- Created: Wednesday, 07 December 2016 12:06
- Written by Barnaby Philips
British and European imperialism are in turmoil over Brexit and its impact on the ever-deepening worldwide crisis of capitalism. The economic costs of Britain leaving the EU will be high for both parties. For Britain, they could be disastrous. In his Autumn Statement on 23 November the new Chancellor of the Exchequer, Philip Hammond, revealed that the black hole in the public finances requires an additional £122bn of borrowing by the end of 2020/21 – up from the £66bn forecast in July 2016 and even higher than the £100bn he was expected to announce. Despite almost a decade of savage austerity, the £10bn budget surplus promised by Hammond’s disgraced predecessor George Osborne is a distant fantasy. The Office for Budget Responsibility (OBR) put £59bn of the extra borrowing down to the referendum result and now expects even slower economic growth, weaker investment, falling tax revenues and rising living costs. Amid much uncertainty the outlook will almost doubtlessly worsen again after Britain officially leaves the EU. Barnaby Philips reports.
The immediate future looks bad enough, with the OBR lowering its growth forecast for 2016-17 from 2.2% to 1.4%. That will be down from 2015-16’s growth of 2.1%. Borrowing for 2015-16 alone will total £68.2bn, well above the previous estimate of £55.5bn. National debt – already totalling £1.78 trillion – is now expected to hit £1.95 trillion in 2020-21, peaking at 90.2% of national income in 2017-18. In 2010 it stood at 64.6%. Profitability is so weak that Hammond is slashing corporation tax by another £12bn while almost none of Osborne’s planned cuts to welfare and public services will be reversed. Only a modest £23bn stimulus under the new National Productivity Investment Fund – largely a subsidy for the private sector – for research and development, housing, roads, and digital infrastructure, really separates Hammond from his predecessor.
The ballooning debt compounded the damning news that Britain’s trade deficit with the rest of the world widened in September when bourgeois economists wrongly expected the fall in the pound to boost exports. The trade in goods deficit increased by £1.6bn over the month to £12.7bn. Imports, now more expensive, rose by £1.3bn to £38.8bn, while exports fell by £200m to £26.1bn. It was offset by the trade in services surplus of £7.5bn, leaving an overall total trade deficit of £5.2bn. In the past total trade deficits have been offset by net returns on international investment income. This is no longer the case. In 2011, the net earning on the UK investment account – the difference between what the UK earns on its overseas assets and what the rest of the world earns on its assets in the UK – was £20bn, but in 2012 that return was a barely positive £0.9bn. It turned negative at –£16bn in 2013, fell to –£32bn in 2014 and again to –£35.7bn in 2015. This is a serious development for the balance of payments current account, which had a record deficit of £100.2bn in 2015, equivalent to 5.4% of GDP. In the second quarter of 2016 the deficit reached 5.9% of GDP. A further run on the pound, already down by 16% against the dollar and 10% against the euro since the Brexit vote, is likely.
The inflationary impact of the weaker pound has been immediately evident. The Bank of England, which has postponed plans to cut the interest rate from 0.25%, expects inflation to hit 2.7% in 2017, and does not foresee a return below its 2% target until 2020. The National Institute of Economic and Social Research is predicting an even higher rise of 4% in the second half of 2017.
‘Soft Brexit’ impossible
The referendum result has created a huge crisis for the City of London, the financial arm of British imperialism. It would be seriously undermined by the loss of ‘passporting rights’ to the single market, which enable it to serve clients and conduct business in Europe. The majority of MPs appear to have reluctantly accepted the outcome of the referendum but remain desperate for a ‘soft Brexit’ that would retain tariff-free passporting rights and also keep Britain in the EU customs union – both of which the EU is resolutely unprepared to allow if Prime Minister Theresa May wants to end the free movement of EU workers into Britain, a key demand of most Conservative Party members. Any access to the single market would mean accepting related EU regulations without having any say on them, depriving Britain of the legislative autonomy so cherished by the Leave campaign. The halfway houses between EU membership and a ‘hard Brexit’ look impossible. The EU is determined to make an example of Britain as a warning to other members tempted to follow suit.
Martin Wolf of the Financial Times fears a ‘huge economic and strategic blunder’ and is calling for the government to overturn the result of the referendum (21 September 2016). The Financial Times has reported on ‘how vital the bridge between the City of London and the rest of Europe is for banks themselves but also for UK employment, the UK Exchequer and EU capital markets’. Banks which use the UK as a gateway to the EU employ more than 590,000 people, possess more than £7.5 trillion of assets and make annual profits of more than £50bn. The 91 UK-incorporated banks that use passporting account for 60% of all incorporated banks in the UK but more than 95% of UK banks by assets and staff. The big three UK retail banks Lloyds Banking Group, Royal Bank of Scotland and Barclays, whose UK-incorporated banks employ 353,000 people and possess assets of almost £3.4 trillion, have passporting rights to almost all EU countries but do most of their business domestically. John McFarlane, chair of both industry lobby group TheCityUK and Barclays bank, says the City of London’s investment banks use passporting rights for more than 20% of total UK activity. Contradicting the promises to end free movement, Hammond has reassured financiers that they will not face curbs on employing EU nationals, another big concern for investment banks, some of which rely on non-British Europeans for 20-30% of their UK workforce. But uncertainty has seen banks and businesses threaten to leave Britain even before it formally begins to exit the EU.
