An Alternative Budget by Gordon Morgan

Alistair Darling affirmed that we are in a major recession caused by the failures of the UK and US banking system and set out his key priority - to paper over the huge cracks in Finance Capitalism.
In so doing he has: cut back on public capital expenditure, effectively abandoning the fight against global warming; ensured a much larger rise in unemployment than might otherwise have been the case; and started an attack on the jobs and conditions of public sector workers which will result in poorer services for all.

To produce an alternative we need to look at the prospects for UK Plc. Alistair notes that world banking losses may total £3,000 Bn (Bn = £1,000 Million). Almost all of the £50 Bn Alistair has so far offered to "invest" in British banks will simply cover those losses. There is little free capital to lend to business or homeowners. In addition the taxpayer has guaranteed around £550 Bn of bank loans, far lower than the estimated £3,000 Bn banks have borrowed. Technically the banks are all bust and only being propped up by a government which does not comprehend the problem.

Financial services makes up at least 7% of GDP and employs at least 1.1 million (some count it as high as 30% and 2 million). Last year banks supplied over £700 Bn of new lending, this year net lending is negative as banks try and repair their balance sheets and those they have borrowed from demand their money back. The only money being lent is some of the money from repaid loans and house repossessions. This means little money for capital investment, or house building, it means businesses going bust as their debts are called in. The consequence is a rise in unemployment, at least 100,000 in financial services and probably a total 1,000,000 rise next year to close on 3,000,000. This will be devastating for those affected.

UK house prices have been falling for a year, currently they have fallen 15% and are predicted to fall during next year a further at least 10% -  a minimum 25% peak to trough fall in price (according to government estimates although most commentators expect  a 35% fall, 50% taking account of inflation). Thus given Government estimates that housing was worth £3,700 Bn last year this means a loss of value of at least £900 Bn in 2 years. As commercial property and land values have been falling, the net worth of UK PLC, its notional "wealth", will have declined by around £1,500 Bn by the end of next year. A huge reduction.

However, according to National Statistics UK PLC had net assets of £7,000 Bn at the end of 2007. This should still leave £5,500 Bn of net assets which can be used to alleviate misery for those most affected and to restructure the economy. UK GDP is around £2,000 Bn a year and the UK is still a very wealthy country.

I have highlighted these huge sums to put in perspective the £20 Bn which Alistair Darling proposes to inject into the economy to ameliorate the crisis.  After £50 Bn direct to banks and a further £550 Bn to back up banks, a miserly £20 Bn to combat the effects of banks loss induced recession.

Fiscal and Monetary Position
Sterling has fallen to a 12 year low against most currencies and is at an all time low against the Euro (27th Nov). A fall of over 5% in a month and around 20% from earlier in the year. This partly reflects the anticipation that interest rates already down to 3% will be lowered to 1% next year, the lowest since 1945. It also partly reflects the on going UK trade deficit of £4 Bn a month, £3 Bn with the Euro zone. As imported goods and foreign holidays are now more expensive, this is how the crisis first hurts those not affected by unemployment.

But Gordon Brown tells us the Government's coffers have never been in better shape to cope with the crisis. In fact they have rarely been worse. In his "pre budget" a year ago Alistair Darling forecast Government borrowing at  £31 Bn for 2009/10, he also believed we were entering a new phase of growth for the economy.

This year public finances in the first 5 months deteriorated by £12 Bn compared to 2007/8. The Chancellor now predicts a budget deficit of £78 Bn in 2009/10 and £128 Bn in 2010/11.

Total Government debt will rise from around £500 Bn to over £1,000 Bn by 2015, excluding the £550 Bn backing for banks. Many commentators feel that these projections by the chancellor are overly optimistic. He is in fact relying on foriegn investors and governments bailing UK PLC out and "predicts" the economy coming out of the recession in 2010 after "only" a fall of 1.1% of GDP next year. The somewhat contradicts his simultaneous statement that GDP is currently 4% higher than warranted by productive forces.

Overall then George Osborne for once is quite correct in pointing out that public finances are a mess and that mess was created by Gordon Brown. The Tories however, pose an even worse solution.

Keynes and Recession
Marx is increasingly quoted as a harbinger of capitalist crises, however, all establishment politicians now nod in the direction of Keynes when justifying how they wish to adopt previously unthinkable measures to save capitalism. Thus Alistair Darling abandons "prudence" as inappropriate in times of recession, and goes for a 1% GDP fiscal boost, i.e. £20 Bn, to reduce the recession by 0.5% of GDP. Were that extra 0.5% sustainable production, perhaps that would work, however, it is largely being directed at boosting short term consumption which will create little new production or jobs, just prolong the recession. The temporary cut in VAT, pales besides President Hoover's November 1929 cut of income tax by half, also at the start of a crash. This 1929 cut however, had virtually no long term effect, nor will Alistair's proposals. Without dismissing Keynes ideas, the crash of 1929 was largely stock market led, the result of a classic bubble. Major Banks largely did not fail. This credit crunch is dominated by bank failures and increasingly industry failures like auto and air. This type of crisis tends to last longer and be less amenable to fiscal stimulus, particularly when directed at boosting consumption. More radical measures will be required to minimise its effects.

