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Class wars: Austerity and preserving the capital order

5 months ago

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“Had austerity been organised like a clinical trial, it would’ve been discontinued given evidence of its deadly side effects…”  – David Stuckler (author of ‘The Body Economic: Why Austerity Kills’ with Dr. Sanjay Basu) Sri Lanka is in the midst of deep and abrupt reforms; the economy will have contracted by several percentage points by the end of 2022 – austerity is upon us and it is beginning to bite. A news report from earlier last week revealed that the Colombo National Hospital’s Accident and Orthopaedic Service (AOS) is routinely unable to perform X-rays and CT scans; S.B. Mediwatte of the All Ceylon Nurses’ Union stated that the supply of film for the X-rays were intermittent and that the scanner had broken down several times this month. A new computerised X-ray system was also installed but had since broken down. This leaves several patients stranded in the wards of the AOS, unable to seek treatment due to the lack of scans.  The same news report provided several anecdotes of patients unable to obtain medicines due to supply shortages. These included medication related to diabetes and high blood pressure. The medical unions have stressed several shortages and issues related to diagnosis for several months. Shortages that were initially seen at clinics are now affecting the major base hospitals and even the National Hospital in Colombo.  In a 2013 interview, authors of ‘The Body Economic: Why Austerity Kills,’ economist David Stuckler and physician Dr. Sanjay Basu discussed the impacts of recessions and accompanying austerity programmes on health outcomes of citizens in countries around the world.  At the time, Greece, reeling from an economic collapse, was also “…in the middle of a public health disaster… To meet budget deficit reduction targets set by the so-called troika – the International Monetary Fund, the European Central Bank and European Commission – Greece cut its health sector by more than 40%,” stated Stuckler.  HIV rates increased 200% and the Mediterranean country suffered its first malaria outbreak in 50 years. Stuckler and Basu estimated that over 10,000 additional suicides and over a million excess cases of depression were counted across Europe and the US since the 2008 financial collapse.   The ‘success’ of austerity   You may recall recent reports in the media regarding increased infections of HIV in Sri Lanka’s prison system. Stuckler is an economist and leading public health expert as well as senior research leader at the University of Oxford and Dr. Basu is a physician and epidemiologist at Stanford University.  “Had austerity been organised like a clinical trial, it would’ve been discontinued given evidence of its deadly side effects,” Stuckler says. “There is an alternative choice that we found in the historical data and through the present recessions – when we place people and their health at the centre of economic recovery, it can help get our economy back on track faster and yield lasting dividends to our society.” Staying with the Greek example, Stuckler contends that “the malaria outbreak was linked to the cut in mosquito-spraying prevention programmes, creating an outbreak that’s much more costly to control than the short-term money saved by reducing the budget. Healthcare access has declined substantially. The majority of people who have lost access are pensioners who have contributed to the system their entire lives.” New School for Social Research Assistant Professor of Economics Clara Mattei discusses the origins of austerity as an economic policy, noting the “success” of austerity in shaping our societies and how we think about our society and how it informs what she calls the “tropes of contemporary policy making” – budget cuts, welfare cuts, and reductions in spending on schools and universities, healthcare, housing and unemployment benefits, and the introduction of higher taxation which invariably burdens the middle class.  Sometimes, as Mattei points out, these policy prescriptions were also enacted simultaneously with tax cuts instead of tax increases, with high income earners and corporates receiving significant tax breaks. This specific aspect of policy paradigms in the wake of a recession was only recently introduced in the UK by then PM Truss and her Chancellor Kwarteng, both of whom had to resign within weeks. We must not of course seek to caricature austerity measures with this most recent UK example since such extreme tax cuts are perhaps not within the confines of policy orthodoxy. However, the reader might be confused, since the Gotabaya regime tried a similar set of tax policies to disastrous effects.  A key difference between the UK and the Sri Lankan policy rollout was that the former was stopped dead in its tracks with a torrent of criticism and pressure from the private sector and financial markets, as well as ordinary citizens, with the media in tow. In Sri Lanka, it was quite the opposite, with numerous sections of the corporate sector, various business chambers, and other groups lining up to congratulate the Gotabaya regime on a ‘progressive’ tax regime.  The Ranil Wickremesinghe Government recently rolled out what seemed to be significant changes to the tax system and structure. Once again, various stakeholders have expressed support for these measures. Before we discuss the nuts and bolts, let us accept that taxation or Government revenue mobilisation, to put it more broadly, is one of the major structural issues facing Sri Lanka and was a precipitating factor in the country’s economic collapse.    