The April 2009 Budget

A Cheer for Alistair

Despite the fact that he doesn’t act on most of my recommendations, I like Alistair Darling. Crucially, he knows that ‘you cannot cut your way out of a recession’.

The measures the government has taken (fiscal and monetary) have not been bold enough. Nevertheless, it is likely that they will restrict the fall in output this year to around 4% (instead of 7 or 8%), and unemployment to around 3 million (instead of 4 or 5 million).

The Tory response is pathetic, dishonest and opportunist. Gordon Brown is right to call them ‘the do nothing Party’. They oppose government policies, without offering any of their own.

They are dishonest in blaming Gordon Brown, when the financial and economic mess we are in originated in the Thatcher years. New Labour’s mistake was to continue with the Thatcher policies (e g privatisation and low taxes for the rich).

Because they are the Opposition they cannot be blamed for opposing government policies. But their lack of any ideas of their own means they are not a credible alternative government.

Vince Cable and the Liberal Democrats are a different matter. They do have relevant policies, some of which Labour would do well to adopt (e g raising personal tax allowances to take the lower paid out of tax brackets).


A Missed Opportunity

However, sadly, the budget was a missed opportunity. The political context prevented the radical measures (requiring more spending) necessary for a speedy recovery.

Instead of apologising for the 50% tax on incomes over £150,000, it should have been accompanied by further measures: to raise revenue and to create a more equal society. For example:

(i) a wealth tax;
(ii) an increased capital gains tax;
(iii) a windfall tax on excessive profits;
(iv) a 55% tax rate on incomes over £200,000.

Such measures might, as vested interests claim, cause some to leave to reside in countries with lower tax rates. Why should we be concerned about this? The most likely to leave are the financiers who precipitated the current crisis.


Better Late Than Never

Such policies, along with cuts in expenditure (mainly on defence – e g Trident), must be matters for a late summer budget. The revenue raised must permit a credible strategy for repaying borrowing, and for further expenditure on:

(i) new jobs in the green energy sphere;
(ii) job support to keep people in work;
(iii) tax relief for the lower paid;
(iv) support for the housing market, especially first time buyers.

All of these measures require a political context which banishes any thought of returning to the capitalism which caused the crisis: instead, it must place the emphasis on creating a more equal, a more democratic and a more compassionate society.

DARLING'S LAST CHANCE

Budget 22 April 2009

22 April 2009 is Alistair Darling's last chance to:

(i) end the recession and drastically reduce unemployment;

(ii) take major steps to create economic and social equality;

(iii)convince people to vote Labour when the general election comes.

Ignore the reactionaries

Reactionaries, who are determined to defend the unequal society, are advising the government not to spend to ease the recession. It is notable that the most vocal opponents of government expenditure are in well-paid (mostly very well-paid)jobs.

They must be ignored. The unemployed, poor families, pensioners, the disabled are the priority.

£100 Billion To B oast The Economy

£100 Billion is the minimum expenditure necessary to:

(i) create jobs to get people back to work;

(ii) increase pensions and allowances for families, the unemployed,the disabled;

(iii) build houses and flats for the homeless,schools, colleges, hospitals.


Borrowing and Repayment

The government is nervous about borrowing because it is reluctant to take the appropriate steps for repayment.

These steps, as I have argued in earlier Blogs, are to:

(i introduce progressively higher income tax rates on incomes over £80,000;

(ii) tax excessive company profits;

(iii) slash expenditure on defence, especially by abandoning Trident.

Without these bold moves, in the budget 22 April, the recession will not end, we shall remain a grossly unequal society, Labour will not be elected.

Spend and Tax

Government Must Spend

The government must ignore the advice of the Bank of England governor - and those who agree with him.

As I have argued consistently in earlier Blogs, the April budget must include at least £100 Billion additional spending - to create jobs, take the lower paid out of tax brackets, increase benefits.

And all measures should aim to create a more equal society.

Repayment of Borrowing

What is not sensible is to borrow £100 Billion without a clear strategy for repaying it.

The repayment should be from taxing progressively incomes over £80,000, taxing excessive profits, and drastic cuts to expenditure on defence.


Defenders of the Status Quo

The reason for opposition to the new expenditure is a determination to defend our unequal society. It is a reasonable bet that almost all opponents of new expenditure would have to pay more tax as part of the repayment strategy.

Also, they yearn for a return to the capitalist dominated economies which caused the current crisis.

For these reasons they must be ignored.

DAVID BLANCHFLOWER: HE WAS RIGHT

Blanchflower’s Predictions

In the Guardian last week (Thursday 19 March 2009), David Blanchflower reminds us that, a year ago, he told the Treasury Select Committee that 'something horrible might come’. He was one of the very few to predict a serious recession.

He was largely ignored. It took the Bank of England’s Monetary Policy Committee six months (after his warning) to even start cutting interest rates. Yet, well before then, it was clear to many of us (especially those losing jobs) that there was an economic crisis deepening by the day.

Blanchflower’s Guardian article is headed ‘Now for the Jobs Stimulus’ He expresses the fear, now shared by many, that, unless the government acts speedily and decisively, unemployment will exceed 3 million.



Labour’s Opportunity: £100 Billion Stimulus


In his article, Blanchflower is, in effect, arguing for government expenditure along the lines I have proposed in earlier Blogs. Gordon Brown and Barack Obama, we are told, will argue for a worldwide fiscal stimulus at the G20 meeting in London next month

Blanchflower’s emphasis is on creating jobs, and taking steps to prevent long-term unemployment, especially amongst young people,

I would add (and I have no reason for thinking that Blanchflower, Brown and Obama would disagree) that the action taken should also aim to create a fairer, and more equal, society.

