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International Socialism, January 1973

Jim Kincaid

Inequality and the Freeze

From International Socialism, No.54, January 1973, pp.20-21.
Transcribed & marked up by Einde O’Callaghan for ETOL.

There are probably some 92 people in Britain with holdings of wealth valued at more than £2½ million – a sum which it would take the average worker about 2,000 years to earn. Included in this total are some really big fish, like Harry Hyams who has piled up £27 million in a couple of decades of property speculation, and Lord Cowdray who, if he dropped dead tomorrow, would cut up for about £100 million.

Other new stars are rising fast. For example, the highest paid executive in British business is Richard Tompkins, who runs the Green Shield Trading Stamp Company. Last year he earned £5,000 a week. Tax reduced his take home pay to just £1,313 a week, but by way of compensation, he paid himself a dividend of £13.50 for each of the 19,511 shares he holds in the Green Shield Company, a helpful bonus of £263,400.

If all the wealth in the country were equally distributed, then each married couple could expect to receive about £8,000. But, for the years 1959-60, The Economist calculated that the richest 5 per cent of wealth holders owned 75 per cent of total personal wealth and the richest 10 per cent owned 91 per cent. It seems quite possible, states a recent academic study [1], ‘that, as far as the distribution of wealth is concerned, Britain has the doubtful distinction of leading the international inequality league.’

It is certain that in the twelve years since The Economist made its estimate inequality in wealth distribution has increased still further. In the period since the Tories took office in 1970, substantial extra resources have been made available to the higher social classes through the mechanism of tax cuts.

Over the past two years tax reductions amounting to £3,000 million have been introduced. For £2,200 million of this, it is possible to estimate which income groups have benefited. Table 1 gives the details [2], and allows, incidentally, for £135m in welfare cuts, £125 million in higher rents, and a £690 million increase in the national insurance stamp all introduced by the Heath Government.

1. The Freeze

Against this background the TUC sat in cosy conclave with the Government and the CBI and discussed the various cosmetic trimmings which would enable a flat rate £2 pay increase to be sold to rank and file trade unionists as a fair deal for the lower paid. The total wage freeze which has now been imposed and which the Government hope to keep in force until the end of April, is full of loopholes which benefit the higher income groups.

Crucially, a dividend freeze involves no loss to shareholders, since the extra cash can be reinvested by the company, and recovered by the shareholder either in the form of an increase in the capital value of his holding, or by extra dividends to be paid when the freeze ends.

The price freeze is an exercise in public relations, not a serious attempt at economic control. During the recent Nixon freeze, some 4,000 staff were fully employed in policing prices, and without much success. The Department of Trade and Industry is pretending to do the same job with 25 staff and maximum fines of only £400 for illegal price increases.

The middle and upper classes have been kept in a sunny mood by the absence of any restrictions on the operation of their incremental scales, and on extra earnings attributable to promotion. There are no restrictions on the prices that can be charged for 2nd hand houses. For higher paid executives the Finance Act of 1972, legalised the use of stock options and share incentive schemes as a substitute for pay increases. Earnings paid in the form of shares not only allow the freeze to be evaded, but the tax system as well, since capital gains on share holdings are taxed at a much lower rate than earned income. As The Times explained recently, ‘approval will now be given to schemes which only a year or so ago were widely condemned as tax trickery’.
 

2. Credit

A key factor underlying the acceleration of the rate of inflation over the past two years has been a massive expansion of credit. Yet the Government permitted the recent introduction of the Access Card which involved the release of about £300 millions of extra credit to the lucky recipients.

A high rate of inflation can greatly reduce the cost of credit to borrowers. For example, if money is borrowed at 10 per cent, and there is an annual rate of inflation of 8 per cent, then the real rate of interest is only 2 per cent annually. In the 12 months ending in June 1972, the total volume of bank advances rose from £27 thousand million to £37 thousand million. The banks have been lending out money hand over fist to their more credit worthy customers, who have been using low cost credit to invest in high growth forms of property such as equity shares, works of art, land and buildings.