Death and taxes   On a recent episode of the television programme People’s Platform with Sonali Wanigabaduge, Verité Research Executive Director Dr. Nishan de Mel discussed the tax reforms in depth, noting the complexities in analysing a tax regime simply based on indirect versus direct and instead framing the conversation in a manner that differentiates between progressive and regressive tax policies.  The increase in marginal income tax rates from 18% to 36% as well as the rate for corporates and SMEs rising from 14% up to around 30% are all seemingly creditable policy adjustments; they may even seem progressive at first glance. However, if you consider these measures in the context of the 2019 tax cuts and the economic crisis, one must immediately question whether these measures have gone far enough and if they have achieved a sustainable balance between being progressive and being able to meet revenue targets.  Further, while the actual rates might have increased on paper, the only thing that is perhaps relevant is the level of actual collection – the generation of tax revenue. In this regard, the jury is still out. Sri Lanka has a notoriously low Government revenue to GDP ratio and income tax and corporate tax revenues as a percentage of total revenue has historically been extremely low, especially in relation to income peers.  Dr. de Mel made interesting points regarding the need to instil a culture of paying taxes in Sri Lanka, and noted that Singapore inculcated the idea of taxation even at low income levels by maintaining a 1% tax which then brought virtually every working Singaporean into the tax net. He contrasted this with Sri Lanka, where there was a culture of public servants not being taxed, high-earning professionals such as lawyers and medical professionals evading taxes, and the Inland Revenue Department (IRD) being unable and unwilling to pursue such revenue.  The subsequent deterioration in public services makes people exit these services as soon as they can afford to, thus many will prefer to opt out of public transport, healthcare, and other social services. This in turn creates the public perception of taxes being wasted by the State since they do not themselves avail the services which are, at any rate, of inadequate quality.  On the subject of the equity of taxation, whether the new structure is progressive, i.e. does it extract more from those that earn more, Dr. de Mel critiques the current structure by noting the aggressive step ups that abruptly cease at the upper income deciles.  For every $ 115 a Sri Lankan earns in a month the tax rate increases by 6% and when you reach an annual income of $ 8,800 you fall into the 30% tax bracket and above $ 10,000 you are in the highest bracket of 36%. This means that the tax system is focusing the burden more on the middle class than the high-income earners since beyond a certain level of income, your tax rate does not increase. In comparative peer group nations, Dr. de Mel uses the example of Thailand – annual income must reach $ 130,000 to get you into a 35% tax bracket.  Dr. de Mel also notes that Withholding Tax (WHT) is back at 5% – the same level as 2019 – arguing that Verite’s research suggests that WHT is a very progressive means of generating revenue due to efficiencies and past actual generation.  Dr. de Mel contends that increasing WHT to 10% and lowering tax rates for the middle class may have generated additional revenue; the 5% increase in WHT could generate over Rs. 25 billion in new Government revenue. He also noted a cigarette pricing formula that was agreed in 2019 but never implemented which would have resulted in an extra Rs. 50 billion in tax revenue. Thus Dr. de Mel brings us to the crux of the argument, which is that a badly-designed tax system has material consequences for the middle class; the tobacco industry lobby seems to have succeeded in shifting the burden away from a specific corporate sector and the middle class is thus being taxed more to support lower taxes for vested interests.   Does the average Sri Lankan enjoy the support of a lobby or pressure group in the way the tobacco industry does? Technically, in a democracy, this lobby on behalf of the people is supposed to be generated by our own representatives. Dr. de Mel also notes the Special Commodity Levy on sugar which was reduced by 50%, causing an estimated Rs. 48 billion loss of revenue with no reversal in sight. Thus, when we judge the Ranil Wickremesinghe Government, we must not consider its policies in a vacuum.   Class neutral, apolitical policy    In her book ‘The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism,’ Prof. Mattei states that we can better understand austerity policies by studying its origins. Mattei looks at austerity as beyond simple policy, as an amalgamation of policy and theory; claiming that the success of austerity is specifically because of the powerful set of theories that underpin its substance.  