The "Pre" Budget
What then are Alisdair Darling's main budget proposals and should we support them.

VAT reduced to 15% - cost £11.5 BN. This is more directed at keeping retailers in business than actually helping the poorest. The poorest 20% pay 12% of their disposable income in VAT compared to 6% of the richest 20%, however, given how little disposable income the poorest have, this will have little effect. VAT is not charged on food and the poorest pay most VAT on fuel. On £50 a week 12% means £6 is paid in VAT. A cut to 15% will save 86p a week. Average household fuel costs around £20 a week. Removing VAT entirely from household electricity and gas would give around £2 to £3 a week to poorer households and only cost £7 BN, saving £4.5 BN.

Capital expenditure brought forward - cost £3 Bn. This is money subsequently cut from budgets from 2011 onwards. There is planned to be virtually no new capital expenditure from then on. Much of the money is roads improvements including motorway widenings. More than anything this shows Labour has given up on the next election.

Invest in Renewable Energy and Transport - cost £0.5 Bn. Also anti environmental changes to aircraft carbon tax which should not be changed. According to a new report the UK is among several countries unlikely to meet their targets of 20% renewable energy by 2020. Total EU investment of around £425 Bn is required to meet this, say £80 Bn by the UK, much of it from government spending. California has announced the San Francisco area will introduce 100,000 electric cars by 2012 with an initial building of 250,000 charging points and 200 battery exchange stations. The estimate savings of $175 BN in petrol, a boost of $120 Bn in batteries and cars $7,000 cheaper than electric over 20 years. A significant green jobs boost. We require a national program to begin now in all major cities to do the same here, allied to investment in renewable generation, insulation, and smarter grids. Propose additional £9.5 Bn a year capital expenditure on renewable energy and transport from 2009.

Public Spending Value for money saving - save £5 Bn a year from 2011. This is a devastating proposal to cut jobs and services and will be fought by the trade unions and wider population. However, if the Government were serious let us propose the following value for money savings. End the Wars in Iraq and Afghanistan - savings £4 Bn a year. Scrap Trident - £76 Bn over 30 years say £ 2.5 Bn a year. Scrap Heathrow 3rd runway - £13 Bn over 5 years say £2.5 Bn a year. Scrap Identity cards - £18 Bn over 6 years, £3 Bn a year.  Total £12 BN with no service cuts and increased saving of £7 BN.

NI and Higher band tax changes - save £6.5 Bn a year from 2011 The rise in NI is a partial reversal of the 2% cut in standard rate tax which accompanied the scrapping of the 10p tax band. Those still affected by the 10p abolition should be compensated - cost around £1 Bn. Higher tax is being raised to 45% for those on over £150,000, raising only £0.6 Bn. At a minimum a 60p tax should be introduced for over £150,000, lower than under Thatcher - raising and extra £1.5 Bn and a 50p tax on those earning over £100,000 - estimate £2 Bn a year. Net savings at least £2.5 BN a year.

The above alternative proposals would increase the stimulus by £4.5 Bn in year 1 and raise the same revenue over the next 5 years. There would however, be an added stimulus to jobs and reductions of CO2 emissions from an additional £9.5 BN of environmental investment each year £57 BN by 2015.

There remains one other major issue, the future of banks. The taxpayer owns over 50% of RBS and is the dominent stakeholder in most other banks. It is also giving free insurance for £550 Bn to the banks. Yet the Government so far refuses to get involved in investment decisions other than to exhort to banks to restore lending. Clearly whilst they remain commercial organisations the banks will do little else. The Banks are BUST as commercial enterprises. Rather than pretend otherwise the Government should immediately nationalise all major banks (credit unions and small TSBs and friendly societies excluded). Rather than trying to run Northern Rock as a commercial enterprise, dispossessions and bankrupcy the inevitable consequences, a concordat between the Government and householders can be drawn up whereby ownership can be turned into rent. This would also give the Government total control over the investment decisions of banks. A series of regional investment boards should be set up involving Local Authorities, Trade Unions, Scottish and National Government to draw up investment plans over say a rolling 5 years. Thus we can hope to create the jobs and environmental improvements which will see us through the recession.

Please note the above is not a Socialist solution, merely a left social democratic one. Capitalism would still remain and may well attack these proposals or even a Government that adopted them.

For a wider analysis of the crisis and socialists response, get the Solidarity pamphlet The Bubble Bursts £2 from www.solidarityscotland.org on line store or send cheques to PO Box 7565 Glasgow G42 2DN

Comments on this article or the above pamphlet can be sent to This email address is being protected from spam bots, you need Javascript enabled to view it and may be added to the above web site.

Gordon Morgan, Treasurer, Solidarity: Scotland's Socialist Movement