‘The dragon’s head is on the Chancellor’s chopping block’
Bubble — By WalesHome on June 23, 2010 7:00 am
Osborne: "This is the unavoidable budget"
Paul O’Shea, Wales Secretary, UNISON
DAVID Cameron called it “the most important budget for a generation” and I would certainly argue that it is, but for all the wrong reasons.
The fact that Osborne is still trying to label the cuts as “fair” is insulting in the very least. In typical Tory style, it is the public sector workers and the vulnerable in society that will face the worst of these cuts and so-called “pay freezes”. Quite how it can be called a pay freeze when inflation is running at 5.1% and VAT is set to rise to 20% is a mystery and it will have a catastrophic impact on the many families that are already facing financial pressures.
Sadly, Wales is going to find these deep cuts even harder to absorb – Wales is already underfunded by at least £300 million a year through the Barnett formula. Couple this with the fact that Wales has one of the highest levels of child poverty in the UK and the budget announcement of a freeze on child tax benefit, and the future for Wales becomes a fearful prospect. It certainly doesn’t present a picture of social advancement, local investment and economic growth. It would seem that the Coalition government is hell-bent on attacking the public sector and those that rely on it in a bid to protect the bankers and super-rich. The bank levy does not go nearly far enough in redressing the balance; in fact, the Coalition seem so committed to shielding their rich friends and cabinet millionaires that they are willing to risk a double-dip recession by adding thousands to the dole bill as well as losing billions in lost tax and revenue in the process.
It is clear that these plans have been in the Tory pipeline for some time. We have seen them scare-monger the public with misleading messages of a ‘bloated’ public sector and ‘gold-plated’ pensions in a ruthless campaign to justify the destruction of front-line services. Yet the facts are starkly different with the average local government pension at £3,800, a mere fraction of the bonuses that fat cat bankers continue to be privy to.
In order for our economy to recover and to repay our deficit we clearly need to grow and invest in the private sector, but this is not going to be achieved through savage public sector cuts. If anything, this slash and burn approach is going to lead to further slump and the very real threat of a double-dip recession. We must not forget that the deficit does not have to be paid back within five years and in fact can be better paid back and sustained through growth. Osborne’s race to cut the deficit in record time is actually a race to devastation in which public services and those that rely upon them will be the first winners.
In Wales we must pull together and work upon damage limitation. UNISON will continue to work with the National Assembly and public service providers to minimise the effects of this irresponsible budget through saving as many jobs as possible, protecting our frontline services and providing a voice for the voiceless. Public services provide the foundation for a fair and just society – it is not a case of whether we can afford to keep them, it is the fact that cannot afford to lose them that will spur us on in Wales.
Siobhan McClelland, health policy expert
THE Westminster Government’s mantra of “We’re all in it together” is perhaps better chanted as “some of us are more in it than others”, particularly if you have children, are disabled or receive housing benefit. The changes to personal allowance and index linking of pensions is counter balanced with an increase in VAT one of the least progressive taxes which affects those who are poorest most disproportionately.
We were led to believe by some that this budget might mark something more fundamental – the redrawing of the boundaries and role of the state and a renegotiation of the social contract between the citizen and the welfare state in particular. There hasn’t been the rolling back of universalism we might have expected – Wayne and Colleen Rooney will still get their child benefit but again freezing this for all will affect those with less money. But does it mark the beginning of the dismantling of welfare?
There is of course a huge question-marked shaped hole in the budget. If much of redressing the deficit is to be achieved through public spending cuts, other than the high level figures, we still don’t know exactly where the axe will fall and again this has the potential to hit the most vulnerable hardest. While in Wales we may have control over how we will determine policy in many of these areas – no pop-up ‘free’ schools for us here – nonetheless the dragon’s head will equally be on the Chancellor’s chopping block come October.
Angela Elniff-Larsen, research and development consultant
THE first reaction I have to the Budget is its confusion. The Chancellor raced across business, pensions, families, welfare benefits, housing, capital projects, broadband, VAT, cider and the England football team in around 50 minutes.
