Chuka Umunna MP

Bank of England Monetary Policy Committee member Adam Posen has voiced concerns about the government’s fiscal austerity measures during a hearing of the Treasury Select Committee.

Dr Posen was asked my Chuka Umunna MP to confirm whether the current fiscal contraction was the most severe in any developed country. He replied by describing it “rare that an austerity programme is this large”, adding that “it is unusual for an economy to be contracting this much when it is not yet under crisis”.

Chancellor George Osborne has ruled out altering his fiscal consolidation plan if growth remains stagnant and it is widely believed that a further round of quantitative easing is the Chancellor’s backup plan if growth remains stagnant.

Following the US Federal Reserve’s injection of $600billion (£370bn) into the US economy through a round of quantitative easing earlier this month, Mr Osborne hinted that a further round of quantitative easing could be in the pipeline, telling the Treasury Select Committee on November 4:“The Governor of the Bank of England has observed that robust fiscal policy gives more flexibility to monetary policy, and that is the principle I take to economic policy-making”

Business secretary Vince Cable said in an interview with BBC Radio 4’s Today programme on Monday 25 October said: “There is flexibility already built into government policy, certainly in fiscal policy, to go to five rather than four years; there’s an opportunity to use monetary policy to maintain demand.”

Given that interest rates remain at a record low level, using monetary levers to stimulate the economy would strongly imply a further round of quantitative easing.

Under questioning from Chuka Umunna MP on the Treasury Select Committee today Monetary Policy Committee Adam Posen was asked: Is there any size of fiscal contraction in the current climate which couldn’t be compensated for by quantitative easing?

Dr Posen replied:

“It is my personal assessment that the short-term effects of the government’s fiscal plans will be quite contractionary. That is why in my statement to the committee and in the last minutes of the inflation report I differed from the majority forecast of the committee.

“Could monetary policy fully make up for this through quantitative easing? Probably, but not certainly. We all have different choices about where we think the uncertainty lies.

“I am less certain than some of my colleagues about the impact of quantitative easing. I believe it is helpful but I do not have full confidence that if we go full bore from here on it it will be as effective as it has been in the past.”

Commenting after the hearing, Mr Umunna said:

“Today, a leading member of the Monetary Policy Committee has highlighted the serious questions which remain on the Chancellor’s Plan B and whether the government can rely on quantitative easing as a backup if its austerity package produces sluggish growth.”

Last week, Chuka spoke in the first full House of Commons debate on the Comprehensive Spending Review, highlighting the need to reform the financial services sector – his speech is below:

Although she is not in her place, I wish to associate myself with the comments, particularly those on welfare reform, made by my right hon. Friend Joan Ruddock, who is also a south London MP. Her comments apply equally to my constituency as they do to hers.

I wish to say a little about the banking sector in the context of this comprehensive spending review, because it has not been addressed in great detail during this debate. During his speech to the CBI on Monday, the Business Secretary said that:

“the British economy, two years ago, suffered the economic equivalent of a heart attack with the near collapse of the banking system. Death was averted by speedy intervention to shore up the banking system to prevent an economic slump.”

Although he has tended to peddle some of the myths we have heard in the Chamber today, at least there he acknowledged that the previous Government stepped in to prevent the recession caused by the financial sector from turning into a depression. For me, the real question is what contribution the Government are expecting the banking sector to make to clear up the mess it created.

In his emergency Budget statement, the Chancellor said:

“The failures of the banks imposed a huge cost on the rest of society, so I believe that it is fair and right that in future banks should make a more appropriate contribution, reflecting the many risks that they generate.”-[ Hansard, 22 June 2010; Vol. 512, c. 175.]

What was promised in that emergency Budget? First, the Government said that they would set up the Independent Commission on Banking. Secondly, they said that they would take action to tackle unacceptable bank bonuses, referring to the consultation that they would start on the remuneration disclosure scheme and talking about imposing more restrictions on remuneration arrangements for those working in the City. Of course, the centrepiece of the action that the Government said they were going to take on the banks was the banking levy.

