The Austerity Myth

UK politics are currently dominated by a single issue: austerity. The official mantra of austerity is all pervasive, finding echo chambers within echo chambers. We are told there is a national debt of £1.56 trillion that can’t be serviced. We are told the UK’s annual budget deficit is out of control. We are told public services and the welfare state must therefore be cut. It is presented as reality and consequence.

Until this year it was a mantra that went largely unchallenged in Westminster, the City of London, and most of the mainstream media. That we even have a semblance of a debate taking place is largely thanks to the SNP and the people who have taken to the streets in protest.

The UK’s national debt of £1.56 trillion – and the growing annual budget deficit – is the justification for the UK government’s austerity programme. It is presented as a given the way a religion refuses to question the existence of its god.

The religion of austerity needs to be challenged not just with slogans but with viable alternative economic strategies.

Although government budgets are more fluid and flexible than household budgets there are still two columns that need balancing out against each other: income and expenditure. This is kindergarten stuff. Yet the Tory mantra about reducing national debt – through reducing the annual budget deficit – has put all its economic eggs in the basket case solution of cuts to expenditure. The social cost of these cuts don’t even register. Ears are closed to alternatives.

If we lived in a thriving healthy democracy, where government and governed were serious about the economics of the state, there would be an urgent and ongoing national debate taking place in every corner of the land about whether the road to a sustainable national economy would be better achieved by putting the emphasis on reducing expenditure or increasing government income.

We’re still waiting for this national debate to begin. Do the authorities and their media outlets think the punters on the street are too stupid to understand economics? When people’s livelihoods, and the social fabric of their communities, depend upon understanding economics, then the basics will be grasped. Budgets are balanced every day in every household. It’s not rocket science.

Amazon announced that their UK sales revenue for 2014 was a staggering £5.4billion. Leaving aside the carnage this particular corporation are doing to other (tax-paying) retail outlets, Amazon declared a UK profit of just £34.4 million. Their tax bill was a miserly £11.9 million. Like so many multinationals they used accountants and loop holes in the UK tax system to shift their profits to somewhere else. In Amazon’s case their accountants shunted income and profits to the zero tax state of Luxembourg.

Source: Amazon’s UK business paid just £11.9m in tax last year | Technology | The Guardian

It’s not just Amazon and other high-profile corporations who are it. Anyone who has read Nicholas Shaxson’s book Treasure Islands (pretty much required reading for anyone with an interest in social democracy) will know that the collective wealth created within the UK is being systematically siphoned off and redirected to so-called “tax havens”.

George Osborne has slashed the headline rate of corporation tax from 28% to 20% and working hard is turning the UK itself into an international tax haven. London’s Square Mile is now the epicentre of a vast global network of legal tax avoidance.

The Guardian reported on 18th June:

“But it is not just on the rate that Osborne has competed hard: new favourable tax regimes for multinationals with offshore financing subsidiaries as well as new tax breaks for patent-owning companies have also been central to aggressive tax competition policy.

These and other measures have seen a wave of companies shifting their European headquarters or research and development arms to the UK – much to the anger of other member states. The UK has seen an influx of multinationals – among them Aon, Fiat Industrial, and Starbucks’s European operations – looking to gain tax advantages through the optimal location of the often small number of headquarters staff.

Last month the US seed and agrochemicals group Monsanto announced that, should it succeed in taking over Swiss firm Syngenta, it planned to move its headquarters to the UK.”

Source: http://www.theguardian.com/world/2015/jun/18/uk-reject-eu-plans-combat-multinational-tax-avoidance

Corporate tax avoidance is the biggest political racket of our times. It is the rule not the exception. A Tax Justice Network report calculated that an estimated $255 billion per year globally is lost in tax every year through these so-called tax havens.

Source: http://www.richard.murphy.dial.pipex.com/ThePriceofOffshore.pdf

This is a problem that the sharpest economic minds need to tackle head-on if we’re to create a social democracy worthy of the name. Tackle corporate tax evasion and austerity is a political non sequitur. Our public services would meet the needs of the people, beyond anything we’ve enjoyed before.

There is also the related but separate matter of illegal tax avoidance. The loopholes and scams that the Government turn a blind eye to. Or the tax they pretend to chase but let go.

A Compass paper In Place Of Cuts argued for a range of Tax Reforms and stated: “Minimise personal and corporate tax avoidance by requiring tax havens to disclose information fully and changing the definition of ‘tax residence’”.

When the Compass paper was published in 2010 they calculated that these two reforms alone were estimated minimally to yield a minimum of £10 billion.

