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International Socialism, May 1976

Jim Kincaid

‘The City Was Delighted’: Healey’s Budget

From Notes of the Month, International Socialism (1st series), No.88, May 1976, pp.3-5.
Transcribed & marked up by Einde O’Callaghan for ETOL.

Jim Kincaid writes: Budget Day must have been exquisite torture for the trade union leaders. Around Congress House the word had been that Healey would start the bargaining with an offer of around 5 per cent of straight pay increases, plus £2 billion of tax cuts. This looked a tough enough proposition to sell to an increasingly restive rank and file.

Then came Healey’s parade of Budget horrors. Only £1 billion in tax cuts – conditional on acceptance of a pay limit of 3 per cent. A small increase in child tax allowances from April, but not a penny on the family allowance. Introductions of the wealth tax postponed yet again. No restoration of the food subsidies axed in the February expenditure cuts.

Even Lord Alf Allen of USDAW, president of the TUC, was heard to say that the offer was too low, Jack Jones was unavailable for comment, having removed himself to the Shetland Islands on Budget Day.

The businessmen were startled by Healey’s impertinence.

‘No one in the City,’ said The Economist, ‘would have dared to predict a pay norm as low as 3 per cent before Tuesday’s Budget ... The Confederation of British Industry is privately delighted. This Budget could hardly have been more favourable in the City.’

Certainly Healey will have to sweeten the offer as bargaining proceeds. But his opening bid shows that it is going to strain to the limit the loyalty of the trade union leaders, and maybe overstrain their ability to manage the rank and file.

The 3 per cent on wages is worth £2 a week (before tax) to the average paid worker. If the TUC accept this, they bring a tax relief which for a married man earning less than £126 a week is worth 87p a week more in the pay packet. A single man gets 40p a week. No tax relief for children is included in the conditional offer.

For a married man, the package works out as follows:

The offer represents a huge drop on last year’s £6 – worth 20 per cent to a man on £30 a week, and 9 per cent to someone on £70 a week.

The conditional tax deal includes a differential element but it benefits only those earning above £126 a week. Healey actually said in his Budget speech that this included, ‘very large numbers of skilled workers’ – what world does he live in?

These figures are for married earners. For single people, the pattern is the same – 40p a week for those on less than £110 a week, rising to £3.10 for those on £200 a week.

The reason why high earners get such large benefits is that one provision of the conditional tax offer is a big rise (£500 a year) in the minimum increase levels at which the higher (ie surtax) tax rates come into operation.

For two months now, the leaders of the skilled and white collar unions have been insisting that the new pay deal should allow for a restoration of the differentials eroded by the flat £6. The pressure is most intense among skilled manual workers, as witness the recent militancy by tool room workers in the car industry. White collar workers do have some limited protection in the system of automatic annual increments – to be allowed in the new pay deal, as in the £6 deal.

Healey’s offer has placed leaders like Scanlon, Gormley and Chapple in a painful clamp. The 3 per cent is too small to allow for more than a limited extending of differentials – £1.20 a week extra (before tax) for the man on £70 a week compared to someone on £30 a week.

Lower paid workers face a different problem. Tax allowances (for self, wife, children) have lagged well behind the rate of inflation. The result is that the tax threshold – the point at which tax starts to be levied at 35p in the £1 – is now well below the poverty line.

Before the Budget, a married man with two children paid 35p in tax for every £1 he earned over £26.60 a week. (Currently the supplementary benefit for this size family is £30.25.) Jack Jones, among others, has been calling for a big rise in the tax threshold for the lower paid. The Chancellor has not been helpful. Children’s tax allowances are up from this April, but only by £60 per child. This means for the man with two children, a rise in the tax threshold of only £2.30 a week – in cash terms an improvement in his take home pay of exactly 81 p a week. And the conditional tax deal, if it comes off, will give him only the same 87p as better paid workers.

To make matters worse, anyone whose wages are so low that they do not pay income tax will get no benefit from the conditional tax offer. You cannot get tax relief on taxes you do not pay. Supposedly the family income supplement covers this group. But surveys show that only half of those qualifying for this benefit actually get it – despite all the deep throated incantations of Marjorie Proops on television.

What matters even more than the conflicting sectional interests of higher and lower paid is simply that workers do not believe that the rate of price increase will go on falling. And with good reason. The Budget itself, with increases in the taxation of cigarettes, alchohol and petrol, added ¾ per cent to the cost of living. National insurance contributions have just been raised. Council rents are due to rise this year by 50p a week. Bus fares will rise because the Government is cutting subsidies to operators by a huge 22 per cent. School meals are going up in September from 15p to 20p.

One third of subsidies on basic foods is being withdrawn this year. The devaluation of sterling since early March will add 3 per cent to food prices, and push up the costs of all goods with an import content. The Price Code is due for renegotiation this July.

Over the past year the living standards of workers in Britain have been forced down by 4 per cent on average. A further cut of 6 per cent would seem to be the government’s aim.

Pensions are to be increased by 15 per cent – but not until the middle of November. The same date is fixed for a 10 per cent rise in unemployment and other short-term benefits. This means that although inflation is still high (between the last benefit increase in November and February, food prices rose by 7.4 per cent) the government has mercilessly returned to the old system of annual increases in social security benefits rather than the more frequent increases awarded since 1974.