The effects on Wales will be deep. The cuts in benefits are savage. Reducing housing benefit to £400 is going to make people homeless. Where can you rent a three or four-bedroom property for that sort of money? The freezing of other benefits, although may be won’t seem much to a multi millionaire, can make the difference between a meal with meat or just pasta sauce for some families.
The VAT increase will hit hard in low to middle income families who are not on benefit. Prices will go up, especially in the retail sector. VAT will hit transport, travel to work costs, food, clothing one way or another. We may, however, see a big spend at Christmas. The Chancellor has also left himself room for manoeuvre: if the economy brightens, he can cull the percentage rise in VAT and look good. The pay freeze in the public sector will hit growth too, as will the 25% savings he is looking for in the public sector. There are many small businesses in the supply chain that will lose business and staff when this impacts. The benefit to business is in England so we have to wait to see what Wales does.
So historic, no. Hysterical maybe, as it seems an over-reactive budget that may strangle the fragile green shoots of growth we are seeing. It may well be historic for the Lib Dems as so much it goes against their ideology and manifesto, cuts to them may well be in terms of votes and seats. This will take a while to digest before we know its real impact.
David Jones, businessman and investor:
I WROTE yesterday afternoon that the markets did not react to hearing the Osborne budget. And I surmised that this was because they had expected it to be as bad as it was.
And it was so very bad that it deserves to be called historic because of its scale and aggression. But it was also historic in some of the details. Surely there is no other government that has committed to reduce the education budget by 25%? Although we’ll have to wait until October for the news of precisely where the axe will fall.
It was also historic in the economic history of the UK. The 2008 crash has been compared to driving a car at 70mph down an open road and then, without warning, slamming it into reverse. To prevent disaster, Gordon Brown and Alistair Darling (and Bush, then Obama) threw everything they could at the chaos that followed. And most of what they did was to print money. The global economy was drunk on credit in the decade before 2008 and once the party stopped the Government’s solution was to go out and buy more booze.
The hangover was successfully delayed, but we always knew that it would come, and yesterday we got the entire plan in just 50 minutes. Not a slow five-year gradual unveiling, but the whole thing. Never has such a deflationary plan been presented before.
Will it work? So far the markets think so, because Sterling hasn’t bombed (at midnight on Tuesday the £ Vs $ is virtually unchanged.) Also, there is enough in the budget to support business growth – the £2m to £5m entrepreneurs relief is a big signal of Osborne’s intentions to grown the private sector to replace a depleted public sector.
As I write there is no mobs with burning torches on our streets. But the hard part is still to come, and if there is significant pressure which prevents the savings being made, then Mr Osborne will be shown to have bitten off more than he can chew.
Russell Lawson, Federation of Small Businesses:
THIS was a very significant Budget for the new Chancellor as he had to walk the tightrope of cutting public spending but at the same time making sure that the private sector retains the ability to absorb the resulting job cuts.
Certainly the mechanism of applying the NI holiday to only some of the nations and regions of the UK is a significant policy. On the one hand the UK has a much greater inequality of wealth between its richest and poorest parts than any other EU member which this is a structural problem with the UK economy and therefore needs to be addressed in more radical ways than have been attempted up to now. This will be the first time that different tax rules will apply to different regions of the UK, and is therefore a ground-breaking departure from previous policy.
On the other hand, however, businesspeople in one of those regions in the south east corner of England might well be pretty angry that the new party in power had gone back on its election promise (“any new business will pay no Employers National Insurance on the first ten employees it hires during its first year,” Conservative Party manifesto).
Government plans to hike VAT to 20 per cent from 17.5 per cent will hurt small businesses in the high street. At least there is some time to go before the increase takes place and it is interesting to note that commonsense has prevailed with the increase coming into play on 4 January 2011 and not on New Year’s Day.
Tags: budget, Westminster
Tweet This
Share on Facebook
Digg This
Bookmark
Stumble
19 Comments
David Jones and Angela Elniff-Larsen point out a clever aspect of this budget – its tough, really tough, but it’s all out in the open. As the Government work on through their term of office, they can start easing things until, suddenly, the year before the next election, they can announce that things aren’t as bad tas they were, and now they can relax the purse strings a bit. After this budget, they must hope that it’ll be all good news.
