A week on, Alec Haglund, IF Researcher, argues that the government’s 23rd September budget and the turmoil that has followed its announcement will lead to disastrous consequences for the economy as a whole, and hurt low- and middle-income workers and the prospects of the young the most.
The direction the new government wants to take is clear
The announcement of a new budget by a recently-appointed government serves as a way to understand what politics drives the leadership and what policies they want to pursue. Given that the government’s budget includes measures such as tax cuts for the top 1% of earners, lifting bans on fracking, removing caps on bankers’ bonuses, and new licences for North Sea oil drilling, it seems clear that the focus of the new Prime Minister and Chancellor is not on helping the young or those who are struggling the most.
Instead, it suggests they are willing to gamble on the livelihoods of both present and coming generations with the economy. Some of their own colleagues have dubbed it “playing A-level economics” with the country. While it is understandable and welcome to plan budgets with the aim of achieving growth, it is difficult, if not impossible, to find any reason why this budget would achieve said growth.
The tax plan set out in the budget is both intergenerationally unfair as well as intra-generationally unfair, in whichever way one looks at it. The tax cuts to the wealthy will, for example, result in bankers earning millions only paying a 2% higher marginal tax rate than graduates earning £28,000. The budget does nothing to help young graduates with high marginal tax rates, or the lowest earners in society who are hurting the most as a result of the cost-of-living crisis, showing the warped set of priorities of the new government.
The negative effects of higher interest rates
As a result of the disastrous budget, the Bank of England will feel compelled to raise interest rates. Higher interest rates have various negative effects on the economy, and they are felt mostly by the low- and middle-income earners as well as the young. Although older people with mortgages certainly will struggle with their increased monthly payments, many of those with buy-to-let mortgages will pass on the cost to their tenants. The UK is already seeing double-digit rent increases year-on-year, and it is likely that those who rent will be forced to pass on an even greater proportion of their hard-earned income to their landlords.
Additionally, it affects the young and future generations in the long-term. Given that the government pursued the damaging path of austerity when the cost of borrowing was low, instead of investing in renewable energy, infrastructure, public services and so forth, the need for public investment remains great. However, it will be increasingly difficult for this government or successive governments to undertake such necessary investments due to the higher cost of borrowing, with the sterling crashing only adding to the challenge.
In a time of record corporate profit and low unemployment, workers find themselves in a position where, for the first time in over a decade, winning real pay rises is a good possibility. As real wages have been falling for a long time, we are likely to see an increase in the number of workers who will use their bargaining power to stop the decline in their real wages. However, higher interest rates also serve to discipline workers’ bargaining power.
High interest rates exist to lessen investment and activity in the economy and to curb the spending power of consumers – essentially causing a recession. Naturally, recessions mean lay-offs, and therefore a weakened position for workers to fight back against real-term pay cuts. Combined with the government’s attacks on the democratic right to strike, this will mean that young people will find it more difficult to stop their real wages from declining, while getting a mortgage for a first home becomes an ever-more distant dream.
A borrowing burden for the young with nothing to show for it
The cost of borrowing to fund tax cuts for the wealthiest in society will primarily fall on young people and low- and middle-income workers, as well as future generations of taxpayers. This is not to say that borrowing is bad in and of itself, but it entirely depends on what we borrow for.
If we would be borrowing to increase productivity in the economy by improving our ageing infrastructure, investing in renewable energy production, high-productivity industries, and social housing, then borrowing today is paid for by improvements we reap tomorrow.
However, borrowing for the sake of funding tax cuts for the wealthiest in society, particularly at a time of a cost-of-living crisis and when absolute and relative poverty is at the highest it has been for decades, is almost exactly the opposite of what ought to be done. It is estimated that the tax cuts for the wealthy will cost the Treasury around £45bn annually. And for what? Many people are struggling at the moment, but not those who earn more than £155,000 annually.
In a similar vein, using public funds to subsidise the massive windfall profits of energy giants will eventually fall on the backs of future generations of taxpayers. Of course, we require immediate action to tackle the high cost of energy bills, but instead of burdening future generations with debt, we should consider more progressive means of achieving affordable energy for all. Taxing wealth and the corporations that can most afford it would appear a much more sustainable option.
A new direction
The government is attempting to call it “progress” when the price of energy doubles within a year while giving support to the fossil fuel giants, subsidising their windfall profits with public funds. If they want progress, they should cancel the tax cuts for the rich and the promises of more fossil fuels and fracking, and instead focus on building an economy that works for everyone – the old, the young; renters and mortgage-payers; and low- and middle-income workers.
In order not to cause further damage to the country today, and to generations to come, the government must swiftly change direction.
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