Decrypting the Chancellor’s 2015 Budget
George Osborne has received heavy criticism over his recent 2015 budget. In the global epoch of financial recovery, the Chancellor of the Exchequer sought to put forward a new fiscal plan under the guise of building a better economy for the working class people. At closer inspection, the budget reveals a deep flaw within British fiscal policy and more importantly, a failure of capitalism to secure economic stability for the lower portion of society.
In his budget before the election, Osborne ambitiously promised to lift public finances into a surplus by 2018-19. This would mean harsh cuts in government spending in order to bring the economy up to scratch. The recent budget however, delayed this objective by a year so as to ease the austerity and pave the way for a smoother transition.
It seems that the Chancellor deferred his ambitions not due to the countries inability but due to an increase in expected fiscal revenue. With higher taxation on dividends, insurance and emissions, he expects to raise £4.5 billion by the end of the term. With new tax relief for pensions, he will raise £1.2 billion and as a result of tougher measures on tax avoidance and evasion, he expects to bring in around £5 billion. According to the OBR, parliament aims to raise taxes by £6 billion. Of all the changes made in this budget, the most shocking came in the form of welfare cuts. By 2019-20 the Chancellor aims to cut the bill by a staggering £12 billion mainly through a reduction in tax credit (having already pulled it back by £25 billion since 2010).
Osborne was quick to shadow these welfare cuts by setting a new minimum wage of £9 from £7.20 for the year 2020. Indeed, the Chancellor cunningly and unoriginally presented Labour and Liberal Democrat pledges in his own budget such as non-domicile regulation and a higher personal tax-free allowance. With the announcement of a higher minimum wage it seemed that the Conservatives were quick to pick the bones of both parties after their colossal defeat.
Such policies did well to mask, more classic, Tory based fiscal policy such as the increase in income tax threshold at which the 40% band begins, from roughly £42,000 to £50,000. Or the inheritance tax cut on houses, which means that houses up to £1 million will be relieved of taxation.
Tax credit: Whilst he may have announced his intention to delay the public surplus (which in the eyes of some economist was an indication of a more relaxed fiscal approach), the Chancellor did not hold back on the poorest in Britain. Shortly after the budget was released, the Institute for Fiscal Studies stated in a report that 3 million households would be roughly £1,000 worse off a year and that 13 million UK families will lose £260 a year on average, purely due to cuts in welfare (primarily tax credit) with low-income workers being worse off. What is most shocking is that these statistics have considered the higher minimum wage that George Osborne adamantly announced. Paul Johnson (director of the IFS) makes it clear; “the key fact is that the increase in the minimum wage simply cannot provide full compensation for the majority of losses that will be experienced by tax credit recipients”.
Taxation: Although the conservatives came to power on promises to adjust taxes (some of which they kept – see inheritance tax cut and income tax threshold), it seems that the policies to keep that promise are dwarfed by the £50 billion tax rise. Tax on dividends will rise, whilst tax relief on buy-to-let mortgages are going to be slashed. Insurance tax will hike from 6% to 9.5% and emission taxation will also ascend. Banks face another 8% corporation tax and pension tax-relief for those earning over £150,000 will be reduced.
Minimum wage and Employment: The economics behind a higher minimum wage is clear. As a result of higher costs from higher wages, firms and business begin to fire more (generally less skilled) workers, kindling unemployment. Osborne himself stated that the higher wage floor would weaken the countries labour force by 60,000 jobs. Indeed, a higher minimum wage in exchange for lower tax credits could kindle poverty in the technological world as opposed to lowering it. With a higher minimum wage for over 25 year olds, the current unemployment rate of 13.7% is more likely to rise. It is possible that employment reduces in the younger bracket where 475,000 are unemployed, as higher costs for firms and businesses would mean that lower skilled workers are easier to fire, albeit they will be paid a similar amount to how much they currently receive.
Education and University: With further education colleges facing harsh cuts, many are expected to face higher costs and may even collapse. In addition to this, university grants are being dropped and the government will be forcing many into taking on higher levels of debt. Furthermore, the cap on already exorbitant tuition fees (£9,000) will be released, allowing institutions to raise them, opening education to the richer and closing it to the poorer in society. The Guardian places student debt to be roughly £51,000 after three years.
