The Institute for Fiscal Studies has estimated that government finances are out of control, and New Labour will have to make cuts of £37bn to balance the budget over the longer term. These cuts amount to 2½% of Britain’s GDP. As right wing Labour MP Frank Field tartly points out, “The government’s forecasts of debt levels have a terrible habit of being way out. This year’s borrowing is 40% up on its estimate last year, standing at a staggering £118bn.” (Guardian 08.12.08) As borrowing rises faster than income from taxes and other receipts, the mass of government debt is likely to hit £1 trillion for the first time ever by the end of 2009. The Financial Times commented, “Mr Darling’s projections look gloomy. The worry is that they may not be gloomy enough.”

The Pre-Budget Report 0f December 1st brought it home to the British people what a mess New Labour has got us in to. Voters are in shock at the enormity of the unravelling crisis. The headlines after the Report last Monday were about the government attempting to kick start the economy by cutting VAT, so injecting spending power into the economy.  As we pointed out, that is not nearly enough to prevent Britain tipping into recession, which is already happening before our eyes. (http://www.socialist.net/pre-budget-report.htm)

In fact the VAT cut is only for a year. And after 2010, tax increases kick in, reducing demand in the economy just when we might be expected to be clambering out of a recession. Alistair Darling declares, “It is right to let borrowing rise. It is also important that we come back into balance over the medium term.” Splurge now, pay later in other words. Spread out the misery over time.

Balancing the books requires either increase in taxes or cuts in government spending. The proposed rise in income tax for the top 1% is just a token gesture. The increase in National Insurance at the same time will hit ordinary people. The rise in employers’ contributions will also discourage bosses from taking workers on. Is that sensible in a recession? The tax increases outlined in the Pre-Budget Report do not go any way to cover the fiscal black hole. They will only raise £3.6bn in total, compared with £37bn in proposed cuts.

So the government intends to cover the rest of the gap by cutting social services. At present spending on health has risen by 3.1% a year since 1948. One reason for the increase is the changing demographics of Britain – an ageing population who are more likely to get sick. Another is the development of more costly treatments. If the government attempts to protect health and education, it will have to lay waste to every other public project in sight. But they will take an axe to NHS capital spending after 2010 in any case. In the 2005 election, Labour accused the Tories of planning £35bn in government spending cuts. Darling said such cuts, “Could only be found from cutting deep into frontline public services.” What’s the difference now?

There are several reasons for the crisis in the government’s finances. The first is that, when capitalism dips into recession, tax receipts wither and benefit claims mount up. A crisis of capitalism produces a fiscal crisis of the capitalist state. Ben Lucas, chair of the Public Services Trust outlines the prospects. “Welfare spending was 35% of all public spending at the height of the recession in the 1980s; it was 25% of all public spending in the 1990s recession; but at present only stands at 15% of public spending. This is bound to rise as a result of unemployment.”

It’s going to get worse for the ‘in tray’ as well. Two thirds of corporation tax revenue comes from oil and gas and the banking sector. And they’re in trouble. They are not going to be putting so much into the pot in future.

A subordinate reason is Gordon Brown’s innate tendency to fiddle the figures. In the good years he used to announce increases in public spending two or three times, in order to get the credit each time the announcement was made. Field sneers at the persistently ‘optimistic’ Treasury figures because Brown has trained a whole generation of civil servants to lie to the British people. Public finances are opaque. Brown has pioneered a whole slew of slush funds through off-balance sheet PFI projects and various other budgets, such as the cost of nationalising Northern Rock and the multi-billion pound safety net for the banks, that are kept separate from the main accounts. Now he’s been caught out.

Even after £37bn in cuts, the government will still only be getting £3 in tax for every £4 it spends. The difference will be made up by borrowing. Readers will note that if they spend £400 a week when they’re only earning £300, they would soon be in queer street. Field raises the spectre of the lenders, who buy government securities called gilts, revolting at this obvious lack of prudence on the part of the government. “What would we do if the bond market refused to buy huge chunks of government debt, or only at a ransom price?”

So we are not only faced with the prospect of mass unemployment – 3 million by the end of 2009. We are also confronted with tax increases and swingeing cuts in public services, an ‘eye-watering squeeze’ as the FT calls it. The future looks grim. This economic crisis is bound to have political repercussions.

Field has his own agenda. “If the debt can’t be sold, it will be impossible for the government to continue. The only options then will be...for the political parties to come together – in a national government – to try to convince the gilt market that the country is serious about bringing under control the gap between projected government expenditure and its falling tax revenue base.”

The electors of Birkenhead voted for Frank Field as the Labour Party candidate. They did not vote for the gilt market. And they certainly didn’t vote for the Tories. Yet Field is arguing for a coalition with the Tories to placate the gilt market. He makes it clear that vicious Tory measures are needed to balance the books.

A coalition government was cobbled together in the crisis of 1931. Then as now, capitalist crisis led to a crisis in the government’s finances. In order to balance the budget Ramsay MacDonald and other right wing traitors went over from the minority Labour government to the Tories. In the teeth of 3 million unemployed, their ‘solution’ was to cut service pay, cut public sector wages and cut unemployment benefit. It didn’t restore full employment then and it won’t work now. But when things get tough enough they’ll try to do it again.

At present Field’s proposal is just a straw in the wind. But one thing’s for certain. The capitalist class will try to unload their crisis on to the workers. New Labour is doing it already, and the Tories will do it even more so if they can get away with it. To preserve and improve our standard of living and our public services, we have to overthrow the capitalist system.