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Britain’s fiscal fantasies

Rather than address a broken public realm and long-term economic stagnation, the Conservatives have chosen to prioritise tax cuts.

By New Statesman

Britain is confronting an unpalatable truth: it is poorer than it expected to be. The economy entered recession at the end of last year but long-term stagnation is the greater problem. GDP is just 1 per cent higher than it was at the end of 2019 – the worst performance of any G7 country other than Germany.

Financial distress is now rippling across the economy. Eight English councils have declared effective bankruptcy since 2020 and at least a further 20 are at immediate risk; corporate insolvencies have reached a 30-year high; and one in four universities are now running at a loss.

The crisis in local government does not only reflect austerity. As Anoosh Chakelian writes on page 20, it is also a product of “risky commercial ventures, financial mismanagement and bungled local projects”. In Birmingham, which declared bankruptcy last year, an equal pay claim will cost as much as £1.15bn. Europe’s largest local authority is now introducing emergency measures, including raising council tax by 21 per cent, cutting 600 jobs and even dimming street lights.

But the wider crisis is inextricable from the austerity imposed since the Conservatives entered power in 2010: councils have endured a real-terms cut of 24 per cent in their spending power.

In such circumstances, the government faces a choice. In January more than 40 Tory MPs, including seven former cabinet ministers, wrote to Rishi Sunak demanding greater financial support for councils. Yet faced with a funding shortfall of £4bn, the government ultimately provided just £600m.

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Rather than repairing a crumbling public realm, the Conservatives have chosen to prioritise tax cuts. At last November’s Autumn Statement, Jeremy Hunt reduced National Insurance by 2p at a cost of £9bn. As this magazine went to press, he was expected to use the Budget to repeat this cut, with the Tories confronting their worst poll ratings since Liz Truss’s premiership.

Tax cuts support the incomes of low and middle earners – whose living standards have been eroded by inflation – but they are poorly targeted. The top fifth of households gained five times as much (£1,000) from last autumn’s tax cuts as the bottom fifth (£200).

Worse, the government is funding tax cuts by further squeezing public services. The NHS, where the waiting list stands at 7.6 million cases, is facing its biggest annual real-terms cut since the 1970s. Under existing post-election plans, unprotected departments would suffer cuts of 17 per cent to their day-to-day budgets.

Few believe such cuts are achievable. As Torsten Bell, the chief executive of the Resolution Foundation, told the New Statesman: “This isn’t 2010, the people running these departments don’t think the cuts can happen. If you talk to the people running the Ministry of Justice about prisons not falling over, if you talk to local government, if you talk to Michael Gove, none of them think that their departments can deliver.”

In an election year, it is unsurprising that politics is trumping policy. But the Tories may be misreading public opinion. After a decade of austerity, restive voters no longer regard tax cuts as a priority. A new poll by the Tony Blair Institute found that 52 per cent want the government to use any fiscal windfall to “improve the quality and efficiency of public services and prevent future crises”, while just 11 per cent want it to “cut some taxes for people and businesses now”.

For too long, politicians have promised European-style public services with tax levels closer to those of the US. By once more cutting taxes, the Conservatives are perpetuating this contradiction. Mindful of its profligate reputation, Labour has emphasised that it would fund public services through higher economic growth rather than higher spending. This is the right ambition: if the UK was as rich and equal as countries such as Australia, Canada, France, Germany and the Netherlands, the typical household would be 25 per cent (£8,300) better off.

Higher growth alone, however, will not solve the crisis in public services. At some point, the UK, where English council tax bands have not been revised since 1991, will require an honest conversation about its future social model. But that is not one that a politically exhausted Conservative Party has any desire to lead.

[See also: The new paranoid style]

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This article appears in the 06 Mar 2024 issue of the New Statesman, Bust Britain

Select and enter your email address Your weekly guide to the best writing on ideas, politics, books and culture every Saturday. The best way to sign up for The Saturday Read is via saturdayread.substack.com The New Statesman's quick and essential guide to the news and politics of the day. The best way to sign up for Morning Call is via morningcall.substack.com Our Thursday ideas newsletter, delving into philosophy, criticism, and intellectual history. The best way to sign up for The Salvo is via thesalvo.substack.com Stay up to date with NS events, subscription offers & updates. Weekly analysis of the shift to a new economy from the New Statesman's Spotlight on Policy team. The best way to sign up for The Green Transition is via spotlightonpolicy.substack.com
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