2000s >> 2001 >> no-1160-march-2001

The Budget: rearranging the furniture

Politicians are sometimes conscious liars—often proudly so. Indeed, that’s their job, to persuade people to support them regardless of their merits rather than because of them, and to justify the actions that the economy demands they make. Politicians confront journalists, grinning from ear-to-ear, knowing their interlocutor knows that they are lying, as they dance through the empty ritual of the media interview. This very fact makes it difficult to estimate what politicians are going to do, and means that they can only be fully understood in retrospect.

This applies especially to the spinmeisters of the Labour Party, who had gone out of their way prior to the election to disguise their intentions under a barrage of rhetoric. With Labour now close to completing its first four-year term, it is possible to look back and examine their period in government by what they have actually done while in office.

The issue of taxation dominates contemporary political debate, with each party competing to be the Party of Low Taxation, whilst simultaneously offering voters higher public services. Tories allege the tax burden has risen, Labour states that tax rates have been cut, endless streams of statistics are hurled viscously in either direction, with illumination being no-one’s goal. In the meantime leftists bleat and demand that Labour “tax the rich and make them pay”. On top of all that, the immense complexity of the taxation system, coupled with intricate shifts in the economy and in methods of presentation, makes it a struggle to try to accurately find out what is really happening.

It has become orthodoxy among Labourites that they lost the 1992 election because of their image of being a tax-raising party, scaring away the affluent workers known as “Middle England”. As a part of their image make-over campaign, and their half-truthful manifesto, they pledged themselves to lower income tax when elected. In the manner of political debate, this allowed their speakers to state that they were going to lower taxes (that is, income tax) even as and when they were going about raising the overall tax burden. Whenever challenged by the Tories, they simply pointed out that the Tories raised taxes 22 times during their period in power.

Taxing problem
Labour have so far succeeded in reducing the starting rate of income tax down to 10 percent. The logic for this is that whilst benefiting the poorest workers, it also cuts taxes for almost everyone else, including the most well-off (since cutting the basic rate lowers the tax paid on that band by all tax payers). Also, as the bulk of income tax nominally falls upon the mid-range of the income scale, reducing the starting rate allows for the appearance of cutting tax for all, without actually costing the government much money. At the same time the state has raked in sizeable sums by ending the IR-35 tax exemption upon self-employed contractors, who though technically selling only their labour power as employees, are able to register as small companies and gain tax benefits.

Reducing the starting rate also has the advantage of tying in with Labour’s employment strategy. Since workers are selling their labour power for a market-defined rate, and will not work for less then that rate, it must be their take-home pay that decides their willingness to work. If their take home pay is lowered, say by taxes, this translates into upwards wage pressures, which ultimately means that the burden for any increase in taxation will fall upon the employers. Conversely, if tax rates are cut, it makes it cheaper to actually employ people, and so cutting the starting rate of tax allows more people to move from unemployment to low paid jobs which can be made profitable.

Labour tied this concept in with their benefits policy, by introducing “The Working Families Tax Credit” (which, they passed off as a tax cut) whereby tax is rebated to low-paid workers, instead of paying them directly in the form of benefits. Whilst this does not affect the overall level of their income, it structures it so that dependence is upon gaining employment rather than claiming state benefits. Essentially, it is using the taxation system as a means of social control to work within the wages system, and to apply labour discipline to the workforce. Thus they can present it as a double coup both of cutting taxes, and also cutting the size of the welfare budget; all by simply rearranging the furniture. Thus, employers are able to exploit cheap labour, without having as great a tax burden to pay.

This reduction in the taxation upon exploiting labour is also reflected in their aim of reducing Corporation Tax as well. The aim is clearly to cut taxes upon production, and so promote investment into those areas. For a long time capital investment in the UK has been problematically low, and the government has sought to ease the burden upon investment via the taxation system. It is in this context that, when they imposed the Climate Change Levy, Labour were keen to point out that it did not represent an additional tax burden, due to offsetting decreases in employer contributions to National Insurance.

