Fiscal Transfers to Capitalists Are Counter-Productive

Prabhat Patnaik | 23 Nov 2024  NEWSCLICK INDIA

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Far from reviving the economy, transfers to capitalists in a neo-liberal regime have the effect of further contracting the economy.

It is common for governments these days to provide fiscal transfers to capitalists, whether through reduced corporate tax rates, or by providing direct cash subsidies, to encourage greater investment by them and thereby stimulate the economy. During Donald Trump’s first presidency there had been a cut in corporate tax rate in the US with this objective in mind.

In India, the Narendra Modi government, as is well-known, has given massive tax concessions with the same objective. Even a minimum knowledge of economics, however, would show that such transfers to capitalists are counter-productive in a neoliberal regime.

This is because such a regime is characterised by “fiscal responsibility” legislation that fixes the upper limit to the fiscal deficit as a percentage of the gross domestic product, and normally the government operates at this ceiling. Transfers to the capitalists, therefore, have to be matched by reductions in expenditure elsewhere, typically in welfare expenditures undertaken for the working poor, or by an equivalent increase in tax revenue garnered from the working poor.

Now, the effect of handing over, say, Rs 100 to the capitalists by reducing transfers to the workers by Rs 100, is to reduce the level of aggregate demand and hence employment and output. Far from reviving the economy, transfers to capitalists have the effect of further contracting the economy. The way in which this comes about is the following.

Investment undertaken in any period is the result of investment orders given earlier, and hence of investment decisions taken in the past; this is so because investment projects have long gestation periods and it is as true of private investment as of public investment. If the tempo of investment is to be stepped up, then a decision for doing so will be taken in the current period and the actual tempo will increase only subsequently. Hence investment in any period must be taken as a given magnitude that does not change during the period in question.

What does change during the period in question is the level of consumption; and here, because the workers consume a higher share of their incomes than the capitalists, any shift of purchasing power from workers to capitalists has the effect of lowering consumption (the same happens if the government reduces its consumption in order to make transfers to capitalists).

What is more, transfers from workers to capitalists (and even from the government to capitalists) have the effect of reducing net exports (that is, the excess of exports over imports), since capitalists’ consumption is more import-intensive. But let us deliberately understate our argument by assuming that transfers to capitalists, that are financed at the expense of the workers, do not change net exports. Since the gross national income, Y, of a country must equal the sum of consumption C, investment I, government expenditure G, and the surplus on the current account of its balance of payments (X-M), that is,

 Y = C+ I + G + (X-M)        ……              (i)   

transfers to capitalists, by lowering C, lower the right-hand side, which depicts the level of aggregate demand.

The equality in the above equation, therefore, can be restored only through a fall in Y, that is, through a reduction in output and employment.

When this happens, the degree of unutilised capacity in the economy increases, which has the effect of lowering the investment decisions of the capitalists taken in the current period and hence their actual investment in the subsequent period. The economy, therefore, far from getting stimulated, actually contracts.

But the story does not end there. Any such contraction in itself, that is, if other things remain the same, has the effect of reducing profits. Thus, while transfers to capitalists as such, have the effect of increasing profits, the fact that such transfers are obtained by reducing the purchasing power of the workers, have the opposite effect, of reducing profits. And under fairly realistic assumptions, these two effects cancel each other out exactly, so that total profits of the capitalists remain exactly the same as would have obtained without the transfers. The assumption under which this result holds is that the working people consume their entire income.

This is a fairly realistic assumption because the proportion of the total wealth of the economy that is owned by the bottom segment of the population is quite minuscule. In India, for instance, the bottom 50% own only 2% of the total wealth of the country. Since all wealth necessarily arises from savings, this only shows that they scarcely save anything at all. Hence our assumption that the working people do not save and that the entire savings in the economy come from the rich, apart from the government, is quite realistic.

