George Kerevan: Why this week’s Budget will be a smokescreen for Tories’ real plans

Some £895 billion has been invented at the flick of a Bank of England computer switch and used to prop up the UK economy through the pandemic. Now, all that is about to stop.

Wednesday’s Budget is the start of a grinding reversal of Treasury financial gears. True there will be some financial goodies to sugar the Chancellor’s pill. We have already had the usual pre-Budget announcements designed to make us think Mr Sunak has nothing to do but hand out fivers. England’s city regions are to get an extra £6.9bn towards transport projects. Another £1.6bn is to be available to roll out new technical qualifications south of the Border. There will be assorted Barnett consequentials for Scotland.

But all of this is a smokescreen for a major change in Tory taxing and spending policy. The Chancellor is a former banker with a banker’s fixation on keeping the national finances in order … the better to pay back loans to his friends in the City.

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Sunak is not concerned with welfare aid for the poor or stimulating economic growth. He is concerned with “balancing the national books” regardless. Particularly because inflation has returned with a vengeance due to post-Covid labour and material shortages. In turn, this has spooked investors, who have started selling off government securities, pushing up interest rates.

But rising interest rates are a problem when it comes to balancing the Chancellor’s books. Higher interest rate charges mean Sunak has to spend more money servicing the national debt. Already he will have to find circa £15bn extra to service government interest payments than was forecast in March. That means less cash available for spending on public services.

The outlook is for even higher interest rates to come. The Governor of the Bank of England (the unimaginative, yes man Andrew Bailey) has just announced that an interest rate rise by the Bank is “inevitable”.

True, it has held them at a 327-year low of 0.1% during the pandemic and they can’t stay low forever. But raising rates now – given the degree of economic uncertainty – is not only counter-intuitive but positively dangerous.

As it is, retail sales in the UK have dropped for five months in a row. If Christmas gets “cancelled” by supply shortages and/or an upsurge in the pandemic, any economic recovery will falter. In this context, charging consumers more for their credit card purchases is surely bonkers.

What can we expect from the Chancellor on Wednesday? He does have a bit more wriggle room compared to his Spring Budget in March. Treasury tax revenues have proven higher than expected, reducing planned borrowing and yielding £50bn that Sunak didn’t think he’d have. It’s like finding money down the back of the sofa. Of course, that’s a one-off so don’t be fooled by his giveaways on Wednesday.

At the start of September, the Treasury quietly published its spending plans for England for the next two years. They show a modest overall increase. But in order to meet published commitments to the NHS and defence, funding for so-called “unprotected” departments (local government, prisons, courts) will have to be slashed – by £2bn in 2023. Even then, the authoritative Institute for Fiscal Studies (IFS) predicts the English NHS will have an annual budget shortfall of £5bn by 2025.

IFS figures also show English

(non-education) local council spending per head has been slashed by one-quarter in the past decade. It is set to fall even more.

All this adds up to a fresh round of austerity even before we get round to discussing taxation. Sunak’s March Budget was the biggest tax raiser in nearly 30 years, adding £28bn per annum in extra taxes!

Much of this comes from a

four-year freeze on income tax thresholds, so most folk have not noticed this whammy. And this was before the manifesto-busting hike in National Insurance contributions last month. That’s another £14bn per year into the Chancellor’s rapidly filling coffers. Yet despite the tax bite out of UK national income now being at near-record peacetime levels, public services are tottering.

It is important not to dismiss Sunak’s Wednesday Budget as just another example of a Tory Chancellor playing Scrooge. Sunak is struggling with a major meltdown in the entire British capitalist model – a meltdown exacerbated by Covid and Brexit. A collapse that must play a key role in framing the arguments for Scottish independence.

In the late 1990s, Gordon Brown oversaw the final stages of UK de-industrialisation. A precarious economy is now built on debt-fuelled consumer demand underwritten by unsustainable property values.

Consumer needs are met mostly by cheap Asian imports. A bloated City financial sector then creams off its profits from home mortgages, consumer credit, facilitating capital investment in Asian manufacturing, and illegal global money laundering. Meanwhile, the UK spends insane amounts on armaments as America’s leading poodle, to maintain the security of this international web of trade and finance.

But this economic house of cards is now collapsing, exacerbated by the pandemic and Brexit. Covid has accelerated the reshaping of the world economy, triggering inflation, trade wars, and technological and military competition between the west and China. The UK economy is in no fit state to survive these storms. Without a manufacturing base of its own, the UK is living off a mountain of debt plus the Bank of England electronic printing of funny money.

But higher interest rates and higher taxes will soon erode the ability of ordinary folk to borrow and consume – or to pay back debt. Plus, the Tory ideological obsession with free trade will flood the UK economy with cheap foreign goods, finally eliminating what’s left of industry.

This explains the pressure on Sunak from the City and London-based foreign capital to “balance the books”, ie prioritise interest rate repayments to bond holders, while the UK economy nosedives.

Sunak’s Budgets over the next five years will centre on the needs of the City, whatever populist nonsense Boris spouts about “levelling up”. Which accounts for Sunak’s announcement that the one tax he intends to cut on Wednesday is the levy charged on bank profits.

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Whatever spending increases emerge from the Budget (and the more comprehensive Spending Review due at the end of this month) expect them to focus on big capital projects such as nuclear power, not on vital public services.

Such capital projects will be spun as “levelling up” or a New Green Deal, but they represent Sunak shovelling cash at the banks and investment industry.

Scotland urgently needs to escape this nightmare and fashion an economy based on need not profit, on local manufacturing not financial gamesmanship.

There is no point in asking Sunak to do this or that for Scotland in Wednesday’s Budget. His hands are tied by the insane logic of the current financial system and Britain’s de-industrialised, pseudo economy. Instead, we should be planning a saner Scottish alternative.