trains, Eversholt and Porterbrook) own 87% of rolling stock (coaches, engines, wagons) which they lease out to train and freight operating companies. Through complex and opaque corporate structures they are owned by financial service and infrastructure investment companies located in low/no tax jurisdictions. ROSCOs paid dividends of £409.7m in 2022-23 and had a profit margin of 41.6%. The cumulative dividend is around £2bn (£2.7bn between 2012 and 2020) in the last decade. The dividend is typically 100% of the pre-tax profits and escapes taxation in the UK. The Labour government is not planning to disrupt this massive outflow of cash, the cost of which is ultimately borne by the public purse.

People want to see water industry nationalised too but there is no plan to nationalise England’s troubled water companies. Since 1989, they have hiked bills in real terms, invested little in infrastructure, dumped sewage in rivers and seas, paid exorbitant dividends and executive remuneration, and are now deep in debt. Their shares are worthless, debt is classified as junk and their finances are precarious. In common with the last Tory government, Labour does not want to nationalise water. Instead, it will tinker with regulation imposing better monitoring of sewage disposal, possible criminal liability of directors for sewage dumping and banning payment of executive bonuses if specified environmental standards are not met. It is hard to see how this will address lack of investment, exploitation of households and lack of corporate accountability.

Economic growth has been the mantra of the Labour government but that is partially hampered by low investment in productive assets. Despite a plethora of subsidies, grants and tax reliefs the UK has been bottom of the G7 league for investment in 24 out of last 30 years, and ranks a lowly.28th for business investment out of 31 OECD countries. Labour’s response is to resuscitate the private finance initiative (PFI) in the guise of public private partnerships (PPP). PFI ran from the early 1990s to 2018. Under this, the government obtained £60bn of capital investment from private sector with repayments of over £306bn. The state effectively became guarantor for private profits. The same is to be repeated again. The government has announced a National Wealth Fund of £7.3bn for investment in public projects, which is hardly ambitious. It will cost more than that just to fix potholes in roads.

The aim is to secure £3 of private funds for every £1 of public cash. The Labour manifesto promised to de-risk additional private investment i.e. it will guarantee corporate profits. Inevitably repayment of each £3 of private finance will be much bigger as the private sector must make profits. Of course, the alternative would be to create money, possibly through quantitative easing. The government can borrow as the cost of borrowing for government is always lower than the cost of the same debt by the private sector. It can eliminate tax anomalies and also tax the rich, but such possibilities are ruled out.

A major reason for low investment is that people lack the money to buy goods and services. Labour’s employment Rights Bill will provide some security to workers by protection from unfair dismissal and ensuring that all adults benefit from the minimum wage. Currently, minimum wage of £ 11.44 is paid to adults over the age of 21. Lower rates are paid to workers below the age of 21. However, considerable real increase in wages is needed to enable people to stimulate the economy. Workers’ share of GDP, in the form of wages and salaries, has gone from 65.1% in 1976 to barely 50%. The median UK pre-tax wage is £28,548, lower in real terms than in 2008. Joseph Rowntree Foundation estimates that a single person needs annual income of £29,500 and a couple needs £50,000 for minimum standard of living. At the same time, 1% of the population has more wealth than 70% of the population combined. The poorest pay a higher proportion of their income in taxes than the richest. The richest fifth households pay 31% of gross household income in direct taxes; compared to 14% by the poorest fifth. The richest fifth pay 9% of its disposable income in indirect taxes, compared to 28% by the poorest fifth.

Successive governments have failed to adjust the tax imbalance or increase workers’ share of GDP. They increasingly rely upon a shrinking proportion of population to boost consumer spending and stimulate economic growth. This has not delivered sustained economic growth. Labour needs to boost workers’ share of GDP and that can’t be done without reducing capital’s share. Will Labour rise to that challenge?

Labour’s 2024 manifesto promised to “develop an ambitious strategy to reduce child poverty”. However, there is no indication of such strategy in the King’s Speech. In opposition, Labour supported the Conservative government’s two-child benefit cap. Around 1.6m children are living in 450,000 households affected by the cap. Families are losing out benefit of £3,455 a year. £3.5bn would go a long way towards lifting a million children out of poverty, but the government has not done so. To put this into broader perspective the government spent some £1,200bn last year.

In response to mounting pressure, Prime Minister Sir Keir Starmer has sought to disarm critics by setting-up a taskforce to develop child poverty strategy. In the face of overwhelming evidence the taskforce will inevitably conclude that children are suffering. This taskforce tactic will only prolong the agony of poverty for millions and further confirm to some that major political parties care little about the ‘have-nots’. The government’s position is that it can’t make uncosted financial commitments. Interestingly, the King’s Speech promised more spending on the military and support for Ukraine’s conflict with Russia. I can’t recall these policy options being explicitly costed.

It may be too early to reach any definitive conclusions about the Labour government’s policies, but the King’s Speech shows that the government will expend considerable energies in impression management. The government has inherited lots of social problems but problems caused by neoliberalism can’t be dissolved by more neoliberalism. The government needs to be bold and show that a different future is possible.


Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

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