Let us, only for a moment, assume that the rich, in this case the capitalists, save their entire income; then private savings equal profits. Since in any economy, total domestic savings must equal total domestic investment minus the inflow of foreign savings, and since government investment minus government savings is what is called the fiscal deficit, this amounts to saying that private savings, and hence profits, in the economy, must necessarily equal private investment plus the fiscal deficit minus foreign savings F coming into the economy during the period; that is,

Profits = Private Investment + Fiscal Deficit – F …(ii)

Since we have argued that private investment and the inflow of foreign savings (which is the just the negative of X-M above) will remain unchanged during the period, as will the fiscal deficit because of the “fiscal responsibility” legislation, profits must remain the same despite the transfers to capitalists.

Dropping the assumption that all profits are saved makes no difference to the above argument. If a proportion α of profits is saved, then equation (ii) simply becomes:

α. Profits = Private Investment + Fiscal Deficit – F… (iii)

If the right-hand side of (iii) remains unchanged, for reasons we have just discussed, then profits must also remain unchanged even if α is not equal to one. Budgetary transfers to the capitalists in short, in a neoliberal regime where the fiscal deficit cannot be increased to finance such transfers and where, therefore, workers’ incomes have to be reduced correspondingly, have the effect not only of precipitating a contraction in output and employment, but of not even increasing the magnitude of capitalists’ income if the workers consume their entire income.

Budgetary transfers to the capitalists in other words cause inequality to increase in an economy without even increasing the capitalists’ income, because they cause an output contraction that negates the profit-increasing effects of such transfers.

They do, however, have one other important effect which is the real reason why the government resorts to them, and that is to change the distribution of profits among the capitalists in favour of the monopoly stratum, away from non-monopoly capitalists. This is so for the following reason. We have seen that total profits remain unchanged despite budgetary transfers to capitalists because while transfers are an addition to profits, the fact that they are associated with taking away incomes from the workers, and reducing aggregate demand, lowers profits to an exactly equal extent; but while this is true in the aggregate, the capitalists who face reduced demand and the capitalists to whom the bulk of the transfers accrue are not the same. In particular, large capitalists are not affected much by the reduction in workers’ consumption demand; but they get the lion’s share of the budgetary transfers. They are, therefore, net gainers, while smaller capitalists whose presence is more pronounced in the market for workers’ consumption goods, become net losers, even when total profits remain unchanged at the aggregate level.

Budgetary transfers to the capitalists are thus a means of aiding what Marx had called “centralisation of capital”, of hastening the replacement of smaller capitals (or even petty producers who produce goods for workers’ consumption) by large capitals. This is what its “crony capitalists” want and the government obliges them. Such transfers are undertaken in the name of stimulating the economy, but they do nothing of the sort; on the contrary they succeed only in contracting the economy, but even in such a contracting economy, they strengthen the position of the monopoly capitalists.

There is some recognition in the media and among Opposition parties that small producers in the country were harmed by demonetisation and the introduction of the Goods and Services Tax. There is, however, less recognition of the harm done to them by the tax concessions and other forms of budgetary transfers made to the capitalists.

Prabhat Patnaik is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. The views are personal.

Hurricanes and Boeing Strike Depress Job Growth, But Unemployment Remains Steady

Dean Baker

November 6, 2024
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The October jobs report showed little gain in hiring, with establishments adding just 12,000 jobs. The number was depressed both by the effects of the hurricanes that hit the South last month and the loss of roughly 33,000 jobs due to the strike at Boeing. The economy has now added 15.3 million jobs since President Biden took office in January of 2021. We now have 5.9 million more jobs than at the pre-pandemic peak. (These numbers adjust for the BLS preliminary benchmark revision.)

The unemployment rate remained at 4.1 percent as hiring apparently offset any hurricane-related layoffs. The hurricanes make it more difficult to gauge the underlying strength of the labor market, but the growth would clearly have been far more rapid without the unusual events hitting the economy in October.

It is also worth noting that the response rate to the establishment survey was extraordinarily low at 47.4 percent. It is typically close to 60.0 percent, which suggests there could be large revisions when we get fuller data in the next two months.