A couple of points that I’m confused on. I thought that the £400 housing benefit was a weekly maximum. Surely as awful lot of homes in Wales can be reneted for less than £1600 a month?
Also, why does VAT hit the poorest the worst? I’m not disagreeing, I genuinely don’t understand. Many of the staples of life like food and children’s clothes are VAT free, I’m assuming that the 5% home energy rate isn’t changing. Is it just a “percentage of earnings” thing, or am I missing something?
Finally, Angela Elniff-Larsen says that the benefits for business are in England. Is anyone able to explain what of Osbourne’s plans are devolved matters, and what are still Westminster controlled?
PS I was going to say something rude like *YAWN* when I read Paul O’Shea’s piece. The unions have reacted entirely negatively to the budget, and in fairly over-the-top language, in my view. But O’Shea actually contributed something new by the end of the piece, so thank you! I hope that the Unions’ attitude in Wales will be one of cooperation with WAG to try and make the most of a very bad deal.
When the US went through “welfare reform” and Al Gore “reinvented government” in the 1990s it required a huge investment in training, information systems and streamlining/redefinition of work-flow systems. It costs money to save money at this level. Do Camer-legg really expect the Civil Service, unions, those on benefits and Wales to just roll over and lay down?
And where were the LibDems? One would think this budget runs counter to everything their members and platform believe in? it just shows how irrelevant they are to this process.
Nick Clegg sold his soul to govern. Cameron only needs a handful from any other party to join him on this or any issue. While the political calculus is brilliant, it’s going to be a long, hot, disruptive summer!
I would urge anyone who has not heard Paul O’Shea speak on the banking crisis and its corresponding impact on the Welsh public sector to do so, as he knows the subject matter inside out and makes the point – quite rightly so, IMHO – that it simply is not fair that low-waged council workers (and, let’s not fool ourselves, they are likely to be most affected) should pay the price for banking and investment folly.
Having had this argument before, I fully appreciate and, to a great degree, agree with arguments put forward by people like Jeff Jones, who says we cannot afford to look over our shoulder and lament on what has already happened, when there is so much to deal with in front of us.
However, what this recession and its consequences have done is give Wales a real back-to-the-drawing-board moment to assess and appraise our economic position and ask ourselves what kind of economy we want in the future. Do we really want to pay this lot off in good time only to suffer the consequences when the next financial crisis comes along? It is bound to happen, not least because the smartest guys in the room end up in the City. Of course they do, because that’s where they can make the best money. And they not only have the wit, but they also have the money to pay for the very best lawyers in order to skirt around any regulation that may (or probably may not) come along as a consequence of the credit crunch.
So what does Wales do to insulate itself, or at least mitigate against, this foreseeable situation? It’s only broad brushstrokes, but I am firmly arriving at the position where I believe Wales has to unhook its economy from the rest of the UK’s, because no longer can we allow our fortunes rise and fall with that of the City’s.
I don’t want the Square Mile as the cornerstone of our economy. I want Wales to take a good, long, hard, scientific look at what it does best or can do best, and then map out a way forward. We need to examine the skills set, the chances of growing a high-skilled manufacturing economy (and developing our own markets), of exploiting fully our resources (and this means water more than coal extraction), breathing prosperity back into the countryside. And we need to think about an expansion of co-operative movements.
All these things are possible. I have examples. And all of them are being worked on to a greater or lesser degree. But we also need to start thinking about establising our own institutions to back up this work and protect us further from boom and bust. We should be thinking about Wales-only pension funds, as they have in Scotland, about a Welsh infrastructure bank, and our own, similar financial institutions.
I don’t pretend that I know all the answers, and maybe free economies are too tied in together for some of this to happen. But the recession behoves this debate. So let’s have it.
