Why can't Britain afford good public services?

Robin McAlpine

Here's a simple question for you; why does the UK find it so hard to finance public services properly? It is now 17 years since the financial crisis that beget austerity and the prolonged assault on investment in public services. That was supposed to be a 'then once it's fixed...' thing, yet it has never gone away. Why not?

Everyone has an excuse and I'll go through these in a minute, but they simply don't answer my question. All the various excuses are simply blame-passing. If you took them at face value, nothing would be wrong other than the way 'the other guy' enacted broadly the same policy that you're following.

But there is really one dominant answer and no-one will say it out loud. Britain can't fund public services because of high levels of economic inequality and the implications that has for tax collection. I'll come back to that in a second.

Before that, the excuses. Labour thinks the problem is that the Tories didn't grow the economy properly. Thing is, I've been really scanning the Labour analysis of what the Tories did wrong to leave us in this financial hole and it isn't clear why they think it happened. Take out some of the immigration stuff, some of the culture war stuff and the Liz Truss chaos and there isn't really much to tell apart the two parties economic policies.

But then 'the other guy' was the Tory line in 2010 when it took power. It wasn't the policies of Labour that were the problem, it's that they spent too much (and let's not talk about the financial crisis). Again, debt repayments don't even begin to explain the financial duress public services are in, so that can't be right.

The SNP is right to blame the Westminster government, but it doesn't have an explanation of what exactly they're not doing. Tax the rich is as far as it gets – until they do and then the SNP goes mad over taxing the rich (in this instance the rich being taxed were the big oil and gas corporations).

Otherwise the SNP says it's Brexit. I'm going to go against the economic orthodoxy here and say 'no it isn't'. I say this because the actual Eurozone is in a total mess and hardly any major European economies are doing substantially better than Britain. This is all 'the religion of trade' and 'the high priests of economic modelling'. 

They have a model which they say shows that unencumbered free trade creates wealth and so Brexit harmed wealth. Except when they don't do Brexit, that model still turns out to be utterly unreliable. That is the model which is said that all we need is above-inflation growth. Yeah, like we had for the last four decades at least – and the problem got worse.

(Before I get emails, I'm not saying Brexit was good, I'm just saying the problems with the UK economy were not created in 2019 and I'm very unconvinced that the impact of Brexit is significant in comparison to the impact of energy prices, the cost of the pandemic and the spike in global inflation.)

I reject completely the idea that the UK's economic model is fine and all we needed was better management of the same policy agenda and to keep every free trade agreement as was. It doesn't explain anything, other than on the margins.

So what is it that means it is now 17 years since we last weren't told that harsh spending restraints are necessary? That's an entire generation of people who only know austerity. And is it inevitable?

Let me start with the latter; is there no choice but to face budget squeezes in the 21^st century? I can deal with that quickly because, no, it isn't happening everywhere. Look at the Danish budget for the coming year – they're increasing spending beyond inflation and in so doing they're still managing to run a budget surplus. This isn't universal. This is happening in certain kinds of economy.

So what kinds of economy is this happening in? Well, particularly neoliberal ones. Let's just look at our biggest neighbours – France and Germany. France is also making swinging budget cuts and Germany is now in something approaching an omni-crisis. The Eurozone and the EU's economic policy framework are doing nothing to prevent serious problems there either.

And what is the defining feature of neoliberal economies? It's not 'free trade' or 'low regulation' or 'freedom of movement of capital', the defining feature of neoliberal economies is economic inequality. They don't say it, but that is the whole principle by which neoliberalism works. 

It works on the assumption that there are people who create value and there are people who absorb value and it is the people who create value who must be incentivised to create more. You can spot them because they are rich (that is the evidence of value having been created...) and there are lots of ways to make them richer. The aim is to 'trickle down' some of that to the 'wealth absorbers'.

This is all measurably bollocks, but it remains 100 per cent the economic strategy of both the UK and the Scottish Governments. So it's grants to Amazon, planning permission for Flamingo Land and the privatisation of electric car charging in Scotland and it's all of that times ten in London.

What's the outcome? This is super easy to explain. If you create a highly deregulated environment for a small group of people whom you actively make richer and richer while also increasing their influence over government policy, they are in a prime position to avoid tax. In fact they'll take the fact they're avoiding tax as clear evidence that they're the right people for the 'job'. 

So you get rampant tax avoidance and tax evasion from those with the most wealth. The rich people might be stupendously personally rich or they could just be the bog-standardly rich people running big business which is where the money really is. The outcome is the same; the tax return from each pound of wealth concentrated in the hands of a few rich people and entities is small and getting smaller.

This is a problem in a country where the share of national wealth going to capital rather than labour (businesses and their owners compared to everyone else) has been increasing steadily since the mid-1970s, with workers losing a full ten per cent of the nation's wealth (and proportionately closer to 20 per cent of their own wealth) over the same period of time.

Yet employment rates remain historically high, so how is that happening? Because wages are falling as a proportion of wealth. As you know, we've reached the point where most poverty is in-work poverty. And the thing about workers is they pay their tax. A PAYE system pretty well negates tax avoidance.

So when you tax workers you get much more income per pound of national wealth, which means if workers are taking less of a share, tax efficiency falls. Or, to put it another way, a small group of people are so incredibly rich they simply avoid paying tax on most of their money, while a very big group of people get paid so little they barely pay tax at all and often rely on benefits.

Which leaves a big tax burden on the group in the middle who (along with whatever corporations deign to pay) makes up most of our public income. But because of that disproportionate burden, increasing tax on them increases the pain much faster than it raises money – so no-one does it.

Or, to put it another way, when we modelled a more equal economy (same size, same tax rates, just more equality in wage levels like a Nordic country) it raised an extra £5 billion without increasing tax rates. That's what you get from the tax efficiency that comes from more even wealth distribution in an economy.

And that's what's wrong with Britain, a country with one of the worst rates of wealth inequality in the developed world. We can't afford public services because a small group of the super-rich (people and corporations) keep running away with all the nation's wealth and it is left to the rest of us poor schmucks to pay for everything from whatever money is left over for us.

Ordinary people pay tax but they've had a lot of the nation's wealth taken away from them. Corporations and the super-rich have gained more and more of the nation's wealth but do everything they can to avoid paying tax. The poorest can work two jobs and still not earn enough to cross the tax threshold.

This is the brutal arithmetic of British public finances. What is most strange about it isn't that it is happening (it has been happening for a long time now) but that we've stopped talking about it. Fifteen years ago economic inequality was a hot topic; now it's all culture wars and immigration. You'd think inequality wasn't a problem any more.

But inequality remains the biggest problem we have. If you're in the comfortably-off middle classes you don't have to develop a conscience to care about this, you just need to look at your tax bill and have someone explain why it is so high yet you get so little for it. If there were politicians in Britain who would actually say this, then perhaps, just perhaps, something might actually change.