Tax farming
The shift from taxation directly on the point production to indirect taxation on consumption has been slowly going on since 1979. The Tories in their final budget observed how nearly half of all taxation came from indirect sources, mostly VAT. Labour has continued this trend, particularly through ever-increasing duties levied on fuel and tobacco.

There are limits, though, to the extent to which a government can exploit a monopoly or oligopoly to levy duties. If businesses are able to pass on the tax increase to the consumer in the form of higher prices this can cause problems. In some circumstances, if the price of a product rises alternative products are sought and demand is choked off. But since both tobacco and fuel, for example, are in their own ways essential with few if any substitute goods available, the result of any price increases caused by tax rises is that black markets and resentment grow up (as the state capitalist regimes in the former Soviet bloc found out). Recently the government has had to increase the amount of money spent on enforcing tobacco excise duty, which has eaten in considerably to its taxation gains. Likewise, the fuel increases resulted in last year’s national blockade and protests. Despite the tantalising promises of politically safe revenue for governments, there are limits to the amounts that can be levied through excise duties.

The reality of the government’s position is that the state is effectively a tax-farming business, and like other businesses, it is entirely subject to the ebbs and flows of the market. It can only raise so much taxation, from any given source and the economy as a whole, as the state of the market will bear. Given that the surplus value siphoned off via taxation is surplus value that cannot be re-invested for capital accumulation by the private sector, taxation represents a restriction upon the capitalist class. Hence, historically, high taxation has been seen as anathema by the capitalists, and much like the small-holder truckers they have organised politically to fight taxation. The amount of tax revenue the state can garner is entirely circumscribed by the needs of profitability.

State spending cannot add to the total of demand in the economy, all it can do is actuate demand, and guide it to overcome consumption problems (e.g. such as sustaining the reserve army of labour). In an economy without nationalised units of production—such as we now have—the best it can do is simply help circulate goods. Capital can tolerate the lost potential valorisation in times of plenty, but when accumulation and profitability slow, it begins to resent the resources lost to unproductive expenditure. Given that taxation has risen from about 9 percent of GDP at the beginning of the century to nearly 40 percent now, a figure that both Labour and Tories seem unable to reduce, it is clear that taxation is becoming too burdensome upon capital.

Labour’s reliance on windfall taxation can be seen in this context. Rather than increase current and general spending which the state will have to sustain in perpetuity, Gordon Brown has chosen to spend large sums on special projects, such as the “New Deal for the Unemployed”, by grabbing the £3 billion “Windfall Levy” from the recently-privatised utilities: a targeted tax which did not affect capital in general, and which did not represent an ongoing drain of surplus value. Likewise, the Chancellor benefited enormously from the sale of the mobile phone frequency licences—a cool £21 billion which can conveniently be accounted as taxation spread throughout the duration of the licence, whilst still being liquidity in the state’s hands.

War chest
Brown’s careful application of taxation, as well as some luck with the economy which has been at the high point of the business cycle, has left the government with a budget surplus, the infamous war chest. Although some money is likely to be spent to create the appearance of a give-away in the March budget, the statements of the government seem to suggest that this surplus will be held to hedge against the next downturn in the economy.

This would be consistent with the government’s whole strategy. Their taxation policies have largely been the usual fare from left of centre social democrats since they all abandoned overt Keynesian practices. What little effect its minor tinkering and readjustments of poverty have, it is always entirely within the scope and allowance of the ongoing workings of the market, and entirely devoid of any capacity to control the economy at a macro level.

Like a ragged, has-been stage magician, the government must keep on performing its budgetary tricks to give the appearance of doing something—anything—to keep hold of some sort of interest in its audience. Taxes go up, go down, and are moved from place to place in a blinding game of find the lady. Underneath it all is a watered-down version of an old illusion—the illusion that the state can control the economy, can direct its course, by playing around with its tax structure. That the act remains the same, time after time, will not stop the show, since the has-beens refuse to stop. They need booing from the stage.


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