Hurricanes Likely Hit Job Growth Primarily in Construction and Restaurants

The direct impact of the Boeing strike is easy to measure since we know the number of striking workers. (The indirect effect on supplier industries is more difficult.) The hurricanes would have both prevented hiring in some sectors and also led to some layoffs in businesses that were closed due to the storms.

It seems clear construction employment was affected by the hurricanes, as the sector created just 8,000 jobs in October after averaging almost 20,000 jobs a month in the year to September. This weakness was driven largely by a drop of 6,600 jobs in residential specialty trade contractors

Other industries likely affected by the hurricanes include restaurant jobs, where just 3,700 jobs were added compared to an average of more than 12,000 a month in the year to September. Also, amusement, gambling, and recreation which lost 7,400 jobs, and the loss of 6,400 jobs in the retail sector.

Adding in these effects, it seems likely that we would have seen at least 100,000 jobs added in October without the impact of the strike and the hurricane.

Healthcare Sector Again Led Employment Growth

The healthcare sector added 52,300 jobs in October, slightly less than the average growth of 58,000 over the year to September. The other big job gainers were state governments, which added 18,000 jobs and local governments, which added 21,000 jobs.

The government sector did not recover the jobs lost in the pandemic until September of 2023. The private sector had regained the lost jobs by April of 2022. Employment in the government sector is now 590,000, or 2.6 percent, above its pre-pandemic level.

Manufacturing Lost 46,000 Jobs, Mostly Due to Boeing Strike

The job loss in manufacturing was driven primarily by the 33,000 striking workers at Boeing. There was a drop in employment in the metal industries of 5,400, which was likely due at least in part to the strike. There was a decline in employment of 6,000 in the motor vehicle industry, although employment in the sector is still 31,500 higher than in October of 2023.

Wage Growth Remains Solid

One factor offsetting concerns about labor market weakness is that we continue to see strong wage growth. Wages have risen 4.0 percent over the previous 12 months. The pace actually accelerated slightly over the last three months, with the annualized rate of wage growth of 4.5 percent. With the rate of inflation falling towards 2.0 percent, this means that workers are seeing healthy real wage gains.

Little Change in Average Hours

Some of us expected a drop in the length of the average workweek as a result of businesses being closed by the storms. This seems not to have been the case. There was no change in the length of the average workweek or the index of aggregate weekly hours. There was a drop in the index of aggregate weekly hours for production workers, but this was driven entirely by a drop in manufacturing and construction; the index for the service sector was unchanged. It is also worth noting involuntary part-time employment actually fell somewhat in the month, hitting its lowest level since June.

Prime Age Employment Rates Fell in October

The employment to population ratios (EPOP) for prime age workers (ages 25 to 54), which had been near its all-time high, fell 0.3 percentage points to 80.6 percent. The drop was driven mostly by a 0.6 percentage point drop in the prime age EPOP for women to 74.9 percent. This is still above the pre-pandemic peak. The EPOP for men edged down 0.1 percentage point to 86.3 percent.

Share of Unemployment Due to Voluntary Quits Falls

The share of unemployment due to people leaving their job fell from 12.1 percent to 11.5 percent. The small number of people changing jobs is one of the anomalies in the current labor market. With an unemployment rate near 4.0 percent, we would expect this share to be above 14.0 percent.

We know from the JOLTS data that layoffs are relatively low, so it doesn’t seem workers have much fear of losing jobs at present. It’s possible that with the huge round of job changes earlier in the recovery workers are more satisfied with their jobs than in the past. Also we have a relatively older workforce now, and workers are less likely to change jobs in their forties and fifties than in their twenties and thirties, but this is one of the anomalies in the current labor market.

Black Unemployment Steady at 5.7 Percent

The Black unemployment rate was unchanged in October. The 5.7 percent rate in October is 0.7 pp below the recent high of 6.4 percent rate in March, but still 0.9 percent above the all-time low hit in April of 2023. It is slightly above the pre-pandemic lows.

The unemployment rate for Hispanics was unchanged at 5.1 percent. This is 1.1 pp above the all-time low of 4.0 percent in November of 2022.