Source: http://www.compassonline.org.uk/wp-content/uploads/2013/05/Compass-in-place-of-cuts-WEB2.pdf

Yet even this modest reform of tax havens, one of many workable alternatives, would negate the need for this year’s proposed £12 billion welfare cuts.

Fair taxation IS a viable alternative to austerity. (As is the socially responsible Keynesian alternative of growing the economy through increases in public spending in order to increase the overall tax take). But we also need to recognise that the UK’s national debt is not yet at a crisis level. Even the annual budget deficit is manageable in the short-medium term.

The UK’s national debt is around 80% of GDP. The IMF, quoted in today’s Guardian, state that a national debt of 120% of GDP is “a level considered sustainable”:

“When the IMF reviewed its programme in Greece in July 2014 it assumed that Greek debt would fall from its current 175% of GDP to 120% of GDP by 2020, a level considered sustainable.”

Source: Alexis Tsipras’s homework has been thrown back in his face | Business | The Guardian

Austerity is little more than an excuse to shrink the welfare state and public services. It is ideological in nature not an economic necessity. It’s an ideological pose to pretend otherwise.

To challenge ideological austerity we need a national debate on alternative economic strategies which put the concept of fair taxation, closing tax loop holes, collecting what is owed, at their centre.

Comments (19)

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  1. bjsalba says:

    Greece has one thing in common with the UK. The financiers and politicians who were responsible for much of the debt have paid no penalty whatsoever.

  2. C Rober says:

    During austerity the elite have doubled their wealth through quantitative easing ,from cheap credit available to drive the economic machine.

    What caused the crash that created austerity? Unchecked banks.

    Who bailed out the banks? Taxpayers credit from other Banks.

    What is driving Austerity in the UK? Lack of manufacturing and a reliance on service industry.

    IS the wealth from the service industry spread throughout the UK? No its London centric , keeping the working classes in the North unemployed , therefore poor.

    The option for the unemployed , or working poor democratically? Not traditional Labour , now a party of career politicians , privately educated millionaires.

    What made the Cameron family wealth? Tax avoidance.

    Why was Scotland not given full tax controls , including corporation tax? Because they fear that Scotland would then become the tax haven for multinationals rather than London , just like Osborne has done through reducing the rates.

  3. Mike Fenwick says:

    Who, might I question, has proven to be the largest beneficiaries of welfare – might I suggest it was the banks?

    And a point not touched on in Kevin’s article – who, not in some tax haven but here in the UK, receives tax relief for the fines imposed through self generated losses caused by PPI miselling, Libor fixes, etc – should we perhaps consider allowing those currently living under her Majesty’s pleasure the right to offset future earnings on their release for their misdeeds?

    Last year in the New York Times, Joseph Stiglitz, moderated a series of articles within the theme “The Great Divide”, with examples of, the causes of, and potential solutions for ever increasing inequality.

    I quote only one of his concluding statements: “Widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves.”

    Sadly, we are shortly to hear of more such man made laws, and witness more individuals pay the price of economic inequality planned and engineered through political inequality.

  4. SteveT says:

    But flush with unexpected victory, our right wing political masters will continue batting aside our outraged written words because they can tell us (and each other) that they’ve got an infuriating first-past-the-post mandate for austerity. The 60% of us who didn’t vote Tory know austerity is a big fat lie to cover ideologically-motivated stealth privatisation that is making Call-Me-Dave and his rich mates richer still.
    So, what do we do about it? Impassioned argument is ignored. A to B marches, no matter how well attended (think Blair & Iraq) are not taken seriously. And this horrible lot have got 5 whole years to follow their 1%-friendly agenda.
    I’m not saying we head for the barricades (except in my angriest moments). But it’s starting to feel like non-violent mass direct action is the only way to stop the austerity bandwagon before it does irreparable damage…

  5. Neil says:

    When the government has spent far more money than we have paid in taxes, there are three alternatives: either the government reduces its expenditure, or we pay more tax, or the government borrows more money until one of the first two options happens. The anti austerity movement is in favour of the third option. Personally, I don’t think it is really more complicated than that – a lot of people just want to shirk hard choices, because they are hard.

