Published On: Fri, Mar 6th, 2020

Budget 2020: The government must turn Britain’s divided economy around. Here’s how

In democratic societies, governments have two essential functions – to deliver prosperity and the conditions for happiness for citizens. Both parts have been in short supply for the last decade.

The Conservative budget on 11th March presents an opportunity for building a sustainable economy – and undoing the damage done by a decade of austerity, borne out of political dogma rather than any economic necessity.

Dealing with the divides

Adam Smith, the eighteenth century moral philosopher, wrote “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable”. Yet that point has been lost on neoliberals.

Firstly, let’s look at poverty and inequality in Britain today. Some 14 million people live in poverty, more than one in five of the population. That includes four million children and two million pensioners. Low wages, anti-trade union laws, zero hour contracts and loss worker rights mean that around 56% of people living in poverty are in a household where at least one person has a job.

Since the 2007-08 banking crash, average wages have been stagnant and have seriously eroded people’s purchasing power.  Workers’ share of gross domestic product (GDP) has shrunk to around 49.2%, a far cry from the 65.1% in 1976.

With a combined wealth of £39.4bn, five UK billionaires have more wealth than the bottom 13.2 million people. The richest 1% of people in the UK owns the same wealth as 80% of the population, or 53 million people. This has been aided by tax cuts for the rich and corporations. Around 42% of the UK adults, and their dependents, survive on annual income of less than £12,500. The household debt has soared to record £1,675 billion.

Hard times

Buying a home is now beyond the reach of most Britons. In 2014, the government promised to build 200,000 new homes in England for first-time buyers, but none have been built.

Meanwhile, uncontrolled rise in rents, inflation-busting rises in the price of gas, water, electricity, transport and other essentials have put too many people on the brink. Unsurprisingly, people have reduced their discretionary expenditure, many shops have closed and town centres resemble economic deserts.

Our social fabric is being torn up. Homelessness is on the increase. Social security benefits have been frozen. People have to wait longer for hospital treatment. Appointments to see family doctors have become harder to secure. Mental health and social care are in crisis. Schools are crumbling and class sizes have increased. Central government funding for local authorities has been cut by 26% in real terms.

The number of police officers in England and Wales fell by 20,600 between March 2010 and March 2019. 23,500 police support staff have been cut. Over 600 police stations have closed. Unsurprisingly, crime is on the increase and people feel insecure.

Despite a plethora of incentives, UK lags behind other major nations for investment in productive assets. Consequently, productivity is low. It is not well placed to meet the challenge of climate change and has made little investment in flood defences.

Tax dodging and how to turn it around

This budget, Rishi Sunak needs to raise wages of public sector workers, which can become a lever to increase wages of workers in other sectors. He needs to invest in manufacturing, new and green technologies, social infrastructure and public services. We can do so through quantitative easing, similar to the one which bailed out banks.

The government needs to redistribute income/wealth by increasing taxes on the rich and corporations who have enjoyed too many tax breaks during the last decade. It can be used to fund childcare, school meals for children in primary and secondary schools. It can be used to increase the state pension which is one of the lowest, as a fraction of average earnings, in the developed economies.

There is plenty of scope to end tax abuses. HMRC estimates that due to avoidance, evasion and arrears, it fails to collect around £34bn-£35bn each year. Other studies estimate the tax gap at between £58.6bn and £122bn a year. So during the last decade between £250bn and £1,220bn of tax has not been collected. Investment in HMRC and robust laws and enforcement is needed.

The National Audit Office reported that in 2018-19, the government had given 362 tax reliefs to companies worth £155bn without knowing their economic benefits.  Entrepreneurs’ relief of £2.2bn has been given without much increase in entrepreneurialism. A former head of HMRC said that the relief is being abused and needs to be scrapped.

The government gives around £40bn a year in tax relief on pension contributions and most of it goes to individuals paying income tax at the rate of 40% and 45%. By reducing the relief to 20%, the basic rate of income tax, the government can level the field and also raise £10bn for investment in infrastructure.

Rather than changing direction, the government is more likely to engage in smoke and mirrors games – cutting some departmental budgets to fund high profile projects and make marginal adjustments to the tax system.

Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor to LFF and tweets here.

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