Angela
the situation with Housing Benefit is probably worse than you think; at present only 50% of claimants get enough HB to cover their rent (despite the Daily Mail’s high profile horror stories of people taking home thousands they are the exceptions). Even scarier is the proposal (which we’re verifying today) that those on Job Seeker’s allowance for a year will then have their HB reduced to 90% of their rent costs which is going to be a major income loser for families already on benefit. This will have a massive impact on the lowest income groups and almost certainly hit Wales disproportionately hard as we are bound to see unemployment rising yet further with public sector job cuts and little to replace them into the medium term.
Duncan – that sounds like an article for Wales Home to me.. I’d certainly be interested to read it!
I thought that was what devolution was supposed to offer us – a chance to disassociate ourselves from the more damaging Anglo-centrisms of Westminster policy, while still sharing our common interests.
The problem is – suggest a good “regional” / “national” plan, like the Welsh stock market, for instance, and the boo-boys start off on their “nation building” rant: Anything different to England is taking us to the “slippery slope to independence”, etc
But an article that outlined how such policies would work for Wales – that would be worth reading!
My “criticism” of the Union’s reaction to the budget, by the way, was not an attack on what Paul O’shea had written. (Is there anywhere that I can hear / read his detailed views as you recommend?) I’m just already bored of the Union’s saying the same as they always say about the Tories, and then accusing the Tories of being driven by “ideology”.
My impression is that the departmental spending cuts are what will truly bite, not so much the headline-grabbing stuff about vat and capital gains, benefits etc. Departmental cuts means job losses.
Illtyd wrote: “My impression is that the departmental spending cuts are what will truly bite, not so much the headline-grabbing stuff about vat and capital gains, benefits etc. Departmental cuts means job losses.”
I agree that they have the potential to bite the hardest. But surely just saying any job losses are bad is both simplistic and dangerous? How many WAG employees are still in that pool system where they’re being paid to sit at home?
People need to move beyond big sweeping statements. Though I can carry on making them, obviously.
Russell wrote: “This will be the first time that different tax rules will apply to different regions of the UK, and is therefore a ground-breaking departure from previous policy.”
Yes, you’re right there. Worth a bigger article on the implications, I think
Hi Iestyn,
I didn’t take it as a criticism, and I agree – the complaining has to stop. There’s very little we can do about the Budget now, anyway.
Paul has written here – http://waleshome.org/2010/04/we-cant-afford-to-cut-the-public-sector/
Can I also recommend Ian Titherington on the same subject? http://waleshome.org/2010/04/a-perfect-storm-that-wales-cannot-weather/
I may have made a rod for my own back by suggesting a way forward on the Welsh economy – hence the “broad brush strokes” get-out-of-jail-free rider. I don’t pretend I know anything other than we can’t go through this again. But I’ll have a think about it and cast around for some educated opinions.
Independence is such a polarising word, inasmuch as it is either good, or bad. There are few shades of grey. But is this really the right way to look at the subject? What is wrong with having stand-alone, stand-apart institutions in support of the Welsh economy. People can call it nation building. I call it national protection.
At the very least, we could start with a Welsh economic think tank. That would cost nothing.
You can read the original piece by Paul o’shea and much much more in the Bevan foundation Review, available for a short time on http://www.Bevanfoundation.org
I agree errmm… with Duncan. There is a need to ‘unhook’ our institutions and governance from England and rebuild our own Nation. The only way to do this is to gain control of the money. This can be done by implementing successful models of banking reform (of which there are a few good examples) which encourages money earned locally to be spent locally and which means (proper) credit unions, and co-operative (not necessarily social) business. It also means public sector capital expenditure on infrastructure built by Welsh private sector.
I’m delighted to see that Russell Lawson and I see eye-to-eye on the significance of the NI holiday being applied only to the nations and regions outside the south east corner of England … as I noted here on Syniadau.
Whether by accident or design on the part of the new ConDem coalition, using national/regional variations in tax as a mechanism to encourage economic growth outside the “hotspot” of south east England has great potential. There could also be differing rates of Corporation Tax, as the government seems to want for Northern Ireland but could equally well apply to Wales and Scotland too, as I said here.
