As the economy descends into chaos the Tories’ answer is yet more incompetence
The Telegraph has revealed that the Tories are already preparing to implement austerity to pay for the coronavirus (Covid-19) pandemic. But not only would such a move be potentially devastating for millions of people across the UK – it would be just plain stupid capitalism too.
PoliticsHome reported that to try and protect government finances, chancellor Rishi Sunak had:
warned that he will have to increase taxes or cut spending
It said this would involve having to
break a key Conservative manifesto pledge not to raise taxes or do away with the long-standing ‘triple lock’ on state pension rises
And PoliticsHome also said:
Further options laid out for Mr Sunak reportedly include a two-year freeze on public sector pay – a move the document says could raise £6.5 billion by 2023-24 – and tax hikes, including a 1% increase in income tax and “new carbon/green taxes”.
The Tories have previously hit public sector wages to pay for public spending. After the 2007/08 financial crash, the then Labour government bailed out the banks to the tune of billions of pounds. The Tories then came into power in 2010. And to help recoup this money, they froze public sector pay for two years. Then, they put a 1% cap on wage rises. But this was lifted in 2017. Now, the Tories want to hit public sector workers again.
But freezing public sector wages and pensions, and raising taxes, is not just bad for people. Nor is it just unconscionable, given it will hit the NHS staff and care workers we’ve all been clapping for on a weekly basis. It’s also really bad for the economy.
A lesson from history
In 2017, the Institute for Public Policy Research (IPPR) reported [pdf] on the effect of the previous decade’s public sector pay cap. It argued [pdf] that increasing public sector pay in line with Consumer Price Index (CPI) inflation then would have created an additional £800m for the economy by 2019/20, £250m of which would have been taxes. The IPPR also said [pdf] that between 2014 and 2017, UK gross domestic product (GDP) growth had mostly come from consumer spending. But the IPPR also noted [pdf] how both raising public sector wages and reducing income tax would boost the UK’s GDP. And increased wages in the public sector often cause [pdf] a rise in pay for private sector workers.
But reducing public sector may can be dangerous. A parliamentary briefing laid [pdf] out:
the threat of deflation from widespread public sector wage cuts which could also influence future private sector wage settlements, and perhaps even more worryingly a reduction in overall consumption in the economy. Any negative effect on wages throughout the economy would also have a negative effect on the public finances due to reduced tax revenues.
In short, if a government raises public sector pay and reduces taxes, people have more money to spend. In an economy like the UK’s, where it is reliant to the tune of hundreds of billions of pounds on people buying stuff, it would seem economically incompetent to restrict this. But economic competence is not the Tories’ strong point, despite claims by the likes of former PM David Cameron of ‘credibility’. And Sunak’s reported wage and pension freeze, coupled with raising taxes, will come amid a backdrop of existing economic chaos.
Before the pandemic hit, the UK economy was already on zero growth at the end of 2019. Now, as BBC News reported, it’s shrunk by 2% from January-March – the biggest fall since the 2007/08 financial crisis. The Bank of England has said the situation is only going to get worse. It’s forecasting a 14% shrink in the economy for the whole of this year. And some analysts are predicting at least 6.5 million people could lose their jobs due to the pandemic, with some research suggesting two million already have.
All in a day’s work
Johnson’s government is creating a perfect storm for a lost decade. It believes the appropriate response to an economic crisis is to compound it even further. Before coronavirus hit, 18% of in-work households were living in poverty. The Tories’ plans will just make that situation even worse.
There’s no easy way out of an unprecedented global pandemic. Yet even by capitalism’s standards, stifling people’s purchasing power at a time when the economy needs as much help as it can get seems ridiculous. But for the Tories, it’s all in a day’s work.
Featured image via YouTube – Guardian News