So what did we see in the comprehensive spending review? Credit is due in respect of the Independent Commission on Banking. I, for one, am pleased to have seen that set up and its terms of reference are good. Beyond that, there are many questions to be asked about what the Government are doing to ensure that the financial services sector makes its fair contribution. We are constantly told that we will be consulted on the remuneration disclosure scheme in due course. I believe that the Financial Secretary to the Treasury, who is no longer in his place, said that that would take place shortly. However, at the moment it is nowhere to be seen. There is a real risk that if we do not see this the remuneration disclosure scheme, which would require the banks to exercise more transparency in their remuneration arrangements, things will not be implemented in time for the forthcoming bonus round, which is about to start in December.

We have not seen much movement on the measures to tackle irresponsible bank bonuses either. We have seen movement on this in Europe, but not on the domestic front. As has been said in the Chamber today, the banking levy is to bring in about £2.5 billion of revenue, and the Government are fond of saying that that is higher in net terms than the previous Government’s payroll tax. That is completely disingenuous, because I tabled a parliamentary question during the summer on the likely income from the banking levy and was told by the Treasury that it would raise £1.15 billion in 2011-12, rather than £2.5 billion. I was told that £2.32 billion was to be raised in 2013-14, not £2.5 billion. The income would finally reach £2.5 billion in 2013-14 before falling back again to £2.4 billion in 2014-15. So in 2014-15 the banks would be paying less than families who are losing out on child benefit will be losing in that way.

What we were also not told in the CSR was that, under the paper issued by the Government, the day after the banks will have a tax-free allowance-a levy-free allowance-of £20 billion, so they will not pay the banking levy on the first £20 billion of taxable liabilities. This is not a levy; it is a walk in the park for the financial services sector. The five biggest UK banks have already announced well over £15 billion of profits this year, so I ask the Government to spell out how those whom they said they would make pay for the crisis they caused are to be required to make a fair contribution, because we do not see it in the Green Book this week.

Chancellor George Osborne’s lack of a Plan B could prove his undoing. But it is the British people who will pay the price argues Chuka in this article he wrote for the New Statesman with economist, Duncan Weldon, this week.

George Osborne grandly set out his economic vision in his Mais lecture to City luminaries earlier this year. A smaller state coupled with higher exports and increased investment were his stated objectives. As Chancellor he is now pursing these goals and keeping his fingers crossed that after he has hacked off chunks of the public sector, the private sector will step in to fill the gap.

If the unprecedented boom in exports and business investment needed to realise Osborne’s plan doesn’t show up, to coin a phrase from Lady Thatcher, his approach can be described thus: “you turn if you want to, the man’s not for turning”. Urged on by Tory backbenchers, the Chancellor refuses to countenance a Plan B, whilst his Liberal Democrat coalition partners wonder what brake, if any, Chief Secretary Danny Alexander is applying to this ideological adventure.

Alistair Darling, Osborne’s predecessor, set out a plan to halve the deficit in four years starting in March 2011. This was controversial with many within Labour: the balance of tax rises to spending cuts was questioned, as was the need for such rapid fiscal consolidation. Notwithstanding this, the judgment of the new Office of Budget Responsibility was clear: the deficit would have been reduced from over 10 per cent of GDP in 2010/11 to 3.9 per cent by 2014/15 under Labour’s plans.

Crucially Darling had a Plan B. If the economy worsened and the prospects of high unemployment or a double dip recession increased, the tempo of deficit reduction could be changed accordingly – the pace of fiscal tightening would be set by the pace of economic recovery (Vince Cable argued for this too during the election campaign).

Conversely Osborne has decided to go further and faster. He is planning on tightening by an additional £40bn over Darling’s plans by 2014/15, as set out in his June Budget and this month’s Comprehensive Spending Review. He has rhetorically lashed himself to the mast of eliminating the structural deficit in one Parliament, allowing very little flexibility if the outlook changes. He is also relying more on spending cuts, and less on tax rises, not only putting him at odds with Labour but also with Ken Clarke.

The Justice Secretary, whilst Chancellor under John Major in the 1990s, achieved a similar rebalancing of the economy and relied much more upon tax rises and less upon spending cuts to repair the public finances in the wake of the last recession than Osborne proposes now. Then exports and business investment grew strongly, although not as strongly as Osborne needs them to at present. And conditions then were very different to those in 2010: exports were helped by a booming world economy and investment increased by the need for business to respond to the revolution in information technology and communications – neither seems likely over the next few years.

