The Chancellor must use the budget to abandon neoliberal policies

Chancellors come and go but the crisis has deepened because they have all become slaves to neoliberal dogmas

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

Next week, the Labour government will present its first budget for 14 years. In a post-Brexit world, it faces considerable challenges in reviving a stagnant economy, diminishing living standards and broken public services.

Despite being the world’s sixth largest economy, a large proportion of the population is overwhelmed by poverty and a sense of helplessness. Adjustments to tax base and rates need to be used to reduce income and wealth inequalities and improve people’s spending power, a key requirement for building a sustainable economy.

Chancellors come and go but the crisis has deepened because they have all become slaves to neoliberal dogmas. People’s living standards have been eroded through never-ending austerity and corporate profits have been guaranteed through privatisations, outsourcing of public services and Private Finance Initiative’s (PFI). It all needs to change.

Profiteering by the energy sector is responsible for creating poverty and killing off the steel and shipping industry. Returns extracted by water company shareholders are the cause of high prices, pollution of rivers and seas, and low investment in infrastructure.

In the 1970s, the UK was lucky enough to win the nature’s lottery in the form of oil and gas deposits in the North Sea. The government squandered the break by handing it all to private corporations and subjecting the industry to comparatively lower rates of tax. The UK handed everything to the private sector, collected $1.72 per barrel in taxes and squandered it on tax cuts for the rich. Norway also found oil and gas deposits in the North Sea but didn’t privatise. It collected $21.35 per barrel in taxes and ring-fenced the revenue for future use. It now has a sovereign fund of $1.4 trillion whilst the UK public finances are a mess. The UK state is still enamoured with privatisation and despite failures won’t bring water into public ownership.

The neoliberal dogma portrays workers as the problem. With the state-sponsored onslaught on trade unions, workers’ share of gross domestic product (GDP) in the form of wage and salaries declined from 65.1% in 1976 to barely 50% now. 12m people, including 4.3m children, live in poverty.  9.3m people, including 3m children are facing hunger and hardship. The pre-tax annual median wage of £28,764 is lower in real terms than in 2008, and is inadequate for people to access good food, housing, healthcare and pensions. Last year some 3.12m people relied upon food banks to survive. Some 17.8m adults have annual income of less than £12,570. The average state pension of between £9,000 and £9,500 is a major source of income for pensioners, and is less than 50% of the minimum wage. Last year, some 5,000 pensioners died from cold as they struggled to afford eating and heating. Unsurprisingly, the UK has labour shortages. 2.8m people are chronically ill and unable to work and 6.33m people are waiting for 7.64m hospital appointments in England alone.

The tax system has been used to impoverish the poor. The richest fifth pay 31% of gross household income in direct taxes; poorest fifth 14%. The Richest fifth pay 9% of disposable income in indirect taxes; poorest fifth 28%. Altogether, the poorest pay higher proportion of income in tax.

Even getting higher education and skills does not necessarily offer a way out of poverty. Student debt has reached £240bn and expected to hit £500bn by 2050. Not so long ago, this was part of the public debt but successive governments have dumped it onto households. The cash which once fuelled spending in the local economy now boosts profits of the finance industry. Unsurprisingly, too many town centres resemble economic deserts.

Due to government policies the top 1% has more wealth than 70% of the population combined. The bottom 50% of the population owns less than 5% of wealth, and the top 10% has 57%. The systematic creation of poverty means that fewer have the capacity to spend and stimulate the economy.

Neoliberal policies have not boosted investment in productive assets. The UK’s investment performance is worse than every other G7 country.  Successive governments have offered tax reliefs, subsidies and grants to stimulate investment but why would companies invest when people lack the power to purchase the resulting goods and services.

Against the above background, the Chancellor Rachel Reeves needs to boost people’s incomes, a necessary condition for securing economic growth and building a sustainable economy. She needs to increase the living wage and at the very least impose a triple-lock on all social security benefits. By ending the two-child benefit cap, government can lift thousands of children out of poverty. By restoring the winter fuel payment to all; it can prevent thousands of pensioner deaths.

Personal allowances have been frozen since 2021 and dragged millions of poor people into income tax brackets. The government needs to end the freeze. Each £1,000 increase in personal allowance costs around £10bn. The benefit to the rich can be clawed back with adjustments at the top end of the scale. This can boost disposable incomes and local economies.

The Employment Rights Bill currently going through parliament offers an opportunity to reset worker rights and end insecure employment. The Bill must be revised to end zero-hour contracts and obnoxious practice of firing and rehiring workers on lower wages. It must give workers a say in corporate affairs by ensuring that worker-elected directors have seats on the boards of all large companies. This can help to secure equitable distribution of income. Only strong trade unions can negotiate with belligerent employers to secure a fair deal for workers.

Taxation policy must be used to reduce inequalities and redistribute wealth. Taxing capital gains and dividends at the same rates as wages is a necessary step. Recipients of capital gains and dividends use the NHS and social care but do not pay any national insurance. That is unfair and must end, and can raise £25bn or more a year for redistribution and or investment in infrastructure.

Indeed, the government has vast policy choices for redistribution and reduction in inequalities. These include wealth taxes on the ultra rich, financial transaction tax, taxes on private planes and yachts. Since 2010, HMRC admits that it failed to collect over £500bn in taxes though others say it is closer to around £1,400bn. This does not include taxes lost due to profit shifting by large corporations. Some £570bn is stashed away in tax havens by UK residents and HMRC has made no estimate of the taxes consequently lost. Altogether, there is a huge potential to raise tax revenues to alleviate inequalities and poverty, and rebuild the economy.

Rather than reviving the discredited Private Finance Initiative (PFI)  under which the government paid corporations £6 for every £1 of investment, the government needs to directly invest in the social infrastructure. Neoliberals always wheel out the argument about public debt whenever any public investment is mentioned. They need to be reminded that post-war construction of the UK was facilitated by government debt of 270% of GDP. This built the welfare state, infrastructure, new industries, revived the private sector, boosted employment and generated tax revenues. By 1976, the debt was reduced to 49% of GDP. Such policies are necessary again. The current government debt is around 100% of GDP, and includes the effects of quantitative easing. When excluded it comes down to about 65% of GDP. So there is room to borrow, and the Chancellor is thought to be considering loosening the self-imposed debt straitjacket.

The hikes in water and energy price have increased household poverty and business costs, and shown that governments obsessed with privatisation have fewer economic levers to manage the crisis. It can acquire more by bringing essential services into public ownership and thus eliminate profiteering and provide economic stability. Neoliberals sing praises of markets and competition, and surely would welcome break-up of banks and internet companies, as that can enhance competition and lower prices.

The Chancellor must abandon neoliberal policies which have held the UK back for so long. They have neither produced prosperity nor happiness for the people. Often emancipatory change is imposed in the teeth of opposition and the same is necessary now. The government must prioritise people’s welfare over the short-term selfish motives of giant corporations and the finance industry.