Mostly Bright Picture, but Hurricanes Make it Hard to Read

This is the last major data release before the election. The economy’s performance under the Biden-Harris administration has been remarkable by most standard measures. The pandemic inflation that drove prices higher across the globe has been brought down and is now nearly back to the Fed’s 2.0 percent inflation target. With wage growth near 4.0 percent, wages are now outpacing prices by a substantial amount.

Clearly much of the weakness in the establishment survey is attributable to the hurricanes. It’s also not clear how many jobs we should be creating at this point. Before the pandemic, the Congressional Budget Office projected we would create just 20,000 jobs a month in 2024, as baby boomers retired in large numbers. The surge in immigration changed that picture, but with immigration now slowed, we will surely see much slower job growth ahead than earlier in the recovery.

This first appeared on Dean Baker’s Beat the Press blog.

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

 

Further thoughts on the economics of imperialism

28th April 2024Leave a Commenton Further thoughts on the economics of imperialism

Over the last 50 years… the imperialist bloc is unchanged and increasing its extraction of wealth income from the rest – and that includes the likes of China, India, Brazil and Russia. In that sense, these BRIC countries cannot be considered even sub-imperialist, let alone imperialist.

Michael Roberts

While many comment on the shifting balance of power in the global economy, over a century after the first analyses of imperialism Michael Roberts argues that the same imperial powers continue to exploit the rest of the world.

Back in 2021, Guglielmo Carchedi and I published a paper in Historical Materialism called The Economics of Modern Imperialism.  The paper focused exclusively on the economic aspects of imperialism. We defined that as the persistent and long-term net appropriation of surplus value by the high-technology advanced capitalist countries transferred from the low-technology dominated countries.  We identified four channels by which surplus value flows to the imperialist countries: currency seigniorage; income flows from capital investments; unequal exchange (UE) through trade; and changes in exchange rates.

We did not deny other aspects of imperialist domination of the majority of world i.e. in particular, military power and political control of international institutions (UN, IMF, World Bank etc) and the power of ‘international diplomacy’.  But in the paper we focused on the economic aspects, which we argued was the ultimate determining factor driving these other extremely important, but determined traits, like military and political domination, as well as cultural and ideological pre-eminence.

In that paper, we paid particular attention to the quantification of unequal exchange (UE) i.e the transfer of surplus value through international export trade.  We used two variables in our analysis of UE: the organic composition of capital and the rate of exploitation, and we measured which of these two variables was more important in contributing to UE transfers. 

We found that since the end of WW2, the imperialist bloc (IC) annually got around 1% of their GDP through the transfer of surplus value in international trade from the rest of the major ‘developing’ economies (DC) in the G20; while the latter lost about 1% of their GDP in surplus value transferred to the imperialist bloc. And these ratios were rising.

The other large area of transfers of income came from the international flow of profits, interest and rent appropriated by the imperialist bloc from their investment in assets, both tangible and financial, in the periphery.  We measured this from the net flows of profits, interest and rent to the imperialist bloc – what the IMF calls net primary credit income – compared to those of the rest of the G20.

For this post, I decided to update that aspect of economic domination by first comparing the gross primary credit income flows for the G7 and BRICS economies.  I just looked at the years of the 21st century.  The gross income flows to the G7 are now seven times greater than those received by the BRICS.

What I also found was that after accounting for the debits ie income flowing out, the NET position was even starker.  The annual net flow of income to the G7 economies was around 0.5% of G7 GDP.  Indeed, the top five imperialist economies (G5) obtained a staggering 1.7% of their annual GDP from such net inflows.  In contrast, the BRICS economies lost 1.2% of their GDP a year in net outflows.

If you look at the net income flows for each G7 and BRICS countries, the biggest gainers over the last two decades have been Japan with its huge foreign asset holdings and the UK, the rentier centre of financial circuitry.  Those BRICS countries that have lost the most (as a share of their GDPs) have been South Africa and Russia.

