Training | 2009.12.17
With cuts looming, the issue of who pays is paramount | Seumas Milne
Labour is finally playing the social justice card, but any attempt to slash jobs, pay or services will lead to industrial conflict
To judge by yesterday\'s rhetoric, real politics is back. Following Gordon Brown\'s metaphorical outing to the playing fields of Eton, the prospect of the studiedly New Labour chancellor Alistair Darling telling MPs the country now faces a choice between the "values of fairness" and a "divided society that favours the wealthy few" is another confirmation. And the day after David Cameron reminded financiers that he came from a family of three generations of stockbrokers, George Osborne set the seal on the new battle lines by accusing the government of abandoning the centre ground to "set one part of the country against another".
There was substance in the new divide, too. After weeks of ferocious squealing from the City, Treasury prevarication and dire warnings of mass exodus and evasion, Darling finally called the bankers\' bluff by announcing a one-off 50% super-tax on City bonuses of more than £25,000 in his pre-budget report. The new levy may not achieve the "permanent culture shift" in Britain\'s bloated financial sector which ministers are now talking about. That would demand fundamental reforms of the sector and the transformation of the part-nationalised behemoths into genuine public banks.
But taxing bankers\' bonuses to guarantee work or training after six months for what are now nearly a million young unemployed sends a powerful message about who is responsible for the crisis and who is paying the price. It can also only do the government good, even if thousands of bankers manage to avoid paying up. Ministers can happily live with accusations of populism when they\'re 10 points behind in the opinion polls.
By resisting the siren calls for early cuts in spending while modestly boosting public investment, Darling has also not only made the right economic choice – any early withdrawal of the stimulus would almost certainly drive whatever modest recovery might be in store into a deeper slump. But he has also underlined the widening divide with the Tories, who continue to demand that the government start cutting without further delay.
The savage cuts budget unveiled in Ireland yesterday and the rightwing thinktank Reform\'s call for a million public sector jobs to be culled give a taste of what Cameron presumably has in mind when he says he is a devotee of Margaret Thatcher\'s chancellor Nigel Lawson.
However, Darling has thrown away the opportunity created by the crisis to begin a fundamental shift in Britain\'s grossly unjust taxation system that could at the same time prepare the ground to reduce the budget deficit. Instead of, say, lowering the threshold on the new 50% top income tax rate to £100,000, bearing down on avoidance and introducing minimum tax rates – to deal with the scandal of the bottom tenth paying 12% more in tax than the top tenth – the chancellor increased national insurance again.
True, there\'s an exemption for those earning less than £20,000. But it\'s a regressive tax that will hit average earners, while the polluters and those best able to pay, whose recklessness unleashed this economic mayhem, are once again being treated with kid gloves – rhetorical flourishes notwithstanding. And even though Darling has postponed the squeeze that Cameron and Osborne are determined to impose from next summer, he is himself planning deep reductions in unprotected spending from 2011 and real terms pay cuts for millions of public service workers, if only to appease the markets and the media.
The Conservatives would certainly cut deeper and earlier, and are currently planning a public sector pay freeze for those earning over £18,000 a year. But even if growth is running at the 3.5% currently forecast for 2011, there is still a risk that the level of cuts envisaged by Darling could choke off recovery and tip the economy into the kind of deflationary spiral that Japan experienced in the 1990s .
Far from reducing the deficit and public debt, that could actually increase both, as Nomura\'s chief economist, Richard Koo, has argued. Perhaps, if Labour were re-elected, it would come to the same conclusion and opt for a slower adjustment. There seems little chance of that under a Cameron administration, for whom the deficit is an ideal opportunity to hack back the public realm in its relentless pursuit of a small state.
Of course the deficit is a potential problem if, as the drip-feed of quantitative easing is withdrawn, the bond markets demand a higher premium to service it – and there needs to be a flexible plan to reduce it. There are also cuts that would actually be welcome, from the exorbitant bureaucratic infrastructure of private contracting and consultancies to the Trident programme. But the political and media clamour for cuts and the elevation of government borrowing and spending – which has saved the economy from a far more catastrophic crash – to the greatest threat facing the nation is far more dangerous.
This has been, after all, not a crisis of the state, but of the market. Governments are not households, and their cuts don\'t represent savings at the economic level. Public spending is at present keeping the economy afloat by filling the gap left by a collapse in private investment and demand. The deficit will be overcome not mainly through cuts or tax increases, but through a return to economic growth. And that needs more public intervention, investment and spending, not less.
But cuts of some sort are clearly what we\'re going to get. There is little public appetite, however, for making public sector workers pick up the bill for the bankers\' folly; nor, opinion polling suggests, for a public spending squeeze. And as Len McCluskey, favourite next year to take over Unite – the country\'s largest union – warns: "Cuts in services, jobs or pay will set off an industrial and political storm for any government which attempts it."
Ministers have at least grasped that in periods of recession and public retrenchment, the issue of "who pays" becomes paramount. Labour\'s 11th-hour decision to play the social justice card – even if its actions are still lagging well behind its rhetoric – may yet help it narrow the gap with the Conservatives. But whoever wins the election, we are facing the prospect of much sharper social conflict for years to come.
For more information, please visit
http://www.guardian.co.uk/commentisfree/[...]/pre-budget-report-cuts-labour
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