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The economy: lying to justify cuts

This article is over 14 years, 2 months old
Politicians demand public spending is slashed, but it is falling taxes that are responsible for growing government debt, says Graham Turner
Issue 2169
 (Pic:» Tim Sanders )
(Pic: » Tim Sanders)

‘Voters back Tories to cut public spending”, screamed the Sunday Times this week. A YouGov poll shows that people want public spending cuts rather than tax increases, Rupert Murdoch’s paper claimed.

Since the chancellor’s budget in April this year the media has fed the public a torrent of diatribes from born-again Thatcherites declaring that the public sector is bloated and needs to be cut down to size.

When the credit crunch erupted, the Tories were rudderless. Along with New Labour, they failed to forecast Britain’s worst post-war recession. Now, by accident rather than design, they suddenly have a purpose.

And the naked prejudice of the Conservative Party is shown by its deliberate misrepresentation of the data. The public sector deficit is unquestionably out of control. However the chief culprit is not runaway spending, but a collapse in tax revenues.

Logically, the remedy should be higher taxes on those that can afford them.

During the year to July, public spending rose by just 1.9 percent. By contrast, tax revenues shrank by 11.0 percent.

In its leader, the Sunday Times railed against the “state spending the equivalent of 50 percent of gross domestic product (GDP)”, a number plucked out of thin air to bolster its scaremongering. The Treasury forecasts that public spending will be 43.1 percent of GDP – not that much higher than the peak of 42.3 percent, recorded under Margaret Thatcher’s Tory government.

Net government borrowing rose by £13.2 billion in the 12 months up to July 2008. This year on year deterioration is the best measure of how quickly the deficit is rising. Figures announced for January, the most important month of the financial year for tax revenues, will be pivotal. Another severe drop in tax revenues is likely and that would push government borrowing up even more quickly.

It now seems that the deficit for the year as a whole will overshoot the Treasury’s forecast. A “double-dip” recession, in which a limited economic revival gives way to further contraction, would of course push this up even higher, giving the media more ammunition to attack public sector workers.

But we should not expect the deficit to fall quickly even if the economy were to recover.


The collapse of corporation tax receipts is not a one-off or a temporary response to the credit crunch. The ability of banks and companies to “roll forward” their losses – counting them against future profits – suggests a structural gap in tax revenues that may persist for many years.

US investment bank Merrill Lynch provided a rare insight into this problem last year. In a regulatory filing, it admitted that $29 billion of losses sustained on sub-prime mortgages in the US were being allocated to its London office. According to the Financial Times newspaper, the bank was therefore “unlikely to pay corporation tax for 60 years” – even if it returned to profit levels reached at the height of the boom.

In this respect, public sector finances have become the focus for a critical question: who pays for the financial crisis?

It is clear from any objective assessment that new sources of tax revenue need to be found to fill the gaping hole in the public sector accounts created by the credit crunch. Higher income taxes are not the only answer.

Companies need to be taxed if they want to do business in Britain.

They can try to relocate their headquarters to Ireland, Switzerland or the Cayman Islands. But they cannot physically move their entire operations. So they need to be taxed on the level of business or turnover.

Companies need access to British markets to sell their goods, and they should not be allowed to operate here if they are not prepared to pay their way.

There is only one conclusion to be drawn from the current media‑led distortions. The public is being deliberately misled to further a second attack on unionised workers.

The first time it was print workers, miners and large swathes of industry.

Now the public sector has become the battleground. Cuts in public services matter little for Tory leaders and their supporters – they can afford to opt out of state provision. There is no point waiting to see if they get elected. Public sector workers need to organise now.

Graham Turner’s new book, No Way To Run An Economy, is published by Pluto Press and is available from Bookmarks, £10. Phone 020 7637 1848 »

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