Now, if you add in the 1% of GDP gain/loss in income from international trade described above, then the imperialist bloc benefits by some 2-3% of GDP each year from exploitation of the BRICS, the major economies of the ‘Global South’ – in effect equivalent to their average annual growth in real GDP in the 21st century.

The World Inequality Database (WID), the Paris-based group of ‘inequality’ economists including Thomas Piketty and Daniel Zucman, has just published a deep analysis of what they call the ‘excess yield’ obtained the rich imperialist bloc on assets held abroad.  The WID finds that gross foreign assets and liabilities have become larger almost everywhere, but particularly in rich countries, and foreign wealth has reached around twice the size of the global GDP, or a fifth of the global wealth. The imperialist bloc controls most of this external wealth, with the top 20% richest countries capturing more than 90% of total foreign wealth.  The WID also included the wealth hidden in tax havens and the capital income accrued from it.   

The excess yield is defined as “the gap between returns on foreign assets and returns on foreign liabilities”.  The WID finds that this has increased significantly for the top 20% richest countries since 2000.  Net income transfers from the poorest to the richest is now equivalent to 1% of the GDP of top 20% countries (and 2% of GDP for top 10% countries), while deteriorating that of the bottom 80% by about 2-3% of their GDP.  These results are pretty similar to the results that I got for net credit income flows above.

What was striking to us in our original paper was that the imperialist bloc of countries as we defined it in 2021 was virtually the same as those advanced capitalist economies that Lenin identified as the imperialist grouping in 1915 – around 13 countries or so.  There had hardly been any additions to the club – it was closed to new members.  Emerging capitalist economies in the last century were condemned to domination by the imperialist bloc.  This new study by the WID confirms that conclusion.  Over the last 50 years in their survey, the imperialist bloc is unchanged and increasing its extraction of wealth income from the rest -and that includes the likes of China, India, Brazil and Russia.  In that sense, these BRIC countries cannot be considered even sub-imperialist, let alone imperialist.

That brings me to a few thoughts on the issue of super-exploitation.  Super-exploitation has been defined as where wages are so low that they are below the value of labour power, ie the amount of value necessary to keep workers functioning and reproducing sufficiently to continue to work.  Workers with wages and benefit levels below that are paupers in effect.  It has been argued that this is the major feature of imperialist exploitation of the Global South. Wages are so low there that they are below the value of labour power.  It is super-exploitation that enables the imperialist multi-nationals to make their super profits in trade, invoicing and investment income.

In our original paper, we questioned whether ‘super-exploitation’, which no doubt exists, was necessarily the major driver of surplus value transfer from the poor countries to the rich.  In our view, the mechanism of capitalist exploitation and surplus value transfer was doing the job without having to resort to super exploitation as the main cause. 

Moreover, international super-exploitation implied that there was some average international wage level that could act as a gauge of the value of labour power globally. But while there are international market prices for export goods and services, there is no international wage.  Wages are very much determined by the balance of power between capitalists and workers in each country.  Sure, there are international pressures and domestic capitalist companies in the Global South competing in world markets against much more technologically advanced companies in the imperialist bloc can often only survive by driving down wages for their workers.  But that means the rate of surplus value or exploitation rises to compensate for the loss of surplus value in international trade with the imperialist companies given their more productive technologies. 

Indeed, in our original paper, we found that it was a combination of the two factors: better technology lowering costs per unit for the rich economies; plus a higher rate of exploitation in the poorer countries that contributed to that 1% of GDP annual transfer of profits from the BRICS to the imperialist club.  We found that it was about 60:40 for the contribution of more productive technology against higher rates of exploitation in the transfer of surplus value from the poor to rich countries..

Could we measure whether the transfer of value is due to ‘super-exploitation or not?  One way would be to look at national poverty wage levels.  They vary sharply across countries and between rich and poor countries.  If these levels can be considered the tipping point of wages above or below the value of labour power, then the percentage of workers in both rich and poor countries earning less than these national levels could be considered to be ‘super-exploited’.

