The British economy - Spinning a recovery

Chancellor of the Exchequer, George Osborne

In introducing the government’s Spending Review on 26 June 2013, the Chancellor of the Exchequer, George Osborne, began the process of spinning a recovery of the UK economy, his eyes firmly focused on the 2015 general election. He told us that Britain is moving out of intensive care and ‘from rescue to recovery’. The action the government has taken, he said, has reduced the public sector deficit by a third, has helped a record number of people into work, and has taken the economy back from the brink of bankruptcy. He then went on to claim that the government acts on behalf of everyone ‘who knows that Britain has got to live within its means’. David Yaffe reports.

There were three principles, Osborne declared, applied to this Spending Review. ‘Reform: to get more for every pound. Growth: to give Britain the education, enterprise and economic infrastructure it needs to win the global race. And Fairness: making sure we are all in it together by ensuring those with the broadest shoulders bear the largest burden and making sure that the unfairness of the something for nothing culture in our welfare system is changed.’ The reality could not be more different. This hype shows the government’s undisguised contempt for millions of increasingly impoverished working class people, as it seeks to conceal the real class interests behind its savage austerity policies. As we argued: ‘The government is testing the water for further and deeper attacks on state welfare and working class living standards as it attempts to sustain Britain’s parasitic and crisis-ridden capitalist economy, and with it the wealth and power of a corporate and financial elite’.1

Reform: devastating austerity

Osborne makes great play of reducing the public sector annual deficit by a third since the ConDem Coalition came into government in 2010. Nevertheless total public sector debt continues to rise and had reached more than £1.2 trillion at the end of June 2013, equivalent to 74.9% of GDP. On present projections it will reach 90% of GDP before it begins to fall in 2017-18. To achieve this end Osborne announced further cuts of £11.5bn in this Spending Review for 2015-16, including £2.1bn from council budgets and £500m from education. Local authorities have warned that essential services will be at ‘breaking point’ and they may not be able to meet all their legal responsibilities as a result of these additional cuts. Osborne also announced that welfare spending would be subject to an overall five-year rolling cap set annually at the budget from 2015. The plan is to reduce public expenditure as a share of GDP from 46.7% in 2010-11 to 40.5% in 2017-18, with at least £33bn of cuts in the first three years of the next parliament.

Despite the much promoted £50bn infrastructure investment announced for 2015-16, public sector gross investment is set to fall in real terms by 1.7% on the previous year. It remains well below the £58.4bn the Coalition inherited in 2010-11. Overall real public sector gross investment is expected to fall 21.9% between 2010-11 and 2017-18.

Britain’s public services will look radically different by the end of the decade after the most severe spending cuts in 60 years. The Institute of Fiscal Studies (IFS) believes that the scale of the planned cuts will force the next government to raise taxes to save some government departments from being unable to provide anything but the most basic services. The director of the IFS, Paul Johnson, said the scale of the cuts would have caused social unrest in any other era. ‘At almost any other moment in the past 60 years, announcements of spending cuts of this scale would have created a storm. As would an announcement that 144,000 public sector jobs would go in one year as part of a programme that would see one million jobs lost by 2017-18’ (The Guardian 28 June 2013).

Growth in a parasitic economy

On 25 July the Office of National Statistics gave its first estimate of GDP growth in the three months to June. At 0.6% it was twice the growth rate of the previous quarter. After two consecutive quarters of economic growth Osborne felt confident enough to say ‘the figures are better than forecast’ and ‘the British economy is on the mend’. The reality, as always, is somewhat different.

After five years the economy is barely half way to closing the 7.2% contraction of GDP in 2008-09. GDP is still 3.3% below the pre-recession level. This makes the ‘recovery’ by far the slowest recovery from recession for more than a century. Although all the important sectors of the economy grew in the second quarter, the fundamental characteristics of Britain’s parasitic economy have barely changed. The dominant services sector of the economy is the driving force behind this fragile recovery. Services are now only 0.2% below the pre-recession peak. However the production industries are 13.4% below that level, with manufacturing 10.2% below and construction 16.5% below. There is little indication of the so-called rebalancing of the British economy. Exports are flat and the trade deficit continues to grow despite a 25% devaluation of the pound. Business investment contracted in 2012 and was 16.5% lower in the first quarter of 2013 than in the same quarter of 2012. Britain’s economy will continue to be dependent on the earnings from its vast overseas assets and particularly those of its parasitic banking and financial services sector.

