On Newsnight last Wednesday, a very sharp old lady nailed Conservative minister David Willetts during a discussion on pension reforms by challenging the idea that we can’t afford to maintain the welfare state today when we could afford to construct it from scratch in the immediate, crushingly-indebted aftermath of World War II. It’s a question I’ve heard before – and one I’ve raised on many occasions. But hearing this game old woman raise it with such fire set me thinking even harder about it. Being weird that way – no, being OUTRAGED enough – I’ve spent most of the day and evening into the early hours researching, considering and assessing that challenge and the facts that lie behind it, and behind the counter-argument.
Willetts – far from the most odious of the current crop of Tory ministers, hemmed and hawed and fudged a response, but really had no good answer. Eventually he had to fall back on the old Conservative red herring that ‘there is no magic money tree’, so reforms are inevitable.
The ‘no magic money tree’ cliché is a key part of the Tory narrative of the current economic situation and the reasons for it, because it allows Tories to ridicule any claim that there is an alternative to cuts. The story (and it is just that, not a factual analysis) that the Conservatives want us to believe states that welfare costs – bloated by ‘benefit scroungers’ and an increasingly ageing population – are ‘out of control’ and that we can’t allow things to continue as they are, so various ‘reforms’ (for which read: cuts) are unavoidable. There is no ‘magic money tree’ to pay for these things we’ve enjoyed as of right up to now, so we have to be prepared to see them decimated.
We’ll return to that fishy falsehood presently. But first let’s look at the past and current contexts and see what’s really happening – and how we really stand compared to that famous and gilded period 70-odd years ago when the political giant Aneurin Bevan constructed a system that aimed to provide for the British people ‘from the cradle to the grave’.
Public debt
A major part of the government’s yarn about the unaffordability of our welfare state is that our national debt is out of control. Various versions of ‘record deficits’, ‘debt worse than Greece’ (it isn’t) etc are misleadingly used to create the impression that the UK is circling the drain in a whirlpool of runaway debt, that things have reached a level that can’t possibly be sustained.
Fact trumps fiction. So here’s a graph showing the UK’s national debt, as a percentage of GDP, since 1950-2010:
Paints an interesting picture, doesn’t it? The government likes to point at recent increases in debt to justify the ‘unaffordability’ of the welfare state. But in the days when the UK was constructing it, saddled by vast costs of fighting a world war, our public debt was more than three times as high, at almost 200% of GDP.
And guess what? As the welfare state was built from nothing, adding major new categories of public spending, our national debt fell rapidly. In a period of 25 years, during which the welfare state was extended, public debt fell from almost 200% to just over 40% of GDP. And just to head off (again) any Tory claims that the debt went out of control due to Labour economic mismanagement, please look again and see that it remained broadly the same through the long years of Thatcher-Major, and actually came down under New Labour until the global financial crisis pushed GDP down and unemployment up:
As this graph shows, debt is often higher under a Conservative government, and for most of New Labour’s term in office, debt was brought down. So much for mismanagement.
Here’s another important piece of the context. This graph shows UK welfare spending since 1950:
If you compare the dates in this graph and the preceding one, you can see that many of the times when the UK’s national debt fell coincided with increases in welfare spending (including under Thatcher). Welfare spending up to the end of the last Labour term were very much in line with historic norms, in spite of the increase in NHS & education spending over the last few years of Labour government.
So, it’s clear that welfare costs are really not the key factor in the UK’s debt problems or otherwise. No – something else is going on, some other dynamic is at work in the current deficit and debt situation. Let’s take a look at some more figures that will give us an idea what’s really causing our current troubles, and then we can suggest what really needs to change in order to resolve them.
From wages to corporate profits
Here’s a graph showing the percentage of GDP that was represented by wages – this time since 1955:
Through the 60s and into the mid-70s, wages grew as a percentage of GDP. But as soon as Thatcher came to power, she instituted a dramatic shift of income away from workers and into company coffers:
And remember, this graph is based on reported profits. Companies have numerous accounting tricks to minimise the amount of profit that is reported for tax purposes, so the real situation would be far more pronounced. But even based on what they admit to, we can see a substantial transfer of wealth from ordinary people, who generally pay full tax on what they earn, to companies, who generally don’t. Which leads us to the next key factor:
Corporate tax rates & avoidance
In terms of the national debt, a swing of income from private individuals to company profits, while unfair, wouldn’t pose a problem per se – as long as companies paid taxes at similar rates to individuals. Unfortunately, even the headline rate of corporation tax is far lower than what individuals would pay on the same overall sums. And it’s falling. Chancellor George Osborne announced, in his last budget, that corporation tax would fall from April 2013, and then fall even further in the following budget. Supposedly, this is to stimulate growth & employment, but as I highlighted in an earlier analysis, there is no link between low company taxes and economic or employment growth. The next graph shows the trend in corporation taxes over the past few years:
Now, it’s important to bear in mind that because of the various accounting tricks the ‘effective tax rates’ that companies report are significantly higher than what they’re really paying. So the real situation is even worse – companies use accounting tricks to lower their taxable profits, then use more to appear to be paying more tax than they are. And then they have yet more tricks to reduce their real tax rates even further. Remember the scandal last year as Barclays paid only 1% tax on its massive profits?