    1. SteveT says:

      But that’s not how the economics work. Deficits are a normal result of a recession (ie the dirty great financial crash of 2008 caused by out-of-control casino banking) because you spend more money on welfare benefits etc to keep out-of-work consumers spending and keep demand from crashing and making the situation worse. Then a recovery starts, largely because you’ve kept demand going, and the deficit falls because your tax take goes up. That was what was happening 2010 until Gorgeous George and his rich boy crew took the wheel & choked off the recovery for five years by imposing austerity – that is, cutting government spending & thereby drastically reducing demand. We’re only now – and despite George’s counter-productive austerity chic not because of it – getting an anaemic, low wage recovery. So essentially, we’ve been cheated of 5 years of growth, better wages, more jobs, while the Tories tried to prove (at our expense) their faith-driven belief that private industry will pick up the slack if you force the public sector to get out of the way. The still-growing number of food banks, the mushrooming of McJobs, and the parlous state of the NHS would appear to prove the market fundamentalists wrong. There’s a great book called Economics of the 1% (by an economist) that explains this far better than I’m doing here & it’s worth a read.

    2. DR says:

      Neil, that is unmitigated rubbish (and shows that you just want to shirk basic concepts ‘because they are hard’). Explain, if you would, how raising less tax – as clearly outlined in the article, and clearly evidenced in the last parliament – reduces the extent to which a government spends more than it earns? (Reducing both expenditure and tax take obviously doesn’t qualify as a ‘hard choice’: it is just stupid. You seem to be one of those people who is deeply confused by what ‘raising taxes’ means. It does not mean ‘increasing the rate of tax’ – although of course, reducing rates of tax, as during the last parliament, does not help – it simply means to collect tax.) The anti-austerity movement is, in fact, very clearly in favour of your option 2. Not in the sense that ‘we pay *higher* taxes’ but in the sense that more tax is paid (because more economic activity is conducted, and because government actually collects existing taxes). The option you ascribe to anti-austerity is actually the *austerity* model in practice (reducing expenditure *and* borrowing more) which you yourself are advocating!

  6. Mike Fenwick says:

    When you hear talk of welfare dependency – how often do you also hear that the greatest recipient of such welfare, and who were utterly dependent on it – were the banks.

    When you hear of tax credits – how often do you also hear that the fines and losses self generated by the banks involved in PPI misselling, Libor rate fixing etc – are deductible as tax credfits.

    Last year Joseph Stiglitz moderated a series of articles in the New York Times under the theme of the “Great Divide”, an analysis from an American perspective of growing inequality.

    I quote from the sentence which ended his piece: “Widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves.”

    We should choose wisely those we wish to write our laws.

  7. al says:

    we are going to increase our spending on war machinery though. oh good, more death and destruction, just what a democratic country wants

  8. Mr T says:

    Some of the points made above need some correction or comment….

    First “….the growing annual budget deficit.” The budget deficit is shrinking, not growing.

    On Amazon’s tax affairs, the recently introduced Diverted Profits Tax is aimed squarely at the likes of Amazon, or in HMRC’s words ‘Large multinational enterprises with business activities in the UK who enter into contrived arrangements to divert profits from the UK by avoiding a UK taxable presence and/or by other contrived arrangements between connected entities.’

    “George Osborne has slashed the headline rate of corporation tax from 28% to 20%”. And the ‘Scotland’s Future’ whitepaper said that it was a priority to reduce Corporation Tax by up to three percentage points, so the SNP were more than happy to get involved in tax competition.

    1. tartanfever says:

      It’s questionable whether or not the UK’s annual budget deficit is reducing.

      The often quoted figure used by Osbourne is the last year of the Labour government 2009-2010 when the deficit ran at £150bn for the year. That figure included the last of the bank bailout funding. approx. £30bn.

      When the tories came to power, they decided that any future bank funding would not be included in annual deficit figures. Since 2011, at the end of the Tories first year, they posted an annual deficit of £120bn (much the same as the previous Labour administration if you remove the bank bailout)

      Since then the deficit has reduced slightly, and only in the last two years because Osbourne has been selling off Bank shares and The Royal Mail in a desperate attempt to reduce the deficit figures. The last figures for this year end apparently show a deficit for £95bn, however at least £10bn has been used from The Royal Mail sell off and another £5bn from Libor and other huge banking sector fines.

      In reality, the deficit is pretty much where it was 5 years ago. Osbourne’s plan to reduce the deficit to £0 by 2014 he announced in 2010 failed catastrophically. Then when you factor in what austerity cuts have been made in the last few years then we actually see that the deficit figures would be worse than those of the Labour government.