The point here is that there are also workers in the imperialist ‘rich’ economies that are ‘super-exploited’ by this criterion.  And in turn, there are many workers in the poor countries that are earning above their national poverty wage levels. 

Look at the poverty wage levels for the G7 and BRIC economies that I calculated from World Bank sources.  Based on the ratio of workers earning less than the poverty wage rate in their respective countries (as provided by the World Bank), I reckon that roughly 5-10% of G7 workers are being ‘super-exploited’, while in the BRICS it’s about 25-30%.  But that still means that 70% of workers in the BRICS, while earning way less per day than G7 workers, are not earning below the value of their labour power on a national basis.  Exploitation of workers in the Global South is huge, but super-exploitation as such is not the main cause.

In sum, what these new studies confirm is that imperialism can be quantified in economic terms: it is the persistent transfer of surplus value to the rich countries from the poorest countries of the world through unequal exchange in international trade and through net flows of profits, interest and rent from investments and wealth owned by the rich countries in the poor countries.  This process developed some 150 years or so ago and remains.

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• This article was originally published on Michael Roberts blog, The Next Recession, on 23 April 2024
• Michael Roberts is an experienced economist and activist writing from a Marxist perspective.

“Austerity is a political choice, not an economic necessity” – Jeremy Corbyn exclusive on #Budget24

6th March 2024austerity, Cost-of-living crisis, Economy, Jeremy Corbyn, Labour, socialism4 Commentson “Austerity is a political choice, not an economic necessity” – Jeremy Corbyn exclusive on #Budget24

“Today’s budget exposes a government that is blind to the scale of the crises we face. While private companies are taking home more profit than ever before, more than 4 million children live in poverty.”

Jeremy Corbyn MP

Jeremy Corbyn MP writes for Labour Outlook on #Budget24.

“Austerity is a political choice, not an economic necessity.”

This is what we said back in 2015, five years into a devastating programme of cuts and privatisation. We knew that austerity would decimate our public services, plunge millions into poverty and send our country into economic decline. It was true then – and it is true now.

Today’s budget exposes a government that is blind to the scale of the crises we face. While private companies are taking home more profit than ever before, more than 4 million children live in poverty. A quarter of a million people are homeless, while millions more languish on social housing waiting lists. Our NHS is on its knees after decades of austerity and privatisation.

Perhaps most alarmingly, we are sleepwalking toward a climate emergency. Make no mistake, the climate crisis is here, and we are running out of time to avoid total catastrophe. People in the Global South are already suffering the worst consequences – more and more people in this country will experience the devastating effects of air pollution, heatwaves and flooding.

The Tories’ economic experiment has failed – and they should not get off lightly. Parroting the language of austerity is a grave mistake, and represents a missed opportunity to bring about the transformative change this country needs. When there are more billionaires in this country than ever before, the idea that we cannot afford to build a fairer and greener society is absurd. We have the means to end poverty, pay our workers properly and save the planet. We just need the political will.

Millions of us still believe in a real alternative.

One that funds a fully-public NHS; austerity and privatisation are the causes of – not the solutions to – the healthcare crisis.

One that introduced rent controls and builds social housing; we will never tackle the housing emergency until we treat housing as a human right, and embark upon a huge council house-building programme.

One that invests in a Green New Deal to transform the economy and create thousands of green, unionised jobs.

One that scraps the 2-child benefits cap; this cruel and callous policy is a moral disgrace, and we could pay for the abolition of this policy seventeen times over with a 1-2% wealth tax on people with assets over £10 million.

One that brings energy, water, rail and mail into public ownership; privatisation has been a total disaster, and it’s time we stood up to the companies holding our country to ransom.

Our economy is not just broken. It is rigged in the interests of the few – and unless we fundamentally rewrite the rules of our economy, nothing will change. There’s nothing fiscally responsible about plunging millions of people into poverty or destroying our natural world. Why can’t we have the courage to campaign for a more joyful, equal and sustainable future?