Because Britain’s negotiations with the EU could take five years or longer to complete, an interim deal will be needed for the time it takes to secure new Free Trade Agreements (FTAs). If talks were to break down, Britain could become isolated and subjected to World Trade Organisation rules, meaning 10% tariffs on UK exports of cars and more than 50% on some meats, with no access for services (The Guardian, 7 October).
The massive disruption caused by Brexit will hurt Europe too. Some 5,500 British-registered companies rely on passports (336,421) to do business on the continent, and more than 8,000 financial services companies based in the EU or the European Economic Area also use single market passports (23,532) to do business in Britain. Brexit would therefore impede Britain and EU members’ ability to work in one another’s economies. Britain accounts for 40% of Europe’s assets in management and 60% of its capital markets business. Amid the deepening Eurozone crisis, Italy’s banking sector is already teetering on the brink of collapse and in October, the German government was forced to deny bailing out Deutsche Bank after a flurry of investment withdrawals. No wonder Paris and Frankfurt, among others, see Brexit as an opportunity to take over a share of the City of London’s previously unrivalled role as the centre of financial parasitism in Europe.
Britain’s long-term decline
Central to the Revolutionary Communist Group’s principled boycott of the referendum was the understanding that either outcome could only have negative consequences for the working class.1 Since 2006, we have argued that British imperialism was no longer in a position to withstand the economic and political challenge of US and European imperialism while sustaining itself as an independent imperialist power.2 The ruling class, split into the Remain and Leave camps, was forced to make a choice it did not wish to make – to become part of a European imperialist bloc or become a junior partner of US imperialism. Either outcome would have significantly curbed the independence the City of London has enjoyed as a global financial centre. The parasitic character of British capitalism, its dependence on earnings from its vast overseas assets and particularly those of its parasitic banking sector, have made the British economy vulnerable to external financial and political shocks.3 This has driven its relative long-term decline in terms of productivity and exports, putting it in a poor position to adjust to both Brexit and its diminishing standing in the world. UK manufacturing as a share of real GDP fell from 30% in 1970 to 10.3% in 2015.
While the government has heaped praise on itself for low unemployment figures, a boom in zero-hour contracts and low-paid work cannot disguise woeful productivity growth down from 0.6% in the second quarter of 2016 to 0.2% in the third quarter – and falling living standards. At the end of September 2016, the uSwitch quality of life index put Britain bottom out of the 10 ‘most developed’ European countries, behind Italy and Ireland. Workers in Britain have suffered a bigger drop in real wages since 2007, down 10.4% on average, than any other advanced country apart from Greece.
The living conditions of the working class will be sacrificed further for the needs of business. While Nissan has pledged to invest in building two new models at its Sunderland plant, the commitment only came after a reported ‘last-minute written promise’ from the government to protect the Japanese manufacturer from the consequences of Brexit, a deal sure to come at the expense of workers. Business Secretary Greg Clark claimed there had been no offer of financial compensation or state aid, but the details of any agreement remain secret. Aston Martin immediately called for other car manufacturers to receive the same favourable treatment. Liberal Democrat MP Nick Clegg said such deals could ‘cost the taxpayer colossal amounts of money’. According to Guardian journalist Aditya Chakrabortty, ‘were the EU to slap 10% extra on British-made cars, the tariff bill for Nissan UK alone would come to just shy of £300m a year’ (The Guardian, 8 November).
Economists warning that Brexit and the election of Donald Trump in the US will be solely responsible for moves towards protectionism ignore the fact that G20 economies introduced a record number of trade-restrictive measures in the first half of 2016. A further average of 17 per month were added in the third quarter. The World Trade Organisation has cut its forecast for global trade growth over 2016 from 2.8% to 1.7%. In the first nine months of 2016, the total value of US trade fell by $470 billion – the first time since the Second World War that its trade with other nations has declined during a period of economic growth. Globalisation has impoverished millions of people, and it is in retreat because of the deepening crisis of capitalism worldwide.
Amid a shambolic political malaise in the wake of the referendum, Bank of England governor Mark Carney has decided to step down in 2019. He once admitted that Britain’s economy relies quite considerably on the ‘kindness of strangers’. The foreign investment he spoke of is likely to be much less forthcoming if and when Britain leaves the EU. An already weak economy faces further, even drastic deterioration. Millions more people will be driven into unemployment or low-paid, insecure work. The ruling class has no way of dealing with the crisis other than to continue attacking working class living standards and to intensify the plunder of oppressed nations. The need to renew the fight for socialism could not be clearer.
1. See David Yaffe ‘EU referendum: the position of communists’ FRFI 251
2. See David Yaffe ‘Britain: Parasitic and decaying capitalism’ FRFI 194 for a discussion on the parasitic character of British capitalism and the importance of the City of London to Britain’s economy
Fight Racism! Fight Imperialism! 254 December 2016/January 2017