British Economy - On the path to a new crisis

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Fight Racism! Fight Imperialism! 240 August/September 2014

Activists campaign against evictions by Lambeth council

The British economy finally appears to have recovered from its steepest slump for 80 years. GDP is estimated to have passed its pre-recession peak of 2008 in the second quarter of 2014. Although it has lagged well behind the US, Canada, Germany and France in the speed of its recovery, the British economy is now growing at the fastest rate of the G7 major capitalist countries, and has employment levels at record highs. Yet all is not as it seems. Having undergone the slowest British recovery from recession on record despite extremely expansionary monetary policies, the economy is unbalanced, heavily indebted and experiencing very weak productivity growth. A growing low-paid, insecure workforce has become a key feature of the British economy. David Yaffe reports.

As has been argued in earlier articles,1 the recent growth of the economy is primarily driven by debt-fuelled consumer spending and inflated house prices. Talk of ‘rebalancing’ the British economy away from consumption towards exports and investment is mere empty rhetoric. GDP per head and real wages are significantly below the pre-crisis levels. House prices are soaring again and household debt has reached £1.43 trillion, nearly 140% of disposable income, and is predicted by the Office of Budget Responsibility (OBR) to reach its pre-crisis peak of 170% by 2018.

Business investment is improving but was still a poor 8% of GDP in the first quarter of 2014. Despite assurances from the CBI that manufacturing recovery is well underway, the latest figures showed a fall in total production of 0.7% between April and May 2014, with manufacturing, the largest contributor, decreasing by 1.3%. In the three months to May 2014 production and manufacturing were still 11.3% and 7.2% respectively below their pre-crisis levels in the first quarter of 2008. Export orders remain flat with Britain’s trade deficit unexpectedly rising to £2.4bn in May from £2.1bn in April. A deficit of £9.2bn in goods was partly offset by an estimated surplus on services of £6.8bn. The pound continues to rise against the dollar and euro, making exports less competitive. Trade is not expected to contribute to economic growth in the next five years.

Record employment rate masks harsh reality

The employment rate has reached a record high. Jobs are being created at an unprecedented rate. 73.1% of 16 to 64-year-olds were in work in the three months to May 2014. That rate was previously achieved from December 2004 to February 2005 and it has never been higher since records began in 1971. In all 30.64 million were in employment, 254,000 more than in the previous three months and 929,000 more than a year earlier. The number of women in work also reached a new record of 14.2 million, with the female employment rate now at 68.1%.

The unemployment rate has continued to fall, reaching 6.5% in the three months to May 2014. 2.12 million were unemployed, still an appalling and unacceptable level, down 121,000 on the previous three months and 383,000 fewer than a year earlier. There were 8.78 million economically inactive people (out of work and not seeking or available to work) aged from 16 to 64, a rate of 21.7%, last achieved in July to September 1990, and, since records began in 1971, it has never been lower. All of this has come, however, at a dreadful cost to millions of working people.

Real wages have been falling since 2008. The real wages of the typical (median) worker have fallen by around 8-10% – or around 2% a year behind inflation – since 2008. The young have been particularly hard hit with falls for 18 to 24-year-olds of over 15% and for 25 to 29-year-olds of around 12%.2 The Financial Times (17 April 2014) reported that average earnings have fallen 9.8% since March 2008, the longest and deepest decline since reliable records began in the mid-19th century. Finally the Institute for Fiscal Studies (IFS) has calculated the impact of falling real wages for a mid-range household’s income between 2013 and 2014 as a fall of 6% below its pre-crisis peak. Real wages are not expected to reach their pre-crisis levels until 2018-19. It could take even longer. In the three months to May 2014 pay including bonuses for all employees was 0.3% higher than a year earlier, with pay excluding bonuses 0.7% higher. Inflation, however, rose from 1.5% in May to 1.9% in June, close to the Bank of England (BoE) target level, so the downward trend of real wages will certainly continue.

Between March to May 2013 and March to May 2014 the number of self-employed increased by 404,000 to reach a record 4.58 million. The self-employed account for more than 40% of jobs created since the coalition government came to power. Over a quarter of the self-employed would rather have salaried jobs. The Resolution Foundation believes that wages could be at least 20% lower than currently estimated across the whole workforce if Britain’s self-employed are included in pay figures. A 10% fall in average real wages since March 2008, would show a fall of more than 12% if the 27% decline in self-employed incomes over the same period is taken into account.