Ever since 1951 pensions and other benefits have been increased to reflect price inflation which has already occurred. Thus for example the increase last November was announced in May 1975 and was designed to cover inflation in the period up to March 1975.

However, as part of the Budget, the government have now changed the method of calculation. The increase just announced is based on what the government thinks inflation will be in the 12 month period up to November 1976.

This change in the basis of calculation means that no account is being taken of the period March 1975 to November 1975 – during which time prices rose by 15.8 per cent, and earnings by 14.4 per cent.

The November pension increase is £3.30 for a married couple. A further 90p a week would have been needed to cover inflation in the six month period during 1975 which is now being discounted. This dirty trick has been hailed in the ruling class as a masterstroke. ‘A brilliant way of cutting the social security bill by £500 million a year,’ said The Economist.

The rejoicing in the City was caused mainly by the Chancellor’s decision to make permanent the arrangement by which companies pay no tax on profits generated by an increase in the value of the stocks of raw materials and finished goods which they hold. These windfall gains are inevitable, and substantial, in a period of rapid inflation. Since this tax relief was introduced by Labour in the autumn of 1974, companies have been freed of about £2 billion in taxation. Currently, most manufacturing companies pay virtually no tax, and for the rest, Healey announced a further cut in corporation tax of £90 million.

The Chancellor ratted yet again on his social contract promise to introduce a wealth tax. He also made a further reduction in the taxation of gifts of wealth which Labour introduced in 1974. Till now gifts of up to £1,000 a year were free of capital transfer tax – the new limit is to be £2,000 a year.

Stately homes and works of art have now been freed from all forms of taxation; they are not subject to death duties, capital gains tax or capital transfer tax.

Healey made no move to close the mammoth loophole which he offered in the death duty system in 1974 – namely that no tax is charged on estates left to a surviving husband or wife.

The amounts being paid in death duties are now so embarrassingly small that The Times has suspended its old custom of publishing the totals of taxes paid in its Wills and Estates column.

Estate duty which last year brought £211 million, is predicted by the government itself to raise only £70 million in the coming year.

In other ways the upper classes will benefit from the Budget. The reduction in luxury VAT from 25 per cent to 12½ per cent applies to furs, jewellery and yachts – as well as consumer durables like TV and washing machines. The raising of thresholds at which higher rate (surtax) is being charged – part of the conditional tax deal – is to cost the Exchequer £103 million a year; and will benefit only single people with over £5,737 a year, and married couples with over £6,555 a year. There is a small increase in the taxation of perks such as the company car and loans from companies to pay public school fees or buy a house – but none of these will come into operation till after April 1977.

On taxation, the Treasury’s Budget press hand outs could not have been more misleading. The impression was given that the only big increase was the extra £330 million on cigarettes, drink and petrol. But in a suitably obscure corner of the Budget statement are the government estimates of tax revenues in the coming year. Even if the £1 billion cut in income tax is implemented, the total take from income tax will go upfrom £17 billion last year, to £19.5 billion next year. National insurance contributions will rise from £7.1 billion to £8.6 billion. And expenditure taxes will rise from £14.9 billion to £16.5 billion.

This enormous total of £5.6 billion in extra taxes would average out at an extra £4.30 a week for each of the 25 million households in the country.

The trick is that in a period of inflation the taxtake is constantly on the increase. VAT is calculated as a percentage of the selling price of goods. When the price goes up, the amount of VAT charged is automatically inflated.

Because tax free personal and child allowances are held below the rate of inflation the average proportion of income paid in income tax rises. This device – the lowering of the tax threshold relative to wages – has resulted in massive increases in working class taxation over the past 25 years. In 1952 a married man with two children would have had to earn more than twice the average wage before he paid any income tax. Now the income tax threshold is only 42 per cent of the average wage. In his latest Budget, Healey continues unchanged the system whereby taxes rise automatically with wage and price rises – whereas any wage increases above a miserable minimum have to be fought for by workers.

Despite these gigantic increases in taxation, the gap between government revenue will stay at a record level of £12 billion. A White Paper last week gave details of the new system of strict cash limits for most areas of state spending. But the limits will not apply to debt interest on state borrowing. Debt interest will rise in the coming year by almost £2 billion to £6.5 billion – equal to about 6.5 per cent of Gross National Product.

There is nothing in the Budget which will reduce unemployment, except a small and decorative extension of the temporary employment subsidy. The basic Healey strategy is to shift resources from wages and welfare spending into investment and exports.

Certainly profits will soar this year. But the government cannot ensure that private sector profits actually get used for new productive investment.

With amazing optimism, the Budget is based on a prediction of 4 per cent growth in production this year. Yet Healey’s Budget added nothing to total demand in the economy. The old Keynesian remedies for stimulating a recession hit economy cannot be risked. On recent experience they produce little growth and a lot of inflation. Healey’s gamble is that world recovery will pull the British economy into export led growth. Yet with 20 per cent spare capacity in the major industrial economies, recovery will have to be far advanced before there will be much call for large amounts of extra imports from Britain.

A mounting toll of sacrifice is being required of working people in Britain. Yet the chances remain very high that the cuts in living and welfare standards – even if accepted by workers – would not produce more than a limited and temporary improvement in the near desperate situation of British capitalism.

The lack of fight against the £6 deal has only emboldened the government, under heavy pressure from foreign holders of sterling, to attempt a further and more severe attack on living standards.

 
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