Housing: With house prices on the rise and an evident asset bubble fostering in the capital, George Osborne has now made it increasingly difficult for anyone aged between 18-21 to claim housing benefit. With the cut of inheritance tax, the well-off are more encouraged to purchase bigger homes in an economy that is suffering from a housing shortage. No doubt does this policy benefit the richer part of society as opposed to the lower class who struggle to enter the housing market.
Welfare: Working age benefits have been frozen for four years whilst child tax credit has been restricted to two children. As a result, poor families with more dependents will lose out heavily, particularly due to a cap in benefits at £20,000 from £26,000. In addition to this, there will be cuts in employment and support allowance for those deemed capable of “work-related activity”. With less housing benefit for younger adults, it is clear that the youth have been hit hardest by these deep welfare cuts.
Debt: Whilst the Chancellor expects public debt as a proportion of GDP to reduce from 80.3% this year to 68.5% in 2020-21, that is not to say private debt will remain the same. With lower tax credits and the aforementioned cuts in place, there is no doubt that private debt will slowly rise, putting more stress on households. Like many before him, the promise to reduce the debt to GDP ratio significantly has been but a dream that many have aspired to make a reality.
Inequality rules Britain, not growth
George Osborne and his party have explicitly highlighted the nature of economic priority under this capitalist framework. It is to peddle growth at expense of equity and feed the mouths of the well-off as opposed to quenching the thirst of the poor. Benefits, housing and education are some of the main economic variables that the poor and needy depend on so as to satisfy their basic necessities, but it seems that the Conservatives were quick to tighten the pressure on such a social class without hesitation. The real issue in developed capitalist economies such as the United Kingdom is not that it is down on GDP from 2.5% to 2.4% but that it is the only G7 country with the widest level of inequality, where the richest 10% control 54.1% of Britain’s wealth and that this value has only increased after the financial crisis of 2008 (Credit Suisse).
Party politics is now surrounded with promises on expanding the economy but no one is concerned with redistributing what they already owns. Such a problem is centric to the economic system of capitalism and it is the primary reason why the majority of British society are apathetic and indifferent towards politics and even more so towards economic policy. Indeed, the recent budget of 2015 only kindles this insouciance further, leaving the lower class worse off and in a bad state.
The ideological error
So what should the focus of economic policy be? The answer stems from a deeper ideological discussion as it is ultimately ones viewpoint that determines what one must expend most effort on. Capitalism has compounded the needs and wants of people, which essentially forms an infinite demand. In doing so, it has pushed growth as the main objective of the economy so as to satisfy this infinite demand. So for the capitalist (like George Osborne), the higher the productive capacity, the greater the extent to which the economy fulfils an infinite but theoretically unserviceable demand. The budget cuts in welfare, tax credit, education spending and housing benefit, all fall into this wider narrative, which is to preserve growth even at the expense of basic necessities and comfort for citizens of the state. In fact, after the financial crisis of 2008 the global economy hid under the mattress of austerity in order to propel GDP up whilst the culprits to the crisis have been unaffected.
If we look to Islam, we find an entirely different ideological position. Rather than amalgamating the needs and wants of the people, the Islamic economic system understood the difference between the infinite desires of man and his basic necessities. This rational and cogent understanding of demand stems from the Islamic ideology. Consequently, the position of the Islamic economy is to push distribution so as to ensure the basic needs of every citizen are met. With a clear focus on the acquisition, possession and disposal of wealth, the Islamic economy facilitates wealth fluidity and removes the need for governments to regularly change fiscal variables such as taxation and welfare.