One other idea I like, suggested by Dylan Jones-Evans in this post on his blog, is that there could be a lower Corporation Tax rate for manufacturing, as was done in the Republic of Ireland until the end of 2003. This would apply across the UK and would address the need to start making things again, since manufacturing as a proportion of GVA has fallen markedly over the last few decades. However it would particularly benefit Wales because a greater proportion of our GVA comes from manufacturing than in other parts of the UK.
Like the idea of varying Corporation Tax rate for manufacturing, particularly as the sector’s contribution to overall Welsh GDP fell 10% to 18% during the time Labour was in government.
You’re right about the figures, Duncan. But the decline in the importance of manufacturing has not been confined to Wales. It went down across the whole of the UK, and went down by roughly the same proportion in Wales as it did in the UK as a whole.
Did it? I thought it had declined quicker here in Wales, but I am happy to believe what you say, MH. And it gives me an excuse to check over the stats (which I really should have done earlier…)
I’ve focused on manufacturing because giving it back some strength seems to me to be a possible way of distancing the Welsh economy from that of the rest of the UK. I don’t think any of this is easy, of course it isn’t. And if banking crisis equals recession, then recession usually means trouble for manufacturing. However, I still think it’s worth exploring, and I seem to have made a rod for my own back with all this “unhooking” stuff…
I’ll try and save you some time, Duncan. I looked at the figures in detail after Dylan Jones-Evans criticized (in this post) the decline of manufacturing in Wales in particular without saying it was only a reflexion of what was happening across the UK. The GVA figures for manufacturing against total GVA were:
Wales: 1997 = 7974/28760 = 27.72% … 2006 = 7545/42193 = 17.88%
England: 1997 = 120700/618187 = 19.52% … 2006 = 128499/985477 = 13.04%
Scotland: 1997 = 13047/61483 = 21.22% … 2006 = 12992/93361 = 13.92%
NI: 1997 = 3333/16476 = 20.23% … 2006 = 4119/26787 = 15.38%
UK: 1997 = 150247/724906 = 20.72% … 2006 = 153155/1147819 = 13.34%
If we take the statistically dodgy path of taking percentages of percentages, the relative decline of manufacturing as a percentage of GVA was 35.62% in the UK, but in Wales was 35.49%. Almost the same, but with the fall in Wales being very slightly less.
This was back in January 2009. I haven’t checked the more recent figures since then.
Thanks, MH. Much appreciated. What do you make of the fact that Wales has fallen more sharply than Scotland or NI, albeit from a higher starting point?
Duncan, Scotland’s fall (as a percentage of a percentage) was 34.40% … and England’s was 33.20%. Neither are so very far out of line with the UK as a whole. NI’s fall (23.97%) was the one that markedly bucked the trend. As for why? I don’t know. Perhaps others can say.
It’s stating the obvious, but I think all parties have been disappointed at these falls for manufacturing and think we should do something to reverse the trend. I think DJE’s idea was a good way of doing it.
Thinking out loud, North Sea oil and gas is now subject to a “supplementary charge” of 20% on the same taxable basis as corporation tax (except that finance costs are not permitted as a deduction) and can therefore be considered as an additional component of corporation tax for that particular industry. See here, Ch 7. Perhaps this could set a precedent for a new model of CT. A low across-the-board base rate, but with various “supplementary charges” being applied. Manufacturing could be exempt with everything else at a higher rate, or there could be different supplementary charges for different sectors. The devolved administrations could also vary the supplementary charge for profits earned in their own countries/regions. This would require regional accounting for tax purposes, but it is something I have wanted to see for ages as it will end pointless speculation about the extent to which some parts of the UK subsidize the others.
Strangely enough, the idea isn’t so far removed from the Calman income tax solution for Scotland. So we might develop it as a common framework principle/mechanism for varying tax both by location and sector.
All very helpful stuff. Thanks for your contribution, MH. I will email you separately about something else in the next day or so.
Seems that Russell Lawson is off-message with the FSB.
http://www.telegraph.co.uk/finance/businessclub/7902105/Jobs-stimulus-needed-to-arrest-slump-in-business-confidence.html