As the MP for Islington North, I will continue to campaign alongside my community for a redistribution of wealth and power. For an economy that puts human need before corporate greed. For a society that cares for each other and cares for all.

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• You can follow Jeremy Corbyn on Facebook, Instagram and Twitter/X; and follow Jeremy Corbyn’s Peace and Justice Project on Facebook, Instagram and Twitter.

Why Jeremy Hunt’s budget fails Britain

The evidence of past policy failures is all around us. Since 2010, the real economy has grown by around 1.2% a year and is set to have the weakest growth amongst G7 countries.


Columnists
Left Foot Forward 

Opinion

Prem Sikka

7 March, 2024 



Every year, the UK parliament enacts a pantomime with deadly consequences. A man with a red box (might as well be a red nose) and known as the Chancellor, ritually promises to eradicate poverty, redistribute income and wealth, rejuvenate the economy and public services, and increase people’s prosperity and happiness. Instead for the last 14 years he has delivered, lower living standards, worse public services, crumbling infrastructure and transferred wealth from the masses to the rich. This year’s budget statement is no different.

Calamitous Policies

The evidence of past policy failures is all around us. Since 2010, the real economy has grown by around 1.2% a year and is set to have the weakest growth amongst G7 countries. The real average wage is unchanged since 2007 and Britons have faced the biggest fall in livings standards since the records began. The richest 1% of the population has more wealth than 70% of the population combined whilst 14.4m live in poverty. UNICEF reported that child poverty levels in the UK have risen by 20% in recent years, and the UK is ranked 39th out of 39 relatively well-off countries.

Deprived of good food, housing and healthcare, British children are up to 7cm shorter than their European counterparts. Malnutrition, scurvy and rickets have returned. A major reason for huge social disparities is that income from wealth, such as capital gains, is taxed at the rates of 10%-28% whilst wages are taxed at the rates of 20%-45%. In addition, national insurance contribution (NIC) at the rate of 10% is payable on wages between £12,570 and £50,270, and 2% above that. Recipients of capital gains, dividends and other forms of investment income do not pay any NIC.

Dwindling household incomes have led to lower investment in productive assets. The overall investment rate in the UK fell from a high of around 23% of GDP in the late 1980s to around 17% from 2000 onwards, compared to an average of 22% for the EU. Public investment in new industries has fallen from an average of 4.5% of GDP between 1949 and 1978 to 1.5% between 1979 and 2019. Public buildings are literally crumbling, there is a huge teacher shortage, local councils are going bankrupt and are cutting services, and 7.1m adults in England have very poor literacy skills. Roads are full of potholes. Hospitals in England have a waiting list of 7.6m appointments and 300,000 a year die whilst waiting for that appointment. 2.8m are chronically ill and unable work. People struggle to see a family doctor or find a dentist. This has a negative effect on productivity.

Disappointing Budget

Against the above background, the budget statement is disappointing. The erosion of disposable incomes continues. In March 2021, the government froze tax free personal allowance at £12,570 and income tax thresholds with the result that 40% marginal rate kicks in at £50270 and 45% marginal rate at £125,140. One consequence is that in an inflationary environment is that 4.2m more workers now pay income tax. If nothing changes by 2028-29 another 3.7m workers will be forced to pay income tax at basic rate of 20%, another 2.7m at 40% and another 200,000 at 45%. Due to frozen tax thresholds, the government will collect another £41.1bn a year.

The Chancellor has handed a few crumbs to the masses in the shape of a 2p cut in the headline rate of national insurance, reducing it from 10% to 8%. It will cost around £10.2bn a year. Someone on median wage of around £29,600 will take home extra £341 year, easily wiped out by higher council tax, energy and household bills and higher income tax due to frozen thresholds. People earning £19,000 a year will be worse off as tax rises due to frozen thresholds will exceed cut in national insurance. Some 17.8m adults with annual income less than £12,570 will receive no benefit.

Due to fiscal drag pensioners will be forced to pay income tax on low incomes, as well as higher council tax, food and energy bills. The projected hit on pensioners is around £8bn. Real value of benefits is not protected so millions of workers relying upon universal credit to top-up their low wages will face real cuts.

