Alistair Darling’s pre Budget Report: Pain now, pay later

Alistair Darling reads the beginners guide to the economy, photo Suz

The government’s Pre Budget Report (PBR), presented by Alistair Darling, the Chancellor of the Exchequer, marks a new stage in the developing economic crisis by proposing to inject £20 billion of public money into the economy partly through tax cuts to try and minimise the effects of the recession.

The PBR indicates the dire straits that British capitalism is in. Darling has had to revise down the government’s growth forecast for next year to a projected fall in GDP of approximately 1%, a record forecast revision by the Treasury. City economists are seriously considering the possibility of deflation, when prices and incomes actually fall, which could spiral into an economic slump.

Darling is attempting to prevent this outcome by immediately injecting £20 billion of government funding into the economy and expanding government borrowing to an unprecedented level. His measures include a 2.5% cut in VAT, the cancellation of the tax rises to low paid workers (for now) and bringing forward spending on roads, schools, housing and energy efficiency.

The government’s strategy is a gamble. He is hoping that the tax cuts will stop the slide in consumer spending and, together with the extra public spending, reflate the economy. All the signs point to a serious economic downturn. John Lewis reports “dismal spending” in its stores as Christmas shopping begins. The entire Woolworths shopping chain has been put up for sale for £1, less than 200g in the shop’s Pic ‘n mix (although the buyer will have to take on Woolies’s £300 million debt mountain) putting 30,000 jobs at stake.

If the gamble does not pay off and the recession turns into deflation then the government will find it very difficult to service its debt. And the Treasury forecasts on which the measures are based are more optimistic than most independent forecasters. But the threat of the crisis in capitalism is so serious that most capitalist commentators support the government’s measures.

The government has promised to pay for this increased spending by cutting public services and increasing taxes in future years. Working class people suffering the worst effects of the recession with job losses, debt defaults and home repossessions will be expected to foot the bill for bailing out the banks and reflating the economy as well. We are suffering the pain of the crisis now while having to pay for its effects later. It will not be lost on millions of families that the fats cats who caused the crisis will be escaping its consequences.

Illusion

It is for this reason that Darling is trying to create the illusion of the top earners also sharing the burden of future tax increases by appearing to slaughter one of New Labour’s sacred cows, the pledge not to increase the rate of income tax, and promised to increase income tax for the top 1% of earners to 45%. New Labour apologist Polly Toynbee in The Guardian claimed “At last, the party of social justice has woken up”.

But it is an illusion. Only those earning over £150,000 will be paying the new higher rate and Darling has put off the tax increase until after the next general election when he has promised to increase taxes for everyone anyway. The income tax rise on high earners will fill at most just £2 billion of the anticipated £118 billion hole in government finances next year. Workers’ National Insurance contributions will definitely rise in 2011 but there will be other tax increases as well.

And the top earners are the most adept at avoiding paying taxes by hiring teams of accountants to evade income tax. According to the PCS, which represents workers in the Revenue and Customs, £25 billion is already lost through tax evasion every year, mainly from companies and rich individuals.

In the past when Labour governments have proposed significant rises in public borrowing and income tax rises for the wealthy there has been a sustained attack on those governments by the ruling class and the capitalist media. But Alistair Darling’s announcement of an increase in government borrowing to £118 billion and in the top level of income tax has largely been accepted. Shares on the FTSE index of top companies on the London Stock Exchange soared by a record amount.

Past Labour governments were sometimes forced to dimly reflect the desire of working class people for better public services and higher taxes on the rich. But Labour has changed into a totally pro-business party and this was a Pre Budget Report designed to try and help capitalism get out of the hole it had dug itself.

Already public services are struggling to keep their heads above water. As the article on our front page exposes, the pressure on NHS spending is already beginning to bite. Darling has announced cuts, “efficiency savings”, of £5 billion in 2010. But the public spending cuts in the following years will be draconian. The Financial Times reported that it will be necessary to cut public spending by 1% of GDP every year after 2012. Robert Peston of the BBC estimates the need to find £40 billion a year in future years. He claims “we will all be impoverished”.

The global financial crisis which has triggered the recession still has some way to go. Citibank, the second biggest bank in the world, was the latest bank to be bailed out last weekend. It was a potential buyer for Wachovia when it failed two months ago but now it in turn has had to be rescued. The US government has promised to underwrite over $300 billion of loans and has part-nationalised the bank at a cost of $20 billion.

It is possible that a global recession will be a deep one. Incoming president Obama is preparing a reflation package of infrastructure spending of an unprecedented $500 billion (on top of the $1.2 trillion spent by the Bush administration to deal with the banking crisis) to try and prevent a slump in the USA.

It is more likely to be a long downturn reminiscent of Japan’s “lost decade” in the 1990s when despite many desperate give-away budgets, Japan remained in recession for 10 years.

The strategists of capital look to the future with dread. They are hoping to unload the crisis onto the backs of the working class and the middle class. Working people will not just accept the terrible effects of the recession or the cuts in public services and a stormy period of struggle in Britain can open up to defend living standards and social conditions.