  9. Leslie Morrison says:

    This whole issue is dealt with in a remarkable book by Mark Blyth, the Dundee born Professor of International Political Economy at Brown University, Providence, USA – ‘Austerity -The History of a Dangerous Idea.’ The mess of the last 10 years he explains rests entirely with the banks and the private sector and that the ‘too big to fail’ syndrome meant that the state (and therefore the taxpayer) had to bail out the thieves and robbers who hide behind the respectable (?!) profession of banking. A private sector fraud is blamed on the state who in turn coerce the taxpayer to pay up whilst the rest bugger off to their tax havens and escape justice. The results are obvious – the poor are being clobbered by welfare cuts so that the government (apparently) can square the books. This is rubbish – the cuts are being used to pay off the debt created by the failure of the banks and we are told it’s our fault. The bell tolls – if Osborne cuts the top rate of tax next month whilst introducing further welfare cuts – all hell will be let loose. The sooner Scotland is out of this mess the better. That said Mark Blyth’s book is a brilliant read

    1. SteveT says:

      Thanks, Leslie. Will take a look at the book

  10. Angela Ursery says:

    Running a national deficit doesn’t a priori lead to austerity. They are two separate decisions and issues. Countries run deficits for many reasons–funding wars or infrastructure investment; receiving too little revenue, etc. Lots of governments presented bailing out industries–particularly those in the financial sector–as a requirement taxpayers must shoulder, a way of staving off some kind of financial Armageddon. Doing so ignored the question: is that an appropriate use of taxpayer dollars? The answer to the question of what to cut (as government can’t fund everything) was also presented as the only solution–gouge social services, education, and similar programs and services. But the range of possibilities was vast–tax breaks could have been erased to raise additional revenue, defense programs could have been postponed or eliminated, etc.
    It is important, then, to not stay with the same assumptions and limitations of those in power. That way lies austerity and ruin.

  11. Dominic Berry says:

    AUSTERITY IS ACTUALLY SUCCEEDING.

  12. Dominic Berry says:

    AUSTERITY IS ACTUALLY SUCCEEDING. When I studied economics at university, I remember that the finance markets were supposed to be regulated like any other market. And so there was no technical name like austerity to describe the present strategy of paying for the greed and folly of the richest from the scant jobs, salaries and benefits of the poor. The term we would have used, (had we required such a term,) would be something like “theft”.

    But given that the money saved by targeting benefits fraud, which is miniscule, or putting disabled people on the street, or making TV shows to villainise them, while setting up record government deficits by refusing to apply tax to the rich, especially the very richest… It seems that this is not economics at all.

    The correct term would be “pillage”. But make no mistake; while this is a failure as an economic strategy for Britain, the pillage is a huge success for the rich.

  13. C Rober says:

    If the last great historical event like the crash of 08 is similar to that of the great depression in any way , then how did the world get out of the hole then?

    Was it austerity?

    Considering that there was no benefits to cut back then , how long did those events last , and if anything what exactly created and sustained a recovery?

    Instead we ignore history , go on with wage deflation , which is negative to tax income and property buying which aids recovery.

    Instead we continue the reduction and removal of the unemployed and disabled , through financial genocide , highlighting them , using them , as both a tool and a blamehound as ordered , to misdirect the TV subdued public with their engineered news.

    Instead we are removing as much economic news as possible , in printed press to prime time news , replacing it just like America too has always done with the “middle class white girl down the well”.

    Instead the News of the day is…

    “Nicola Sturgeon forces still working 90 year Auld English Great Granny oap to dip into savings”

    “Sturgeon seen having drinks with illegal ISIL supporting immigrant pedophile on benefits thats not a Tory ex minister”

    “Its disgraceful , the Scottish FM isn’t flipping houses near Westminster , destroying the London economy”

    “Calls from Tory peer to bring back death penalty for being ginger”

    ” The Scots want lard classed as national dish , with full fiscal powers over deep fried food”

    and so on , retractions will appear later if at all , might just be repeated instead.

  14. Bleat says:

    Actually Kev I think you’ll find that’s a tad patronising. There has been a very lively debate going on regarding econ policy throughout the UK. Maybe it hasn’t filtered through to your echo chamber…

    SNP Keynsian? really 0.5 % spending increase? lol? Aye away and…..

    Oh and according to most independent figures an independent Scotland would have a budget deficit of 8 -9% requiring 15 + growth if public spending is not to be cut. That’s a hell of a lot of borrowing

    Anyway welcome belatedly to the debate…enjoy.

  15. Heidstaethefire says:

    the essential truth in this piece is contained in the second last paragraph. The purpose of austerity is is not economic, it is political. It is to destroy the welfare state.

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