We should also remember the 1930s and the 1980s. In both cases state spending was cut back whilst Tory governments, clinging to approaches variously referred to as “the Treasury View”, “Sound Money” and “Monetarism”, waited for the private sector recovery to take hold. Yet, when the problem is too little demand, who seriously advocates cutting back demand further? This is economics driven by ideology and lacking commonsense.

Today the Chancellor’s rhetoric has made dealing with the deficit the sole aim of macroeconomic policy but, as the axe falls and jobs are lost from the public sector, there is a real danger that the private sector is not strong enough to absorb the newly unemployed workers. If this is the case unemployment will rise and, with it, the welfare bill as tax income falls. The deficit will worsen, forcing Osborne, who has left himself with no option, to cut spending further. It is self defeating austerity that could well create an economic death spiral.

Moreover, in the 1930s and the 1980s the recovery did eventually come but years later than it had to and with a high social cost in terms on unemployment, poverty and crime. In both cases the lack of an active regional policy, as now, left pockets of higher deprivation blighted by structural joblessness. And in both cases there was an alternative that could have been taken if the government had not been so blinkered.

Hopefully the private sector will be strong enough to counteract the effects of Osborne’s measures, Britain will enjoy an exporting and investment renaissance and workers will move near seamlessly from the public payroll to newly created jobs in industry. However, history suggests that the odds of this occurring, especially at a time of continued global economic turmoil, are not high. Osborne’s lack of a Plan B could prove his undoing – unfortunately it is the British people and not the likes of Osborne who will ultimately pay the price.

Chuka Umunna is the Labour MP for Streatham and a member of the House of Commons Treasury Select Committee. Duncan Weldon is an economist and former adviser to the Opposition Treasury team.

Chuka Umunna, Member of Parliament for Streatham, has slammed the government’s Comprehensive Spending Review for slashing funding for policing, axing Educational Maintenance Allowance and raising social housing rents.

Police and community safety

In the statement, delivered on Wednesday by Chancellor George Osborne, it was announced that central government police funding will reduce by 20 per cent in real terms by 2014-15, impacting directly on policing on local streets.  A July 2010 report by HM Inspectorate of Constabulary stated that a “cut beyond 12% would almost certainly reduce police availability”.

In answer to a recent Parliamentary Question tabled by Mr Umunna, the Home Office revealed that government funding for Metropolitan Police neighbourhood policing has risen every year from 2004 to 2010, but this is now under threat.

Last month, Mr Umunna held an adjournment debate in the House of Commons on youth crime in London, highlighting the importance of neighbourhood policing, rehabilitation work and funding for youth activities.  With the cut to the police budget, the demise of the Youth Justice Board announced last week and 28% real terms cuts in local authority budgets, the future of these programmes has been thrown into doubt.

The Crown Prosecution service faces cuts, and the government is pursuing plans to close 157 local courts, while central government grants for local fire and rescue spending will fall by 25%.

Housing and welfare

The Comprehensive Spending Review promised to continue funding the Decent Homes Programme, under which local housing management bodies Lambeth Living and United Residents’ Housing are set to benefit if the achieve a two-star rating. However, the Communities Department which is responsible for social housing faces cuts of 68% while the budget for building affordable homes has been slashed by 60%.

Social housing rents will increase for new tenants to 80% of the market rate, which could mean increases of hundreds of pounds a week for tenants. It is feared that this change could lead to an overall higher housing benefit bill which would cost the public purse more in the long term.

The Chancellor also announced further cuts to housing benefit, with new rules stipulating that couples claiming housing benefit would only be able to claim a room in shared accommodation, rather than a flat.

Working Tax Credits will be frozen, and the level of help with childcare costs which parents can claim through the credits will be slashed. In Lambeth, there are 28,300 claimants of Child or Working Tax Credits and 39,400 housing benefit claimants.

Unemployment

Nationally, there will be public sector job cuts of 490,000 and a report released last week by auditor PricewaterhouseCoopers (PWC) predicted job losses in both public and private sectors totalling 1 million.

Because public sector employment is disproportionately high locally, our area will suffer more heavily than others from the public sector pay freeze announced in the Budget. In Lambeth, public sector employment accounts for 36% compared to 23% in London as a whole.

