Gordon's gamble

Our economics correspondent Michael Roberts looks at the UK Finance Minister, Gordon Brown's budget, which was announced last week. He is going to raise taxes in order to spend more on the health service. But as he has no intention of changing the fundamental nature of the economy, a better health service must come from the pockets of the hardest-working labour force in Europe.

So there it is. The most popular budget in 25 years. 65% of those asked thought Gordon Brown's 2002 budget was "good for the country", despite the fact that it meant a rise in annual taxation of over £8 billion. Indeed Brown is now the most popular Chancellor since Denis Healey (!) in 1977, another tax-raising Labour Chancellor.

What does that tell you? First, it tells that, contrary to all the Tory press lies, British working people are not opposed to paying more in taxation if it is for worthwhile services and the form of the tax burden is fair. And second, it shows that the great gain of the labour movement after 1945: a National Health Service - tax-funded and free at the point of use - is something still cherished by most working people, despite the terrible way that it has been run down by successive Tory and Labour governments.

At last, this New Labour administration has recognized the importance of at least some public services, rather than continually encouraging and financing big business to deliver the basic needs of the community. But remember this new spending programme does not start until April 2003. That's nearly six years after New Labour came to office. And in those first years, Blair and Brown stuck rigidly to Tory public spending plans. Education, health, transport, social services, local government services and housing were starved of funds, even though the tax burden of the national economy rose.

What happened to tax revenues? As Gordon boasted in his budget speech, the money was used to pay down "public debt". New Labour paid off the owners of government bonds used to borrow money for spending in the past. In other words, for six years, the government raised the tax burden to pay off loans from the City of London. As a result, Gordon can boast that Britain has lowest public debt to national output ratio in the OECD, around 30%. This policy outdid the Tories for what Gordon likes to call "prudence". It's as though you had a mortgage on your house that was equivalent to 50% of the value of the house and you decided that rather than spend any money making sure the guttering was all right, the electrics worked and you had central heating, you would use any extra money you scraped together to pay down the mortgage by 10%. This was "prudence" gone mad.

But anyway, now the policy is to be altered. Taxes are to be spent on improving health and education. Of course, there's nothing for anything else. Britain's deplorable and expensive transport system gets nothing. The UK's shocking lack of reasonably-priced and available housing will get no help from the public purse. Local authority services, particularly social services that look after the elderly, the ill, the disabled and young people in care will get nothing.

OK, you might say, but at least something is being done about health. And at first sight, Gordon's promises are bold. Over the five years to 2007-08, the plans are for total spending on the NHS to rise at 7.4 percent a year in real terms. But to do this, overall taxation must rise, from 39.1 percent of GDP last year to 40.5 per cent in 2006-07. By then, the ratio of taxation to GDP will be some five percentage points of GDP higher than in 1993-94.

That doesn't sound too bad. But the reason £8 billion of extra taxes each year only translates into a 1% point increase in tax to GDP is because Gordon expects the UK economy to grow faster than it has done in 30 years. Trend growth in the economy is now assumed to be 2.5 percent a year, up from the 2.25 percent previously assumed. This year the Treasury forecasts growth at 2 to 2.5 percent, though it is forecast to rise to 3 to 3.5 percent in 2003 and 2.5 to 3 percent in 2004.

That's optimistic, to say the least, in a capitalist world still struggling at the lowest rate of growth for 30 years. It assumes that the world economy will start to grow fast and sustain that growth right through this decade without any economic slump. And interestingly, the Treasury's increased estimate of long-run growth owes nothing to Gordon's efforts to improve productivity of British capitalism through an "enterprise culture". It is based purely on a higher estimate of growth in the workforce caused by immigration and higher labour force participation. In other words, health and other public services are staffed increasingly by skilled workers from other parts of the world prepared to take the poor pay - and it is their incomes that will help pay for it!

And that brings us to how the taxes are to be raised. The increase in tax is not through income tax rates but by increases in national insurance. That means both people at work and their employers must pay more. The danger of this is that it is a tax on jobs. As one bosses' representative said: "Experience suggests the higher payroll costs will be shifted on to employees." Higher wage costs would cause employers in labour intensive sectors to review employment levels ahead of next April. Companies could scale back recruitment. Companies could also recruit more part-timers. They number 7 million, about a quarter of whom earn less than £70 a week, below the £89 at which National Insurance contributions start. Supermarkets, for example, could take on more casual part-timers.

As for ordinary families, many will gain from the new benefits in the budget, including the child tax credit, but many will also pay higher national insurance. What the chancellor gives with one hand, he takes with the other. The Institute for Fiscal Studies calculates that couples with children will on average be 79p a week worse off from next April due to the combined effects of the tax increases and child tax credit. Low-income couples will gain significantly from the tax credit, while better off couples will lose out due to tax increases outweighing the £10.45 per week credit they will get. The Institute says just over half of couples with children will lose between £1 and £10 a week, and 13 percent will lose more than £10 a week.

And of course the key question is: will the increased burden of taxation mean that there will be decent health service at the end of this decade? The government commissioned a special report to find out the answer. The Wanless report concluded that the proposed increase of £34 billion in real spending on the NHS would still leave UK public spending as a share of GDP lower than Germany's, well below France's and lower than Italy's, while squeezing money for anything else.

What that conclusion suggests is that the way to generate sufficient funds to deliver a proper health service, decent schools and colleges and other key public services that also pay their staff a proper wage is through the economy growing at a reasonable rate, not just through increased taxes. If the UK economy could grow at 4% a year for the next decade rather than even the increased rate of 2.5% that Gordon Brown hopes for, then there would be plenty of resources to meet health service targets without raising the tax burden on the average family. But capitalism has not been able to deliver such growth rates anywhere in the OECD since the 1960s. The decade of the 1990s, supposedly a boom decade, saw growth in the UK no higher than 2% a year, and no better elsewhere.

But because New Labour has no intention of challenging the fundamental nature of the way the UK economy is structured, namely that economic growth depends on big business making sufficient profits to invest, it cannot tax business too heavily to raise funds. And above all, it cannot improve the rate of productivity of the British economy. So a better health service must come from the pockets of the hardest-working labour force in Europe.