Prem Sikka on shrinking the state

Austerity can only be ended by a shift in political philosophy argues Prem Sikka

Within minutes of the Chancellor delivering his autumn statement, The Daily Telegraph declared that ‘George Osborne has ushered in the end of austerity’. True that he succumbed to public pressure and temporarily abandoned the savage cuts in tax credits, which top-up the income of the less well-off. He also did not proceed with the rumoured cuts in police budgets, but that does not amount to the end of austerity. Austerity is part of a neoliberal philosophy which espouses a smaller state for supporting citizens but not for corporations, reduction in government but not personal debt, abandonment of citizens to markets and cheapening labour to increase corporate profitability. Austerity is an ideological choice and not a social necessity.


The Greek economic crisis showed the difficulty of standardising economic policies across countries, regardless of their local needs. Many commentators have drawn attention to the foolishness of imposing an overvalued Euro and curbs on state intervention in social and economic matters. Yet this philosophy is written into broader economic policy too. For example, on 19 June 2015, the EU reassessed the UK’s economy and said that “The United Kingdom should put an end to the present excessive deficit situation by 2016-2017 at the latest. The United Kingdom should reach a headline deficit of 4.1 % of GDP in 2015-2016 and 2.7 % of GDP in 2016-2017, which should be consistent with delivering an improvement in the structural balance of 0.5 % of GDP in 2015-2016 and 1.1 % of GDP in 2016-2017, based on the Commission’s updated 2015 spring forecast”. The above numbers are arbitrary and have no regard for any local social settlements mandated through the ballot box. They damage democracy and limit public choices. The policies are entrenching austerity across the EU and have been eagerly embraced by the UK government as it resonates with its right-wing policies. For example, in its autumn statement the government is committed to a further £12 billion reduction in public expenditure as it seeks a ratio of 36.5% of GDP by 2020, a level last achieved in the depression era of the 1930s. The relentless assault on ordinary people continues. The current government has backed off cuts in tax credits, but their replacement known as Universal Credits will deliver the same devastating effects from 2017 onwards. The Institute for Fiscal Studies (IFS) has said that 2.6 million working families will be £1,600 a year worse off than they would have been under the current system while 1.9 million will be £1,400 a year better off. The government is looking for £22 billion of what is calls ‘efficiency savings’ in the National Health Service (NHS) which is already hard-pushed for cash. In addition, the government is looking for a 25% cut in the Department of Health’s Whitehall budget.

Poor record

The government has a poor record on chasing tax avoiders, but there are to be 18% further cuts, which the government terms efficiency savings, to Her Majesty’s Revenue and Customs (HMRC). HMRC admits that for each of the last 10 years, it has failed to collect about £35 billion due to tax avoidance, evasion or arrears though some models put the estimates at around £120 billion a year. Other cuts include 26% for the Cabinet Office; 14% for the Department of Works and Pensions, 37% for the Department of Transport and 17% for the Department of Business, Innovation and Skills. The government is to close a number of courts even though some 30,000 cases relating to tax disputes are waiting to be heard. Altogether some 80,000 civil servant jobs are expected to disappear which will have a knock-on effect as people will have less to spend. A 56% cut in local government funding by 2020 has been planned. So how are the local councils to fund libraries, road repairs, housing, flood defences, child care and services for the elderly? The government says that councils can sell £250 billion of assets. The difficulty is that this form of privatisation can only generate one-off cash and can not solve the deeper funding problems. Selling household silver to pay for operating costs is not a good policy. The sale of public buildings would mean that councils would need to lease offices and pay rents. The sale of parks would decimate the local environment. By starving councils of funding, the government will soon declare them to be inefficient and thus pave the way for privatisation of swathes of public services. Local councils are to be allowed to add 2% to council tax to fund social care. This is expected to raise £6.2 billion, but are ordinary people in a position to provide this? The workers’ share of GDP has been relentlessly depressed. In 1976, wages and salaries accounted for 65.1% of the gross domestic product (GDP). It now stands at 49.3%, the lowest ever recorded. Despite the recession corporate profitability is high, but a wage rise in real terms for workers is not on the horizon. Lengthening queues at food banks and decimation of local high streets show that ordinary people do not have the purchasing power to support a sustained economic recovery. The government could stimulate the economy by redistribution of wealth, but it will not do so. The corporation tax rate has declined from 52% (in 1973) to 20% and is set to further decline to 18% by 2019. The top rate of income tax has declined from 83% (in 1979) to 45%. Perhaps, those with the broadest shoulders could carry the biggest cuts, but that is not the case. There are no plans to reverse cuts in corporation tax or income tax reductions for the wealthy. The government could borrow to invest in social infrastructure, but is committed to eliminating the deficit and having a surplus by 2020. Instead, it is expecting ordinary people to take on more debt. The personal debt in the UK is about £1.46 trillion, just short of the GDP. The government’s economic recovery plans assume that by 2020 this would rise to about £2.5 trillion. With a shrinking share of the GDP, most people will not be able to repay this debt. The seeds of another financial crisis are being sown. The Conservative government is pursuing its ideological project of shrinking the state even though ultimately only the state can provide social infrastructure, bailout of banks, security and enable citizens to have a collective identity. The government may achieve its deficit reduction and appease the City of London, but at what social cost? A new society is being crafted where timely healthcare will be available to those able to pay, and decent housing will be beyond the reach of many. In the government’s policies, poverty, poor health, lack of economic opportunity, decent housing and reliance on welfare are portrayed as failures of the individual rather than as properties of a social system.

Deprivation in inner cities 

The Conservative administration of 1979-1997 pursued similar policies and these were accompanied by deprivation in inner cities, high unemployment, riots and ultimately complaints that without investment in healthcare, education and transport, the private sector could not thrive. Historically, the UK economy has been built by a combination of public and private investment. The state built telecommunications, biotechnology, airlines, shipping, gas, water, electricity and other industries as the private sector did not show any appetite for risks in emerging technologies. This provided well-paid skilled jobs. The current obsession with deficits and appeasement of markets will leave the UK behind in competitive stakes. The never-ending austerity will not be reversed by simply changing governments. A major shift in political philosophy is needed. There are signs that the Labour Party under the leadership of Jeremy Corbyn may provide this new direction. Relationship with the EU will need to be renegotiated so that citizens’ aspirations can be met and the state is not strait-jacketed by some market diktats about investment. The EU and UK government obsession with public debt and neglect of personal debt needs to be challenged. The alternative is misery for millions, insecurity and instability which will deepen social divisions.

Leave a comment...

This site uses Akismet to reduce spam. Learn how your comment data is processed.