The 1945 MomentBoris Johnson Should Follow Biden’s AmericaNot Cameron & Osborne
Austerity failed Britain during the COVID-19 crisis, but the Government has not yet signalled a bold new vision for the UK’s economy, says Jonathan Portes
“She [England] is not being true to herself while the refugees who have sought our shores are penned up in concentration camps, and company directors work out subtle schemes to dodge their Excess Profits Tax”
This sentence, from George Orwell’s essay The Lion and the Unicorn, is much less quoted than his more conservative-friendly descriptions of the essence of England – “old maids hiking to communion among the morning mists” – or his withering scorn for the “flabby”, unpatriotic left-wing intelligentsia who did not, in his view, really understand England or the English.
But the point of the essay, published in 1941 when defeat by the Nazis was a very real prospect, was to lay out a radical, even revolutionary, agenda for Britain after the Second World War. Orwell’s six-point programme included socialism at home – nationalisation of land, the banks, and more, and a cap on incomes – and freedom for India.
As Orwell saw it, England – “a stuffy Victorian family… with the wrong members in control” – needed to seize the opportunity presented by the war, and the way that it had revealed both the strengths and weaknesses in the structure of our society, to change fundamentally our social and economic order.
So can, or should, the aftermath of the COVID-19 crisis be another 1945 moment for the UK?
Difficulties Dodged in Budget
Even before the Coronavirus pandemic, a decade of slow productivity growth, stagnant real wages and growing inequality had made the wrong turn taken by UK economic policy palpably apparent.
A narrow focus on public finances may have meant that the fiscal position – Government debt levels – didn’t look so bad. But growing inequality and hollowed-out public services made us less, rather than more, resilient to crises.
Austerity left the British economy – and society as a whole – fundamentally unprepared for the pandemic, meaning that its impacts were vastly unequal, both in health and economic terms. The poor, black people, those with ethnic minority backgrounds and the disabled have been hit far harder – not because of the genetic make-up of either the virus or its victims, but because, as Michael Marmot’s report found, these were already the groups most vulnerable to existing health inequalities which had worsened in the past decade.
The success of the vaccination programme means that the UK economy will recover – perhaps quite strongly – over the next year. But it is likely to be a K-shaped recovery – much better for some than for others – that will further expose and widen those structural inequalities.
For those of us who have been able to work from home, in relatively secure jobs, and who have accumulated extra savings, the ‘feel-good factor’ of the lockdown ending will mean that we can go out and spend again, which is likely to lead to something of a consumer-led boom. However, the end of the furlough scheme and of the boost to the Universal Credit benefit means that October is likely to see a rise in unemployment combined with cuts to the incomes of the unemployed and low-paid workers.
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Against this backdrop, the best that can be said about the Chancellor’s March Budget is that it did not immediately repeat George Osborne’s macroeconomic policy mistakes of raising taxes and cutting spending before recovery is established.
Rishi Sunak’s strategy is now reasonably clear: to continue to spend “whatever it takes” to get through the pandemic, while at the same time trying to maintain the Conservatives’ image – as best as possible – as the party of “fiscal responsibility” by promising future tax rises and spending cuts to reduce the deficit.
A supine media, which continues to parrot nonsense about the “nation’s credit card” will make this much easier than it should be.
But nor did the Budget contain anything remotely adequate to address the scale of the UK’s challenges. All the difficult issues were dodged.
The Government’s ‘Levelling Up’ fund turns out to be an exercise in pork-barrel politics, aimed at funnelling money directly to the constituencies of Conservative MPs or marginals targeted by the party, with no meaningful devolution of power.
Brexit was barely mentioned, except as part of the somewhat disingenuous claim that it will allow the UK to re-introduce freeports. There was essentially nothing about the UK’s transition to net-zero carbon emissions.
And, buried in the small print, were a variety of spending cuts that will simply increase the pressure on public services that in some areas – in particular, the court system and children’s services – have already almost ceased to function properly in parts of the country. The planned real-terms cut to public sector pay is just a foretaste of what’s to come.
Ambition and Ideas
What would an alternative economic programme look like?
Well, for starters, one could look across the Atlantic.
The ‘American Rescue Plan Act’ passed in early March is far more than a response to the Coronavirus pandemic. It doesn’t just provide a $1,400 check for most adult Americans – it also expands tax credits, child care subsidies, unemployment benefits, food stamps, and housing benefits, all overwhelmingly targeted to lower-and middle-income families. Some estimates suggest that it could halve child poverty in a single year.
Nor does Joe Biden’s administration intend to stop there. The next step will be to propose an equally massive infrastructure bill, both to restore America’s decaying transport infrastructure and to invest in clean energy and address climate change – effectively a ‘Green New Deal’. All of this will paid for by a combination of borrowing, at historically low interest rates, and some reversal of Donald Trump’s tax cuts for corporations and the better-off.
This isn’t to say that any Government could simply copy-and-paste the Biden plan. But both the objectives and the scale of the ambition could provide a model.
A similar programme on this side of the Atlantic would mean a major re-shaping of the benefits system, with a substantial increase in the generosity of Universal Credit, combined with massive investment in decarbonising the economy and in funding public services, particularly local authorities and social care. This in itself would go a long way towards repairing the damage of the past decade and enabling us to feel more confident about the next one.
How would we pay for it? In the short-term, the UK doesn’t really face any fiscal constraint: the consensus among economists, central banks and the International Monetary Fund is that raising taxes too early is more risky than simply continuing to borrow. But that won’t last forever. Again, while raising corporation tax is unlikely to be hugely damaging, Sunak ducked the big issues here. There is no good economic or public policy argument against an excess profits tax on companies which have done well out of the pandemic.
But, more importantly, the current tax system desperately needs reform. Council tax is regressive; the shift to online spending has allowed companies such as Amazon and Google to escape paying anything like as much tax as their domestic competitors by moving profits offshore; fuel duties will be eroded as we end our dependence on fossil fuels; and income tax revenues are too dependent on a small number of high earners.
Changing all of this will be complex and far from painless. While it would be nice to think that, if the super-rich and the tech giants just paid their share, the rest of us could escape any tax increases, unfortunately this doesn’t add up. Middle-income earners will have to pay up too, one way or another.
And there are other challenges. Before the pandemic, the UK’s relatively dynamic and flexible labour market, which created jobs, had a flip-side – namely, precarity and insecurity. This has been visible in the abuse of zero-hours contracts in some sectors, in the growth of freelancing rather than employee jobs in others, and in a decline in training and development across the spectrum.
Meanwhile, the UK’s system of employment regulation – with relatively good protections for workers and a tax structure that makes freelancing and self-employment much more attractive, was clearly outdated a decade ago. The recent judgment of the Supreme Court means that Uber can no longer get away with the absurd fiction that its drivers are self-employed contractors and that Uber is just an app, not a taxi service, so not liable for VAT or paying the minimum wage.
Combining flexibility – which many workers want and new business models require – with security will mean a greater role for government, for example, in providing earnings-related unemployment and sickness benefits.
A genuine devolution of economic power to regional and local levels would also make ‘levelling up’ more than a slogan – it would reduce inequalities between the rich and the poor, between deprived areas and more prosperous ones, and of gender and race.
None of this is rocket science. For better or worse, I’ve tried to stick here to proposals that are well within the bounds of conventional economic thinking. It’s not ideas that we lack; it’s ambition.
Jonathan Portes is Professor of Economics and Public Policy at the School of Politics & Economics at King’s College London
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