In the autumn the Government introduced some fairly mild restrictions on the rate of lending by banks. However, the last Budget once again allowed tax relief to be claimed on interest on borrowed money. Thus, in effect, a direct subsidy from public funds was offered to those able to borrow at low rates of real interest in order to make investments with a high return.

The Budget next spring will bring further substantial gains to the already wealthy. The Government intend to integrate the present separate systems of income tax and surtax. At the same time they propose to raise the income thresholds at which the higher rates of tax come into operation, and to reduce the top rates of tax levied.

The unified tax system will mean some small gains for the lower paid, e.g. a married man with two children and £23 a week will have his tax reduced by about £1.50. A man with the average wage of around £30 a week will pay roughly the same tax as at present.

But anyone earning £15,000 a year will benefit by a tax cut of £6.23 a week. If his £15,000 a year is unearned, investment income, then his tax will be cut by £27.50 a week. And anyone who collects £12,000 a year from three or four non-executive directorships will be richer by £57.70 a week in reduced taxation.
 

3. Prices

Already a number of developments are in train which will increase retail prices in ways which are legally allowable under the terms of the freeze. Companies are able to raise prices if they can show that the cost of imported raw materials has risen. The National Institute’s Economic Review for August 1972 estimates that the floating of the £1 since last June will add 1 per cent to the retail price index over the next six to nine months because of the higher cost of imports. It is estimated that if the Value Added Tax (VAT) is introduced at the proposed rate of 10 per cent (a low rate of tax by European standards) then the retail price index will rise by a further 2-3 per cent. This includes the £40 million a year that is to be raised by VAT on children’s clothes and shoes, at present exempt from purchase tax.

The next round of council house rent increases, affecting about 1 million tenants, is due in April, though the Government may well postpone these as an ostentatious demonstration of fairness – and because council rents for over 4 million tenants were raised massively in October.

What can certainly be expected are substantial increases in the price of imported grains and cereals. Following the disastrous failure of the Russian grain harvest the Soviet Union has already bought 30 million tons of grain on the world market, and prices, internationally, are rising dramatically. Not just bread, cakes and biscuits will be affected, but because grain is used for feeding animals, the price of meat, poultry, milk, butter and eggs is liable to increase.

Finally, there is the impact of the Common Agricultural Policy, due to come into effect in Britain on 1st February 1973. The Government reckons that as a direct consequence of the introduction of the Common Market system of agricultural support, food prices in Britain will rise by 2 per cent a year for the next five years.

A recent study by a group of economists [3] has shown that these extra costs will be borne disproportionately by the lower income groups in Britain, because a high percentage of their limited income is spent on food. The findings of this study are summarised in Table 2.

The impact of extra Common Market food costs will be highly regressive, and will mean in fact a small net gain to the higher income groups as compared with the previous system in Britain. By the time the policy is in full operation, there will be a net transfer of £500 million a year away from households with less than £36 a week. Half of this will go to European farmers, but not in ways which will lift earnings of the smaller peasants and agricultural labourers on the Continent. For it has been found that higher food prices within the EEC are largely translated into higher land prices and more purchases of inputs such as fertilizer and machinery.

The Government have launched a major propaganda campaign designed to suggest that the sort of flat rate, across the board pay deal recently proposed to the TUC would be effectively redistributive in favour of the lower paid. It is likely that the Government’s post freeze incomes strategy will be along the same lines.

It is the case that the redistributive consequences of the flat rate pay norm would be trivial by comparison with the massive shift of resources in favour of the rich which the Tories have organised. To bring home to the mass of workers the true facts of the situation will be a formidable but vital task for socialists in the coming months.

Notes

1. Atkinson, B.A., Unequal Shares, London (Penguin Press), 1972. Lots of useful information – but conclusions reformist and therefore utopian.

2. Meacher, Michael, in The Guardian, 31 July 1972.

3. Josling. T.E., and others, Burdens and Benefits of Four Support Policies, London (Trade Policy Research Centre) 1972.

 
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