The Working Neighbourhoods Fund, which was set up by the previous government to fund small-scale, local projects to tackle worklessness and unemployment, from which our local area has benefitted, will be abolished.

Education and health

Chancellor George Osborne also announced that the Educational Maintenance Allowance (EMA), which helps thousands of local young people stay in education and get the qualifications they need, will be axed.  According to figures recently obtained by Chuka Umunna MP from the Young People’s Learning Agency (YPLA), 3,836 young people in Lambeth benefitted from EMA in 2009-10.

The planned guarantee which the last government initiated for cancer patients to have access to diagnostic assessments within one week has also been axed.

Transport

The Comprehensive Spending Review also promised further misery for local commuters and train users, with fare rises of as much as 20 per cent or more expected over the next four years following the removal of caps on fares.

Commenting, Chuka Umunna MP said: “The deep and immediate cuts announced this week will hit areas like ours hardest and I am deeply concerned about their impact.

“Thousands of my constituents will be affected by the axing of Educational Maintenance Allowance, higher social housing rents and hikes in rail fares. Local services like policing have taken a huge hit, particularly when the level of savings our police service has already made is taken into account.

“The government’s actions will increase unemployment and risk holding down growth, which would lead to a higher dole bill and lower tax receipts, possibly increasing the deficit in the long run. What we desperately need is a plan for jobs and growth, which the Liberal Democrat – Conservative government has failed to provide.”

Chuka Umunna MP, who sits on the Treasury Select Committee, has slammed the government, which today announced its plans for a bank levy, for going soft on the banks only a day after hitting the public hard with deep and immediate spending cuts in yesterday’s Comprehensive Spending Review.

The Comprehensive Spending Review said that “it is only right that during difficult times, steps are taken to ensure that the banks make a full and fair contribution,” although the government’s draft proposals announced today fall far short of this aim.

The government has opted to apply the levy over and above a £20 billion allowance rather than using a threshold. Under a threshold, any bank with total liabilities of more than £20 billion would have been taxed on all their profits, while under the plans announced today all banks regardless of their size will not be subject to the levy on their first £20 billion of taxable liabilities.

A stipulation was included in today’s plans that the levy will not apply to firms where 50% or more of activity is defined as ‘non-financial’. Because investment banks often have extensive and varied operations, this could allow firms to dodge the tax.

In the June Budget, the government announced a banking levy at a rate between 0.04 and 0.07 per cent. Following this, charities such as Oxfam called for a higher rate and the IMF suggested that the government’s suggested level was not sufficient to curb reckless behaviour in the City.

With today’s plans again allowing for a levy of less than 0.1%, the government has failed to respond to these criticisms. The government was expected to announce the proposed rate today but instead it is to be announced closer to when the levy begins to apply from 1 January 2011.

Figures obtained by Mr Umunna through a Parliamentary question in July show that the government only hopes to raise £1.15bn from the levy in 2011-12 and £8.37 billion in total between 2011-12 and 2014-15 (less than half the government’s total cuts to welfare spending of £18 billion announced in the CSR yesterday). Meanwhile another answer to a Parliamentary question by Mr Umunna in July stated that the financial services sector would receive £1 billion as a result of the corporation tax reductions outlined in the June Budget.

Commenting, Mr Umunna said: “The actions of banks triggered the financial crisis, meaning the government had to borrow billions of pounds in order to protect people’s savings, keep high street banks open and prevent the economy from seizing up.

“In the Comprehensive Spending Review, there were no new measures to ensure that those who caused the crisis pay their fair share towards paying down the deficit and the draft bank levy legislation published today falls far short of the decisive action we need and is an insult to those losing benefits and local services.

“Not only is the rate at which the bank levy applies too low but we learn now that the tax will not be levied on the first £20 billion of these banks’ liabilities, gifting them somewhat of a reprieve.”

This week, Chuka hosted an event in the Palace of Westminter to promote the Robin Hood Tax campaign. Actor Bill Nighy spoke at the event, which was also attended by director Richard Curtis, both of whom are supporters of the campaign.

The Robin Hood Tax is a proposed 0.05% levy on non-consumer financial transactions to raise money for domestic use and international development projects. Chuka is one of the Robin Hood Tax’s Champions in Parliament.