Mattei calls this the austerity trinity – the mutual operation of fiscal policies, spending cuts, and taxation; monetary policy including interest rate hikes; and industrial policy, the attack on organised labour. She traces austerity to further back in our past, since before the advent of the much-maligned policies of neoliberalism and states that “austerity is fundamental to the operation of capitalism”. She looks at austerity not just as a means of stabilising economies, something it has very rarely achieved, but also as a means to preserve the capital order, noting that to understand the logic of austerity, we must accept its origins. “What is the capital order? Capital is not merely a commodity, but it actually presupposes a specific social relation of production and class relations that require stabilisation; if you do not preserve this class relation that is at the foundation of economic growth under capitalism, then the system may be in crisis.” Mattei contends that World War I created a shock to the relationship between the state and the market. The state, in its quest to guarantee economic and military victory, had to cross what was hitherto a natural boundary of its traditional operations: the state became the main employer, producer, and thus regulator of the labour force. The worker movements noticed their own relative strength within this system as well as the political choice made by the state to directly intervene to coerce workers into greater exploitation in order to win the war. Thus began “calls for economic democracy, calls to overcome capital as a class relation, regaining sovereignty as producers and to abolish the profit motive and private property of the means of production – through guild socialism, worker council movements…” Mattei considers this period as a moment when workers were becoming convinced of their ability to forge a new system, beyond what she calls the classist relation of workers to capital. Sri Lankans perhaps need not question the foundations of the capitalist system to derive lessons from Mattei’s work; it is essentially a negotiation of what should be the central priority of the state, especially in the period following an economic collapse.  She considers this period as the moment that births the relationship between austerity and technocracy when in the midst of the international financial conferences held in Brussels (1920) and Genoa (1922), governments turned to experts and economists to help stabilise the global market, thus beginning a culture of experts advising governments with theories that were considered beyond the class warfare of the time, considered to be apolitical theory that was class neutral.  This created the framework through which a large swathe of economics operates today: as a framework described by Mattei that “expels class conflict, expels worker as the source of value and instead tells us that the economy is made up of individuals that are not in conflict with each other but are actually in harmony, it’s not the worker that counts, it’s the entrepreneur that drives the economic machine. It seems neutral, apolitical but it justifies a classist set of economic policies.”   Coercion and negotiation   Thus referencing this post-war period of the early 20th century, she notes that “austerity coerces the shifting of resources from the majority that was empowered” to “disempower them materially… by direct policy: making strikes illegal and by curtailing wages and thus creating a recession, monetary deflation, causing higher unemployment and killing the bargaining power of workers…”  Protests planned for a few days after this piece goes to print have been attacked by various businesses, industry professionals, business chambers, the tourism lobby, and other organisations. The press release by The Hotels Association of Sri Lanka (THASL) warned that destructive protests would not be “tolerated,” noting the negative impact on tourism and business.  It seems ironic that the very same parties that applauded some of the failed policy measures of the previous Government are once again on the side of the State and not the people, revealing the yawning gap that now exists – consisting of the State, the business community, and salaried upper middle classes versus the working classes and working poor. Dr. de Mel saved perhaps his most salient point until the end when he characterised Sri Lankan issues as a crisis of democracy, a lack of representation.  To this end he noted that the Gotabaya regime had gone beyond all reasonable norms of democracy when deciding upon and implementing policy, doing so with no discernible justification and analysis.  He noted the recent Committee on Public Finance (COPF) proceedings where members of the Board of Investment (BOI) had been unable to provide adequate documentary cost-benefit analyses for a 12-18-year tax holiday granted to an investor that was already operating in Sri Lanka. Dr. de Mel noted that this culture had still not changed, with many policies being implemented without sufficient analysis or accompanying white papers and projections. In many ways, this speaks to the major discrepancies in policies enacted and proposed by the Wickremesinghe Government that seem intent on conducting class warfare, insisting on harsh short-term policy reversals to relieve immediate pressure from the system, placing it squarely on the shoulders of the middle class with no mention of deep, long-term reforms that can lay the foundation for Sri Lanka’s economic future.  The central structural economic issue that Sri Lanka has been faced with is a lack of diversified and consistent dollar inflows. The plan seems to be to simply hold out for an increase in tourism, hope for the bandage of the IMF facility of $ 2.3 billion, and revert to business as usual under the catch-all term that is back in vogue: liberalisation; conducted not with the people at the centre of its universe but with capital, the entrepreneur, industrialists, and the business operation given utmost priority.    (The writer has over a decade of experience in the banking sector after completing a degree in accounting and finance. He has completed a Master’s in International Relations and is currently reading for a PhD at the University of Colombo. He is also a freelance writer and researcher, and can be reached on email: and Twitter: @kusumw)

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