Osborne’s determined effort to stimulate the housing market has been a significant factor in the recent return to growth in the UK economy. It began with the government’s Funding for Lending scheme which started last August and gives banks and building societies access to cheap cash. This allows lenders to reduce the cost of mortgages. It has continued with the Help to Buy scheme announced in the Budget which has so far subsidised £1.3bn of house purchases over the last four months. Under the scheme the government lends buyers up to 20% of the value of a new-build home, priced below £600,000, interest free for five years. A second strand of the scheme called ‘Mortgage Guarantee’ will be available from January next year. This will allow all buyers to borrow with small deposits as the government will guarantee 20% of the loan to the lender. This will also apply to houses worth up to £600,000 and existing owners can use the scheme to remortgage their property. The government has been warned from many sources that the schemes will create a new property bubble without a very substantial increase in housebuilding. Last year housebuilding was at its lowest level for 30 years with only 98,280 registered starts. According to the Resolution Foundation, 1.25 million households would fall into ‘debt peril’, where debt repayments on their mortgages exceed half of disposable income, by 2017 if the Bank of England’s official rate rose 2 percentage points higher than forecast without a recovery in wage growth. But Osborne’s eyes are on the next election and whatever stimulates growth, however artificial and ephemeral, will serve his purpose.

What of Osborne’s claim to have created a record number of jobs, despite slashing jobs in the public sector? According to a recent TUC research, four in five jobs created since 2010 have been in low-paid industries where the average wage is less than £7.95 an hour. The UK’s Low Pay Recovery finds that of a 598,000 net rise in employee jobs across high and low-paid sectors since June 2010, 77 per cent are in low-paid industries, such as retail, waitressing and residential care. Retail has made the biggest contribution to rising employment levels, with the number of employee jobs in this sector increasing by 234,000. The average wage in retail is just £7.35 an hour. Residential care, where the average wage is £7.78 per hour, makes the second biggest contribution of 155,000 jobs (www.tuc.org.uk). Since 2011 half of new jobs have come from workers becoming self-employed where median wages are even lower – under £6 an hour (The Guardian G2 16 July 2013).

As it is, unemployment stands at a horrendous 2.51 million, or 7.8% of the workforce. Long-term unemployment reached a 17-year high with the number out of work for more than one year reaching 915,000. Real wages are 9% below the pre-recession peak and are set to fall further with pay rises well below the rate of inflation.

Fairness: growing inequality

We are clearly not ‘all in this together’ and those with the broadest shoulders are not bearing the largest burden. The last three years of the Labour government saw income inequality rise. After housing costs, the Gini coefficient 2 reached 40% in the three years to 2009/10, it fell to 38% in 2010/11 and rose again to 39% in 2011/12. It will rise further as Osborne’s measures continue to hit working class families. In 2011/12 the share of total household income of the top 10% of households reached 30% while that of the lowest 10% was 2%. The IFS says that the income for the poorest tenth of the population will drop 4.5% over the next four years, while the richest 10% will see their weekly incomes rise by 1% over the same period. The number of taxpayers earning more than £1m a year has almost doubled in the past two years. There are now some 18,000 people who earn at least £1m, the highest number ever recorded by HMRC.

However, inequality in British pay is dwarfed by inequality of wealth. Whereas the top 10% of households bring about 10 times as much annual income as the bottom 10%, the top 10% own 850 times the wealth of the bottom 10%. 1 in 10 British households have total assets greater than £1m. In 2010 there were about 2.5m millionaire households in Britain. That number is growing. A ‘high net worth individual’ is defined as anyone with a $1m (£640,000) or more in investible assets. This excludes the value of a main home and ‘consumable durables’ such as cars. Britain is home to the fifth largest group of these wealthy individuals in the world with 465,000 of them in 2012, up from 441,000 in 2011.

Whereas the pay of most workers is falling, shareholders’ dividends are reaching record levels. Investors received a record quarterly payout from UK companies in the three months to June with gross dividends rising to £25.3bn in the period. The total was £1.4bn more than the previous record in the third quarter of 2012.

Meanwhile the ConDem government has shown that it has little intention of curbing the highly profitable parasitic activities of the banks or the high bonuses of their top bankers. New EU rules to curb the pay and bonuses of top bankers at banks receiving new state funds to no more than the higher of 15 times the national average salary or 10 times the wages of the average bank employee were privately opposed by Britain. In early July Osborne refused to implement important recommendations of a parliamentary Commission on Banking Standards on strengthening the banks’ capital in relation to assets and toughening the ringfencing between retail and investment banking activities. Two weeks later, Business Secretary, Vince Cable, even went so far as to criticise what he called the ‘capital Taliban’ of the Bank of England for imposing excessive financial burdens on the banks, because it insisted lenders hold top-tier capital equal to 3% of their total loan book. Clearly we are not all in this together.


1 David Yaffe, ‘Crisis of British capitalism: Ruling class in denial’ FRFI 232 April/May 2013, www.revolutionarycommunist.org/capitalist-crisis/2968-cb170413

2 Income inequality, as measured by the Gini coefficient, ranges from zero (when everyone has identical incomes) to 100% (when all income goes to one person). Statistics from Households below average income (HBAI): – 1994/95 to 2011/12, June 2013.

Fight Racism! Fight Imperialism! 234 August/September 2013

 

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