To find out more about the Robin Hood Tax, follow this link.

The ratio of spending cuts to tax rises is a political choice. Growth, not ideological grandstanding, should come first, Chuka argues in an article for the Litmus newspaper (a collaboration between Left Foot Forward and others) which can be downloaded here.

What the country needed from June’s Emergency Budget was a clear statement of how the new government would secure our economic recovery. What we got was a political attack on the role of the state, predicated on a rewriting of the history of the economic downturn.

The coalition’s argument goes something like this: our economic problems flow from the country’s debt; this debt had nothing to do with a financial crisis that caused tax receipts to drop and benefit payments to rise – it had everything to do with the profligacy of the last government; then, as a matter of economic necessity, the only answer to our problems is to shrink the state over a rigid timeframe. This is nonsense but usefully serves to rebrand the coalition’s political choices as economic necessities.

Now the government is pursuing the most drastic cuts since the Second World War. The aim is to eliminate the structural current deficit over the course of this parliament, with roughly 80% of consolidation measures being delivered through spending cuts and the remainder through tax increases (of which more later).

And the result? Geoffrey Dicks, a member of the government’s new Office for Budget Responsibility told the Treasury Select Committee in July that the Emergency Budget made a double dip recession more likely. Then in August the Bank of England cut its growth forecasts, citing poor business and consumer confidence, tight bank lending and public spending restraint as the reasons.

There is, of course, an alternative way. As President Obama argued in a letter to G20 leaders before they last met, it is not that deficits should not be reduced but that the speed of reduction should be flexible, reflecting economic circumstances rather than political whim. The same can be said of the choice of spending cuts to tax increases – the coalition’s consolidation package is overwhelmingly based on the former and not the latter, which is unfair and economically questionable.

Landman Economics and the Fabian Society have shown how the poorest 10% of households will, proportionally and in real terms, shoulder a greater burden than the wealthiest 10% as a result of the June Budget. For example, the Chancellor who earns £145,000 per year will proportionately bear a smaller burden of deficit reduction than Sandra Sanchez who cleans his department’s offices for under £15,000 per year.

The sense in going for the coalition’s consolidation ratio of spending cuts to tax increases is called into question by a recent IMF paper that said spending cuts must “protect the poor and unemployed” in order to be sustainable and that tax increases “need to be part of the solution”. This is supported by a study by Ray Barrell of the NIESR who found that spending cuts of 1% of GDP reduce growth by 0.37% in the first year, but that an equal-sized consolidation through tax would reduce growth by just 0.11%.

So a different ratio of spending cuts to tax rises is called for. Labour proposed 66:33, and built into its plans flexibility to alter the timetable for deficit reduction according to levels of growth. Given the mounting threat of return to recession, moving even further to a ratio of 50:50 deserves consideration.

A 50:50 ratio would improve the distributional impact of deficit reduction by bypassing half of George Osborne’s proposed spending cuts. It would allow us to retain the growth-boosting Regional Development Agencies, investment allowances and the R&D tax credit. Indeed, in 1994 the then Chancellor, Ken Clarke, told the Commons that a 50:50 ratio would “meet the objective of healthy public finances”.

A revised ratio along these lines would entail finding an additional £9.5 billion in tax rises, on top of the deficit reduction plan proposed by Labour at the election. Tripling the bank levy (in line with IMF proposals) would raise £5 billion; introducing the proposed mansion tax would raise £2 billion; retaining the supertax on banker’s bonuses would raise £2 billion; and, moving to per plane air duty would raise £3 billion. These measures would collectively raise enough to achieve the 50:50 ratio, with £2.5 billion left over that could be used to fund tax credits for job creation, or incentives to get banks lending to small businesses.

Deficit reduction is not a precise science. But scores of leading economists tell us that strategic tax increases could play a bigger role. Even the European Commission – known as a hub of “spending-cutters rather than tax-risers” – now says that examples from recent history have “weakened” the case against tax rises.

So does George Osborne believe the current Justice Secretary got the ratio wrong in the 1990s or is he simply choosing an ideologically convenient but irresponsible fiscal policy over something better and fairer?

