Osborne’s spending review: More punishment on the way

Chancellor George Osborne announced the result of the government’s latest public spending review today, which included a proposal for a further cut in local government spending of 10%.

This cut is on top of the 30% cut in local council budgets which will see the City of Lincoln’s net revenue budget fall from around £18 million to £12 million by the end of the period to 2017/18.

This will continue to result in cuts in services that the council and the people it represents have valued over the years and utterly deplore having to lose.

Public services cannot continue to take this level of punishment, nor should they have to.

As Leader of the City Council I am frequently asked why all this pain is necessary.

The current gap between national income and expenditure (“the deficit”) is not about excessive spending, it is about loss of tax revenues and the grossly unfair, but largely unseen distribution of the tax burden between rich and poor.

Tax revenues have fallen steadily in recent years by an annual rate in excess of 10%. There are a number of reasons for this:

  • A long term decline in the UK’s tax base (the number of parties who can be taxed) by the flight of manufacturing and other businesses to lower wage economies around the world reducing tax revenue from high value industries.
  • Higher rates of unemployment leading to loss of tax revenues and a greater call on public spending to provide income support
  • The fractionalising of jobs – splitting jobs into part time/ small number of hours/zero hours contracts which means low pay and little or no tax revenues (this has produced the current paradox that the Government boasts about, that there are more people in work- not really, its more people in the labour market but with considerably less work each)
  • Loss of tax revenues is also about the effect of pay restraint both in the private sector and the public sector- typically people getting 1% pay increases or less and paying less tax as a result and depressing consumer demand
  • There is also the reduction in Corporation Tax (what companies pay on profits) and the reduction in the higher rates of income tax both significantly lessening what comes into the Exchequer
  • There has been a significant fall in tax revenues from the financial sector-notably Banking and other City of London financial services
  • Then we have the “Tax Gap” this is the difference between what the Chancellor gets in by way of tax revenue and what he should receive. Estimates vary between £35 billion and £120 billion(about the size of the public deficit)
  • Tax evasion and tax avoidance and late payment of taxes owed, often by very large companies, has rightly been getting a lot of attention lately.Some large, well-known companies found to have used all sorts of methods for paying little or no tax- an absolute scandal that people are just beginning to recognise.

You did not hear much about these issues in the Chancellor’s statement today. It was more of the same old mantra that we have seen since 2010; that the way out of recession is to go on cutting public spending and taking away the public services that, in hard times, people desperately need.

So what’s the alternative I hear you cry!

We need to concentrate on getting economic growth going and generate the tax revenues that will flow from this.

There are three specific things I would have liked to see the Chancellor do:

  • A large scale public investment programme in housing, transport, education, and green technology, underpinned by a boost in demand and financed by the two banks currently in public ownership
  • A lifting of the current cap on the borrowing powers of local council’s for council house building. This can be supported by the £27million a year received in rent paid by council house tenants in Lincoln- and would help us meet the desperate shortage of affordable homes and be a terrific boost to jobs in the local building industry,get people off the dole and increase tax revenues !
  • Stop the phoney rhetoric on tax avoidance and legislate to stop it and introduce a financial transaction tax. According to the Institute of Public Policy Research, a tax rate of just 0.01 % would raise £25 billion a year