Osborne’s four myths mean he hits the poor and helps the rich

Crowd pleaser. Facundo Arrizabalaga/EPA

George Osborne performed his main role at conference: to produce some good news to deflect attention from defection and deviance. Abolishing death taxes while targeting tax avoiders sounds good and the Tory faithful loved it. And this is good news on the cheap.

The Treasury estimates that the move will cost £150m in a total government budget which is estimated to be £732 billion in 2014-15. It does not cost much because it will only benefit a small number of prosperous pensioners. And the conference also loved the freeze on working-age benefits; which means a cut in real terms for the unemployed and those on low incomes.

But beneath the hyperbole and soundbites, a divisive philosophy underpins the chancellor’s economic narrative. The wealthy and rich need to be better off through tax cuts as an incentive to work and save, while the poor and disadvantaged need to be made worse off and suffer welfare cuts as an incentive to work. This will only increase the current high level of inequality in the UK – which ratcheted up in the early 1980s. And it will not help the economy to break out of its current stupor of low wages and low productivity.

Osborne’s crowd-pleasing rhetoric is based on a rewriting of history (he has “photoshopped” the economic realities) and a distorted use of data.

Myth 1: Labour’s great recession

The chancellor conveniently forgot the global financial shock and world economic crisis. So the great recession was all the fault of the previous Labour government. But when the coalition government fails to meet its growth and deficit targets it is someone else’s fault. So the chancellor blames the Eurozone despite the fact that in most of the Eurozone growth has been more rapid than the anaemic growth in the UK.

Myth 2: Cutting the deficit

The chancellor has consistently failed to hit his targets on cutting the public sector deficit. According to the latest report from the Office of Budget Responsibility (OBR), public sector net borrowing: “has risen by 6.2% in the year to date”.

The pathological austerians blame the persistent deficit on the failure to implement savage cuts in public expenditure, but the problem is on the other side of the balance sheet. Tax revenues are low because of low wages and widespread tax avoidance by many major corporations. The “Google tax” designed to shut off tax avoidance schemes used by the tech sector may help the latter, but only increasing real wages will help the former.

Myth 3: Long-term economic plan is working

The recovery of the economy since the Global Great Recession has been the slowest since records began. The graph below shows the path of GDP following the major recessions since the early 1970s. Even looking at the revised data recently produced by the Office of National Statistics, the recovery has been slow and protracted.

Recessions and Recoveries: GDP growth following pre-downturn peak. ONS (2014) Economic review. Sept 2014

What is of particular concern for long-term prosperity is the stagnation of productivity growth. The chart below shows that productivity has been falling since the great recession. This translates to lower real wages for workers – and lower tax revenues for the government. Neither the government or the opposition has yet produced a plan for long-term growth that will “fix the economy” and generate sustained productivity growth.

Recessions and Recoveries: Productivity growth (output per hour) following pre-downturn peak. ONS (2014). Economic review. Sept 2014

Myth 4: You can’t increase taxes

The chancellor repeated the usual refrain that in a globalised world you cannot increase taxes as firms and workers will rush to leave the country. This is a myth. The overall level of taxation is an ideological not an economic issue. Many successful advanced nations, such as the Nordic countries, have a relatively high level of taxation and public expenditure without any adverse impact on their economies. And government expenditure increased in every advanced economy from 1960 to 2007.

The challenge for any tax-cutting chancellor is how to pay for education, healthcare and pensions. These are the biggest components of public expenditure and citizens want to live a long and healthy life and want a good education for themselves and their children. If the chancellor is serious about cutting taxes then this can only be achieved by the wide-scale privatisation of healthcare and education – which will further widen the disparities between the prosperous and the poor.

As usual, the chancellor repeated the mantra that: “We are all in it together”. We are not. And the policies of this Conservative government as laid out by the chancellor will lead to further divisions and rising inequality.