Now, to be absolutely frank, this graph from the Socialist Worker site doesn’t quite compare apples with apples, as it compares the increase in profits of a select group of companies with the tax-paid trend of UK companies generally. But that only skews the data slightly – and it’s still an extremely telling and eloquent picture of the part of the problem I’ve been describing:
This massive switch of income to company coffers, combined with lower rates of corporation tax and then the aggressive avoidance even of those lower rates, has led to an enormous tilt in the balance of national wealth from the public purse to the corporate purse:
As a result, private companies are sitting on unused balances of appr. £700 billion – at a time when the economy is in recession and the government is expecting the ordinary member of the public to bear all the pain.
Unrealistic profit expectations
Over the past 30 or so years, the neoliberal ‘reforms’ and deregulation of Thatcher & Reagan have created a massively inflated profit demand among investors. Instead of a reasonable expectation of a steady and sustainable profit, investors have expected large – and constantly growing – rates of return:
As you can see from the graph, the increased importance of the financial sector to the UK economy, with its even more inflated profits, have served to overheat investor expectations. These expectations have pressured company executives to cut every possible penny of cost and to avoid every possible penny of tax. Unsustainably so – but every CEO is going to be most immediately concerned with his own income and security in the short term. All of which is massively damaging to the UK economy, and fuels the next problem:
The rich get richer
As investor greed has grown, so have the rewards for those who are able to meet their expectations in the short term. This has fuelled a massive acceleration in the pay of a very small number of people who claim to be able to sustain the unsustainable: a continual increase in profitability and a continual reduction in costs. This sucks income from the lower earners and inflates the wealth of the few who run companies or own them – and these people, just like big corporations, can afford to pay accountants to exploit every available loophole to reduce the percentage of tax they pay. This further enriches those few people (and their accountants!), while reducing state income to provide services and security for the many.
The poor get poorer
The massive rises in income inequality – again starting with Thatcher’s accession to power – have fuelled a simultaneous rise in poverty in the UK. As poorer people – by definition – have to spend more of what they receive simply in order to survive, taking money out of their pockets reduces the government’s take in terms of income tax and VAT. This removes money from the public purse that should be available to pay – easily – for the social state of which Britain used to be rightly proud.
I hope I’ve painted a very clear picture for you – one that unequivocally shows just how deceptive the government’s ‘narrative’ about the current ‘crisis’ is. And, as I’ve spent all day on this and it’s now very late, I hope I’ll remain lucid enough to be equally clear in drawing the right conclusions from all the evidence!
Osborne and co are very keen on talking about the UK’s ‘structural deficit’ as a justification for the ideological changes they want to push through – and are making. It’s an absolute lie. There is no structural deficit – but there IS a structural problem.
It’s not a problem of Labour profligacy. It’s not a problem of scroungers vs strivers, of an ageing population or of an out-of-control burden on the UK public purse. It’s a problem of a systematic and continuing transfer of wealth and income from the many who would pay tax on it and spend most of the rest into the pockets of a few who will avoid taxes in every conceivable way and keep as much of it for themselves as (in)humanly possible.
It’s a very different one from the picture that our ‘leaders’ would like to paint for us. I said I’d come back to the enormous red herring of the line that there is ‘no magic money tree’. It’s rare for me to agree with the Tories – but they’re absolutely right. There is no magic money tree.
But there is something very concrete and even more important: a massive pot of gold that has been stored up through greed and deception by a few wealthy individuals and some extremely greedy and powerful corporate interests. More than enough to to provide for the needs of ordinary people for generations to come – and what we need are not cuts to public staff and services, not increased retirement ages and pension contributions, and not an acceptance of the supposed inevitability of the destruction of Bevan’s ‘cradle to grave’ ambition.
No, what we need is a series of bold, unapologetic measures to take back the wealth that the few have taken by stealth and deception from the many; to enforce a proper assessment of company profit and a fair taxation of it; a dramatic restructuring of ethos and expectation in our corporate and financial sectors toward levels of profit and growth that are sustainable and a level of labour cost that sustains and enhances our social structure; and an end to the gutless, witless surrender of our democracy to private and corporate interests. Then it will not only be affordable to maintain our social protection – it will be easily so.
These measures will never, under any circumstances, be implemented by the current, craven government that is in thrall to its paymasters and its redundant ideology.
Until we can get rid of it, we need to inform and equip ourselves to resist its measures to the utmost extent. And then, when we have an opportunity to do so, we must vote them not only out of power but out of existence as a political force – and then, without embarrassment (since they’re trying to do the same), make whatever electoral reforms are necessary to ensure that they never take power again.