Chuka Umunna is the Labour Member of Parliament for Streatham and a member of the House of Commons Treasury Select Committee.

Chuka Umunna, Member of Parliament for Streatham and a member of the House of Commons Treasury Select Committee, called the Chief Executive of Her Majesty’s Revenue and Customs (HMRC) to account today over her department’s handling of overpayments and underpayments of income tax, and demanded to know why his constituents should have to pay for the mistakes of HMRC.

Last year, HMRC implemented a new National Insurance and PAYE (Pay As You Earn) system. During the switchover to this new system between June 2009 and August 2010 the department was unable to deal with the backlog of millions of un-reconciled cases from previous tax years.

In August 2010, HMRC began the process of reconciling overpayment and underpayment of taxes for the 2008-09 tax year, and it was revealed that millions of taxpayers would be receiving reconciliation notices informing them that they were owed payments or asking them to pay more in tax to make up for their previous tax payments being miscalculated by HMRC. 1.4 million people are estimated to have underpaid and 4.3 million overpaid income tax during the past two years due to errors in their PAYE tax code – resulting from miscalculations by HMRC tax officials.

The Treasury Select Committee called HMRC’s top civil servants to answer questions about the operation of the PAYE system, including Dave Hartnett, Permanent Secretary for Tax, Bernadette Kenny, Director General of Personal Tax, and Lesley Strathie, Permanent Secretary and Chief Executive of HMRC.

Referring to the worry the prospect of paying more tax would cause constituents in the lead up to Christmas, Mr Umunna challenged Ms Strathie asking, “Is your organisation fit for purpose? Can you understand why people think it’s not?”.  Ms Strathie insisted that the standard yearly reconciliation process had been inaccurately portrayed in the media as a mistake, and that this was the reason people had lost confidence in her workforce—but maintained that PAYE works for the majority of taxpayers.

Mr Umunna also asked “How many people have been notified of over or underpayment so far?” Mr Hartnett said HMRC had sent out 45,000 notifications so far (out of around 6 million). He also mentioned that the first 14,000 to receive compensation for overpayment had already cashed their refunds. Mr Umunna then asked Mr Hartnett “when do you expect to complete the notification process?”  to which Mr Hartnett said it is expected to be completed by Christmas this year. Mr Umunna pointed out that many of his constituents would be anxious to hear whether they would be affected by the reconciliation process between now and then and asked “can you speed up the notification process?”  Mr Hartnett explained that it was an automated process and the technology was still being tested, but that a decision would be taken on 21 September 2010 as to how quickly they would be able to notify individuals.

Concerned that some of the 1.4 million people who are being told they owe HMRC money for underpaid tax will have to pay 3 per cent interest on the money if they cannot pay their bill immediately, Mr Umunna said “I find it quite extraordinary that people who don’t know they’ve underpaid are now being charged interest—what can I tell constituents who come to my surgery asking why they should have to pay for the mistakes of HMRC?.”  In response to this question, Ms Strathie announced that a concession would be made on interest payments: people will first be notified about the payments and the interest will only be charged if they ignore the notice for three months and do not return a self assessment form.

Mr Umunna tabled a parliamentary question on 13 September 2010 to find out the exact numbers of people living in the Streatham constituency, in Lambeth and in London who be affected.  An answer is due from HM Treasury on 16 September 2010.

The progressive pressure group Compass has launched a major new campaign to end legal loan sharking.

Chuka, who is a member of the management committee of Compass, co-launched the campaign in a letter to the Guardian along with other leading politicians, academics and campaigers. The letter calls on the government to introduce interest rate caps and increase access to affordable consumer credit.

An interest rate cap would help prevent the exploitation of vulnerable people in places such as Streatham, where High Street lenders charge as much as 400% APR. Some payday lenders in the UK legally charge up to 3000% APR.

Local organisations such as the London Mutual Credit Union which serves Lambeth and Southwark and of which Chuka is a member, provide an alternative to loan sharks by lending small amounts of money while encouraging people to save.

To learn more about the End Legal Loan Sharking campaign and to sign the petition, follow this link.

Earlier this week, Chuka appeared on BBC Newsnight, debating with Michael Portillo and arguing against the Liberal Democrat-Conservative government’s ideological spending cuts.

To watch Chuka’s appearence, follow this link