How working together to combat poverty works for us all

Mike Danson, Heriot-Watt University

Today, HM Revenue & Customs has named and shamed a number of large national chains and about a dozen smaller Scottish businesses in the personal services sector for failing to pay workers the national minimum wage. Many many more profitable companies are paying less than the Living Wage and are employing some of the very poorest on zero hour contracts, people who are desperate for wages to put food on the table, shoes on their children’s feet, to heat the house in winter, and pay their way through college and university. The workers are doing what they have been told to – work your way out of poverty. But working your way out of poverty isn’t working, trickle down economics doesn’t work, and it’s going to get worse as Working Tax Credits are withdrawn and other benefits cut.

Researching this using Treasury, DWP, EU and other official statistics and the excellent work by Profs Christina Beatty and Steve Fothergill recently highlighted some horrendous impacts on the poorest in society, a failure even to achieve the distorted objectives of the Westminster Government, but also an under-appreciation of the implications for local enterprises and entrepreneurs across Scotland. The cuts in social security benefits – announced even before this summer’s additional £12bn cuts per annum are considered – will remove £1.5bn from the pockets of Scotland’s poor and so directly reduce spending in local shops, services and businesses by that amount. Multiplier effects will exaggerate that loss to the country’s enterprises. The numbers on long term sick and disability benefits are showing no signs of falling, the downturn in numbers on unemployment benefits is lower and slower than any previous recovery from recession. Jobs being created are low paid, low productivity, low innovation and low profit. These austerity cuts will damage the economy but especially the poor (both working and inactive), small and medium enterprises, and put back recovery and regeneration. A different strategy is needed for Scotland.

Much of the attention this week has been quite correctly focused on how the poor are being so severely affected by the Government and Parliament in Westminster, and the other posts on this dedicated Challenge Poverty Week blog have discussed many aspects of the impacts of the cuts and changes in entitlements to support. There are wider economic costs which we should be aware of and these need embedded into any analysis of the system-wide implications of austerity because they demonstrate how the cuts hurt us all. Cutting the incomes of those on benefits directly reduces expenditure in their communities; when you are making everyday choices between eating, heating, clothing and the other necessities of life there is no question of being able to save.

Every pound ‘saved’ by the Treasury from the Social Security budget reduces the UK economy by the same amount initially, but then by more as this money is not circulating around the local economy. These effects are felt most acutely in the most deprived parts of the country – the old industrial areas, rural, seaside and traditional mining communities. Where these cuts represent redistribution from poor to rich through tax cuts and diverted spending through macroeconomic choices different areas benefit: specifically where higher rate tax payers live. But as the better off will save their extra incomes or disproportionately spend on imported goods, foreign holidays or certain retail and hospitality sectors, the overall combined impacts will be negative for the national economy. Money leaking out of poor neighbourhoods, through cuts, and out of the country through redistribution to the already well-off damages employment, incomes and power of small and medium enterprises as well as the country as a whole.

These redistributions by class, community and place are detrimental to families, but also to entrepreneurs who serve them close to home. So much for building an enterprising culture, while those individuals and groups who benefit from increasing inequality and personal wealth are featherbedded through divisive and inefficient policies. Promoting economic development of the Home Counties stokes further inflationary pressures, to the disadvantage of the whole and of the rest of the UK, exacerbating the harmful effects on the balance of trade. In brief, an economic strategy based on attacking the poor under a specious argument of balancing the budget will fail of itself, will fail local enterprises and will fail the economy in aggregate.

To address the increase in imports generated by these redistributions, the UK Government and Treasury are now embarked on a mission of attracting capital inflows, and so are running cap-in-hand to foreign governments and moneylenders to balance these other books. Encouraging  overseas, often state-owned, corporations to buy, operate and reap the rewards of supplying our utilities, railways, nuclear power stations, Trident missiles, health and education services – whilst denying our own public sector organisations the opportunity to compete for such contracts –  adds to the long term damage to the economy. The latest Nobel prizewinner (Angus Deaton) recognises the nonsense of this approach, as have former winners (most notably Paul Krugman, Joseph Stiglitz, and Amartya Sen) and economists from across this country and beyond. Poverty and inequality are bad for us all, for small businesses and for generations to come, and it is important that the spillovers from attacks on the poor are not seen just as having inhumane effects on our poorest neighbours.

Solidarity, coherence, innovation, strong trade unions and equality are the characteristics of the world’s leading economies – we find them across the North Sea where those societies lead the rankings on almost all indicators. Before the recession they devoted the highest proportions of their national incomes to social spending, paid the highest out-of-work benefits on any measure; since then they have protected the poor especially from the worst effects of the crises, and their recoveries have been quicker and stronger. Austerity is failing Britain, further cuts to the poorest are exacerbating levels of inequality not seen since the 1920s and not suffered currently elsewhere in Europe. Nordic societies have shown there is a better way, we should pursue it with vigour.

Mike Danson is Professor of Enterprise Policy, School of Management and Languages, Heriot-Watt University