The Islamic alternative
As we have seen, whilst the Conservatives have focused heavily on pushing the economy towards a higher GDP, the Islamic economic system would redefine a states objective in respect to its view on the economic problem. This article will now highlight three of the key aspects in the 2015 budget by presenting the Islamic perspective on each of them so as to demonstrate the difference between the capitalist and Islamic foci:
Taxation: In the free-market, taxation has risen to unsustainable levels. Capitalism places income based progressive taxation on a pedestal when it comes to equalising wealth. Indeed, the higher level of taxation will place more financial burden on citizens of the state whilst a small increase in the threshold for tax above the 40% band (proposed in the Chancellors budget) would only relieve the burden off higher income earners. The main issue with such a scheme however, is its inaccuracy in transferring wealth from the richest to the poorest due to its easily exploited nature. Tax loopholes mean that the upper class (including elite corporations) are able to legally avoid taxation to such an extent that the UK lose around £4 billion in avoidance and £5.1 in illegal evasions. Unlike the upper class, the lower portion of society lack the legislative capacity to find and access these loopholes, raising their burden relative to others. While Osborne may have granted the HMRC more funds to deal with this systemic issue, it is clear that his grant is a temporary solution. As a result of an individualistic profit-maximising mentality, capitalism has always suffered from a society that seeks to cheat the system and whilst many argue this to be expected, the policies enforced do not prevent it from occurring rather make it easier for the tax avoider/evader.
Islam has an entirely different view on taxation and it is inline with its viewpoint. With a wealth (as opposed to an income) based taxation scheme, the Islamic economy implements only a handful of taxes. Neither have a high burden which prevents individuals and corporations from being deterred from paying them (essentially paving the way for higher tax receipts). These taxes are also relatively simple and strictly enforced, which prevents the upper portion of society from exploiting them, thus allowing for more funds to be redistributed to the lower class. So the one who makes no surplus wealth would be free from a certain level of tax. Furthermore, tax burdens are measured in line with the degree to which an average citizen is able to sustain his basic needs and wants. If these burdens are too harsh, much like that of the reality in the UK, then the Islamic economy would not push the citizen to pay as the security of his/her life takes priority over their tax receipts.
Welfare: In the Islamic economic system, one of the top priorities is to redistribute wealth rather than accumulate it. This is a practical policy that is intrinsically welfare-orientated and stems from a different viewpoint towards life. By keeping tax receipts consistent, implementing strict regulations on those who fail to pay and closing tax loopholes entirely, the state would be able to raise enough revenue to fund vital areas of expenditure such as education, housing and benefits. Unlike the Conservatives, the caliph would drastically lower education and housing costs (as they are rights belonging to the people), increase benefits for those who require it and cut tax for those who are unable to pay it.
Employment: In Islam, price floors and ceilings are not permitted and wages are left to market forces. Minimum wages in particular would be abolished and the supply/demand for labour will be influenced (if distortions do exist) in order to organise the suitable wages for workers. That is not to say that workers will be paid very little. The rights of the worker is a pivotal matter and the agreement between their employer is paramount to a successful labour market. By eliminating artificial wage boundaries, the costs to firms and businesses stabilise unlike the constant fluctuations that they have to face in a capitalist economy between successive budgets. Under capitalism, the sustenance of an economy depends on minimum wage levels due to the profit-maximising growth mentality held within firms and businesses. Without it, workers would be heavily exploited. Islam eradicates this incentive with an equity-based distribution mentality that releases the states dependence on merely a minimum wage in order to maintain economic stability.
Conclusion: New budget, old economics
Many are disappointed by George Osborne’s budget. After winning by a landslide, the Conservatives promised many things and whilst the Chancellor claimed to fulfil a few, the British public are well aware of what they were promised and what they actually received. It is time that we realised that rotten fruits picked from a corrupted tree will continue to be rotten until one uproots it and plants a new seed.
This budget will be replaced by another, and that other will once again be replace by another. Such a process is perpetual but the economic mindset in each policy is consistent. It is the capitalist ideology which flames the focus of expanding growth so as to increase the slice of cake enjoyed by the rich whilst preventing the poor from sitting at the table of wealth. Contrastingly, it is the Islamic economic system that is based on an intelligible ideology, which is the ultimate salvation for mankind. It is a new form of economics that will end inequality and propel growth to new heights, leaving behind bankrupt capitalism.
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