The middle and higher income families, most likely to vote Conservative, are the major gainers. The higher rate of capital gains tax on residential property disposals has been cut from 28% to 24%. Owners of multiple properties will be the main beneficiaries of the tax break worth around £600m.

The high-income child benefit threshold will be increased from £50,000 to £60,000 with a taper extended to £80,000. Nearly 500,000 families with children would benefit by around £1,300 next year. In sharp contrast the two-child benefit cap which hits the poorest, depriving 402,000 families of around £3,200 a year is to be retained.

The International Monetary Fund (IMF) has urged the government to shun tax cuts called for greater investment in public services and infrastructure but that is not what the government has done. Green investment is missing altogether from the budget. The Chancellor has promised £3.5bn to replace the NHS IT system and claims that this will somehow generate savings of £35bn. Another £2.5bn top-up will largely meet the pay settlements. There is little or nothing extra for expansion of the NHS or appointment of additional doctors and nurses to reduce the 7.76m hospital appointment queue in England.

Tax cuts for higher income earners are financed by borrowing and cuts in public spending of around £19bn and will hammer councils, police, courts, justice, border checks and transport. Services will be cut and public sector workers face prospects of further real pay cuts. Potholes in roads will become a way of life.

The Chancellor soothed public anxieties by claiming that the UK is on track to become the world’s next Silicon Valley. However, he was silent on how this is to be achieved when there are severe skills shortages and due to low pay many academics are migrating to other countries. Last year, the government announced a package of $1.2bn (£1bn) investment into the vital semiconductor industry compared to $50bn by the US, $40bn by China and $10bn by India.

Instead of investment the government has launched a gimmick – a British ISA. This nationalistic gesture will enable some to invest £5,000 a year in secondary UK stocks and shares for a tax free return. This will be beyond the reach of million as 34% of UK adults have savings of less than £1,000. Not a penny of the amounts put in the British ISA will go directly into investment in productive public or private assets though bankers and financial intermediaries will gain.

The budget is silent about value for money for the billions handed to private companies in subsidies. For example, Drax has received £6.2bn subsidy and set to receive another £4.2bn. Rail companies have received £75bn subsidy in the last decade and in return people don’t own a single railway engine or carriage.

On the face of it, the government is helping small traders raising the VAT registration threshold from annual turnover of £85,000 to £90,000. But nothing has been done to simplify rules. Here are some nightmare examples: toilet rolls have a VAT of 20% but caviar is zero-rated. Potato crisps have 20% VAT but prawn crackers and tortilla chips are zero-rated. Cakes and biscuits are zero-rated but if they are wholly or partly covered in chocolate then taxed at the standard rate of 20. There is 0% VAT on unshelled nuts but 20% VAT on shelled nuts with the exception of peanuts even when they are out of their shells. Roasted and salted nuts are subject to 20% VAT but toasted ones can be VAT free.

Overall, the budget hits pensioners and average families and transfers wealth from the less well-off to the rich. It is likely that the government will try to boost its dwindling electoral fortunes in autumn with a tax cut, but it has consistently failed to address deeper economic problems. The economy can’t be revived by cutting purchasing power of the masses and by strangling public investment.

The budget also poses major challenges for the Labour Party, the official opposition in parliament. It had promised not to increase capital gains tax, corporation tax or levy any wealth taxes. It pinned its hopes on somehow securing growth but that looks forlorn without major investment or rebalancing the tax system in favour of the masses. It had modest proposals for raising additional tax revenues by reforming non-dom taxation, levying 20% VAT on private school fees to raise around £1.7bn, and reforming the taxation of “carried interest” at private equity to raise around £600m a year. Now the government has pre-emptied the non-dom taxation reform which it claims will raise £2.7bn in 2026/27. This leaves Labour with £2.3bn of tax raising initiatives, nowhere enough to rebuild the economy or redistribute. It will need to revisit the entire issue of taxation, public spending and economic management.

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.