Research by the Social Market Foundation (SMF) think tank shows that one in five, or nearly 5 million British workers are low-paid. They earn less than two-thirds of the median hourly wage, a higher proportion than in any developed country other than the US. The government, through its policy of outsourcing public sector jobs to private companies (the amount spent on outsourcing has doubled to £88bn since the coalition came to power) and its punitive back to work benefits system, forces people to accept low-paid insecure jobs. That is why, says the SMF, being in work does not offer a route out of poverty. Low pay necessitates ‘colossal’ state spending of some £21bn a year on tax credits for those in employment (Financial Times 28 April 2014). It amounts to a subsidy for employers at the expense of a living wage for millions of workers. It perpetuates poverty among growing sections of the working class in this country.3

A growing low paid, insecure workforce is an important contributory factor to the British economy’s very poor productivity growth. Output per hour worked is 26% behind the US and 24% behind Germany and France. Ian McCafferty, an external member of the BoE Monetary Policy Committee, has argued that this poor productivity growth will persist as the economy recovers because he says much of the decline in output is ‘structurally entrenched’. He points out that over the last seven years unemployment did not rise as fast and as far as expected during the recession and then began to fall even before the recovery got underway. That combination left output per worker 3.5% lower in 2013 than in 2007, when previous trends would have pointed to it being much higher. The BoE has estimated that output per hour worked in 2013 was 16% below the level that would have been expected on the basis of pre-2007 trends. More recently with factory output growing, annual manufacturing output per hour in the first quarter of 2014 increased by 3%. Manufacturing, however, only counts for around 10% of GDP. Productivity for the whole economy fell by 0.1% in the same quarter and was 4.3% lower than before the 2008 recession (Financial Times 20 June and 2 July 2014).

Debt-fuelled expansion

According to new estimates from Standard Chartered bank, at the end of last year Britain’s total debt (private and public) to GDP ratio was 277%, higher than that of the US at 260%. It could rise even further. The major component of household debt is mortgage lending and with house prices still rising at record levels, boosted by the government’s mortgage lending schemes, the ratio of household debt to disposable income seems likely to pass its pre-crisis peak of 170% within the next few years. As inflation rises and interest rates climb from their historically low level of 0.5% to an expected 3% by 2018, up to two million mortgage payers could find themselves dangerously stretched with many losing their homes.

Public finances have barely improved despite four quarters of economic growth in the last year. The cuts made to corporation tax by this government in what the Chancellor, George Osborne called ‘the largest reduction in the burden of corporation tax in our nation’s history’ will cost more than £5bn this year alone. The intention to return to a budget surplus by 2018-19 looks increasingly unlikely and politically unattainable, given the drastic additional cuts that would be required to achieve this. In June the government borrowed £11.4bn taking the total borrowed in the quarter to £36.1bn, which is £2.5bn or 7.3% higher than the equivalent quarter in the previous year. This was higher than City economists had expected. At the end of June 2014, public sector net debt, excluding financial interventions and other transfers, reached £1,304.6bn, equivalent to 77.3% of GDP. It is almost certain to rise throughout the next parliament no matter what government is in power.

A parasitic and decaying capitalism

Britain’s unbalanced economy is critically dependent on the earnings from its vast overseas assets and particularly those of its parasitic banking and financial services sector. At the end of 2013 British international investments, including financial derivatives, amounted to £9,562bn or 5.93 times Britain’s GDP, £659bn less than in 2012. Of these, loans and deposits abroad by UK banks (‘other investments’) were £3,472.2bn or 2.15 times GDP and financial derivatives were £2,414.8bn or 1.5 times GDP – a gigantic usury capital. These assets are matched by even greater liabilities of £9,593.8bn. In 2013 Britain’s net earnings on its investment account were negative, at –£16.3bn, the second year in succession of such deficits – in 2012, net earnings were –£3.7bn. This should be compared with net earnings of £22.7bn on the investment account in 2011 and significant net earnings in previous years.4 This is a serious development for the balance of payments and therefore the standard of living of British people. This decline in earnings on the international investment account stems from the impact of the imperialist crisis throughout the world. It shows the vulnerability of the British economy to any external economic or political shocks.

At the end of 2013 Britain had a balance of payments deficit of £72.8bn or 4.5% of GDP. The collapse of earnings on Britain’s international investment account has left Britain’s balance of payments at the worst level, as a proportion of GDP for more than 25 years. The deficit on trade in goods reached a massive £107.9bn. Without the large surplus on services trade of £79.4bn – financial services are responsible for more than 70% of this – given the negative net earnings on the international investment account, the balance of payment deficit would have been much greater. Britain is living far beyond its means. This situation is not sustainable.

The prospects for the British economy are poor and with it the livelihood of millions of working class families. Public and private debt continues to grow. Public finances are in disarray and the punitive attack on state welfare and benefits is driving millions more into poverty. Britain is living beyond its means as the balance of payments deficit continues to grow. These are the features of a parasitic and decaying capitalism. It is on the path to a new and even more destructive crisis.       

1. See David Yaffe ‘British capitalism a recovery built on sand’ in FRFI 235 October/November 2013, on our website at and earlier articles.

2. See David Blanchflower and Stephen Machin Falling real wages

3. See Cat Wiener ‘Cuts bite deep in poverty Britain’ in this issue page 1.

4. These figures are regularly revised by ONS and will differ from those given in earlier articles in FRFI which take up this theme. Nevertheless the trends outlined do not fundamentally change.