Government Borrowing and Repayment

For a package on this scale it is obvious that there would be a major increase in government borrowing. However, this is a problem only if there is no clear strategy for repayment

Such a strategy should be developed in a context of creating greater equality. This means higher income tax for people earning over £80,000 a year, with progressively higher rates.

£80,000 45%

£110,000 50%

£150,000 55%

£200,000+ 65%

In this context, part of the spending should be used to take at least 1,000,000 of the lower paid out of tax brackets and increase unemployment benefits. For obvious reasons, this extra income would be spent - a stimulus to the economy.

The second element of the repayment strategy should be a windfall tax on companies with excessive profits (e g utilities and oil companies).

The third element should be cuts to expenditure on defence and government quangos (by abolishing them).


This is Labour’s opportunity. A recent opinion poll (also published last week) indicated that 82% of respondents supported higher taxation for the better off.

The Economy: Who Is In Charge?

Action October-February

Although both were slow starters, the government and the Bank of England have taken significant action to end the recession. We have had:

(i) interest rate cuts - from 5.5% to .5%;
(ii) Alistair Darling’s £20 Billion Fiscal Stimulus;
(iii) hundreds of £ Billions to support banks;
(iv) a decision for the Bank of England to pump £150 Billion into the economy to increase lending (‘quantitative easing’);
(v) a number of small initiatives to support small firms and borrowers.

More could, and should, have been done – as I have argued in earlier Blogs. However, the above, and the fall in sterling and commodity (especially oil) prices, amount to a significant stimulus to the economy.

Why is it, then, that the doom and gloom persists – in forecasting, as well as in every day experience?

No Conviction

The crucial factor is that, with few exceptions (e g David Blanchflower), the government’s and Bank of England’s forecasters are useless.

When everything seemed to be going well in 2007, the majority of forecasts predicted that things would continue to go well. Now, when everything seems dreadful, most predictions are that things will continue to be dreadful.

To be fair, today (16 March 2009) the Bank’s governor says that the period of deflation need not be long if there is ‘prompt and decisive action’. Although he does not specify, he presumably means government action.

And to be fair to Alistair Darling, he has not, so far as I am aware, departed from his October forecast that we would start to come out of the recession in the middle of 2009.

As I have indicated in earlier Blogs, I am in the Darling camp: my forecast in a February Blog was that ‘green shoots’ will start to appear April/May 2009.

‘Green shoots’ are not, of course, the same as significant recovery, which is why I added that government action on a large scale is necessary.

No Control?

Uncertainty about the future is very largely the result of the government’s, and Bank of England’s, limited control of the economy.

Banks are told to increase lending but they do not – even when it is part of a ‘deal’ when they receive £ Billions of taxpayers’ money.

My prediction on the bottoming out of the recession April/May is based on the fact that the Fiscal Stimulus, aggressive interest rate cuts, the fall in sterling (against the dollar and the Euro), the fall in commodity prices (especially oil), quantitative easing must have an effect.

Timing is clearly a difficulty. April/May will be more than 6 months from the time of the Fiscal Stimulus, and from the beginning of interest rate cuts.

But the recovery will be extremely slow without further government action. This must include taking more control. The priorities are:

(i) lending, to businesses and households, through institutions under government control (Post Office, Northern Rock, Bradford and Bingley, Royal Bank of Scotland, Lloyds Group);
(ii) assisting first time (house) buyers with deposits (e g an interest free government loan);
(iii) additional spending to create jobs, build houses etc along with a convincing strat al egy to repay borrowing from increased taxation (progressive rates on incomes over £80,000) and reducing expenditure (mainly on defence).

These should all be included in the Budget in a few weeks time.

For the details of these proposals see my February Blogs.

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Will Government Listen?

Forget the City

The Blair governments’ strategy, which has persisted since he resigned, was to avoid upsetting the City at all costs. Favourable financial conditions (e g low taxes, the prospect of big bonuses, high returns on investment) would, it was argued, keep money flowing into London and support an expanding economy.

We now know where this strategy has landed us. Without government £ Billions, the banks would have collapsed – resulting in the collapse of the capitalist economy.

It is now clear that the position would have stabilised much more quickly if, instead of the half-cock arrangements we now have, the banks had been nationalised. The government could then have determined a level of lending (and interest rates) to save jobs and stabilise the housing market.

YouGov Poll (Guardian 9 March 2009)

This poll of Labour Party members found over 70% support for most of the measures advocated on this Blog over the past 3 months. There is support for:

A Windfall Tax on excessive company profits (e g the utilities);

Ending, or drastically reducing, bonuses;

Higher rates of tax on those earning over £100,000 a year;

Greater equality (through legislation).


The only major issue (which I regard as very important) not mentioned in the report is a large reduction of expenditure on defence.

The Budget and Economic Recovery

In 20 February Blog (Will April Be The Cruellest Month?), I predicted that there would be signs (green shoots) of the recession end April/May 2009. Significant recovery will follow, however, only if the government takes further action.

The action must include job protection/creation, taking at least a million out of tax brackets, increases in allowances and pensions - and, vitally important, a strategy for repayment of the necessary borrowing over a 5 year period.

The strategy for repaying the borrowing is a key factor in creating a fairer, and more equal, society.

My proposal, which the YouGov poll indicates would be supported by a large majority of Labour Party members (and, I believe, a majority of citizens) is for borrowing of £100 Billion to fund the above.

The repayment strategy, over a 5 year period, should be along the following lines.

Reductions of expenditure (mainly defence) £35 Billion

Windfall Taxes on Companies £25 Billion

Higher Tax Rates on Personal Income £30 Billion

A Wealth Tax £10 Billion


Without this kind of strategy, any claim that the government intends to create a fairer, and more equal, society will lack conviction.