Fantasy economics for a decaying economy

George Osborne

Britain is ‘walking tall again’ claimed the Conservative Chancellor, George Osborne, in opening what was a blatantly political Budget speech.1 It was aimed at blunting the Labour Party’s attack on the coalition government’s economic and social policies in the few weeks left before the 7 May general election. Britain, he said, ‘is growing, creating jobs and paying its way. We took difficult decisions in the teeth of opposition and it worked’. He taunted Labour throughout the speech: ‘The sun is starting to shine – and we are fixing the roof’; ‘Out of the red and into the black – Britain is back paying its way in the world’; and ‘Living standards on the rise. Britain on the rise … The Comeback Country’. The speech was littered with election slogans interspersed with carefully selected economic data. DAVID YAFFE reports.

The most remarkable reversal of policy in this Budget from last December’s Autumn Statement (just over three months ago) was the decision to cut the planned budget surplus in 2019-20 from £23bn to £7bn. It was conjured up in an attempt to undermine Labour’s contention that the Conservatives were intent on reducing the state sector to levels last experienced in the 1930s. The new target will now see state spending as a percentage of GDP at the level of the year 2000, when Gordon Brown was Labour Chancellor.

Public debt under control?

Osborne claims that public debt is now under control. The deficit, he says, is half that which the coalition government inherited. This is the kind of half-truth that runs throughout his Budget statement. It will fall from £153bn in 2009-10 to a forecast £90.2bn in the current tax year. It is only down by half as a share of GDP, from 10% to 5%. The intention of the coalition government, however, was to ‘eliminate’ the deficit by the end of this parliament. In this it failed, despite the brutal austerity measures imposed on the vast majority of working people. It is only the sales of some £18bn of assets acquired during the banking crisis – a large number of mortgages that the government has owned since the bank bailouts and a new batch of Lloyds bank shares – that has allowed Osborne to opportunistically announce a fall in public debt as a share of GDP from 80.4% in 2014-15 to 80.2% in 2015-16. In the long run such sales will make no difference to the size of public debt, they are capital transactions, and the state will lose out from mortgage repayments and dividend income it would otherwise receive.

The deficit, Osborne moralises, is nevertheless still far too high and must come down. He plans massive spending cuts to reduce it. The deficit is to fall to 4% of GDP in 2015-16; then down to 2% the following year; and down again to 0.6% the year after that. In 2018-19, Britain will have a budget surplus of 0.2%; followed by a surplus of 0.3% in 2019-20. Public debt, on these plans, will fall from 80.4% of GDP in 2014-15 to 71.6% of GDP in 2019-20, a somewhat limited achievement, given the devastation and upheaval of the policies needed to achieve it.

These plans require the Chancellor in the new parliament to find additional spending cuts of around £30bn by 2017-18. Then it is intended to take off the brakes and deliver what the Office of Budget Responsibility (OBR) has called ‘the biggest increase in real spending for a decade in 2019-20’. Its chairman, Robert Chote, annoyed the Treasury on Budget day when he called this a ‘rollercoaster’ profile of public spending. The Conservative Party has eyes on the next but one general election. Osborne says he is ‘clear exactly how that £30bn can be achieved’. £13bn is to come from government department spending cuts, £12bn from welfare savings, and £5bn from clamping down on tax avoidance. The plans require a scale of spending cuts in 2016-17 and 2017-18 far greater than the coalition government has achieved so far. Given the damage the austerity policies have already caused to public services, these future plans are not politically and socially credible.

Labour’s public spending target of only reaching current account balance by 2019-20 gives it a fiscal leeway of about £32bn over the Conservatives. It can avoid cutting welfare and departmental spending as fast and as deep as the Conservatives. No party has so far spelled out how the vast majority of new spending cuts will be implemented or whether they would raise taxes. They want to avoid doing this until after the election. The division between departmental spending cuts, welfare cuts and increased borrowing over the next parliament is something the main pro-austerity parties – Conservatives, Labour and Lib Dems – are very reluctant to reveal. According to emails recently leaked to the BBC, taxing disability benefits, limiting child benefits to two children and restricting the carer’s allowance to those on universal credit are among the vicious measures being drawn up by Conservative officials to meet planned welfare cuts. The Conservative Party says that it is still to decide where the axe will fall.

Bribes for critical voters

The OBR believes that the government policy decisions in this Budget are unlikely to have any material effect on the economy. The rhetoric and sloganeering in the Budget speech are hardly convincing. That is why Osborne had to use what minimal resources were available to appeal to traditional Conservative supporters and wavering voters. A leaked Conservative £1m inheritance tax give-away was not in the Budget as it was blocked by the LibDems.

A rise in the tax-free allowance in 2016-7 and 2017-18 for both basic and higher rate (40%) taxpayers will benefit better-off voters but will do nothing for low earners and most part-time workers with earnings below the basic tax free allowance of £10,600. Further gains for some 17 million savers, including pensioners with substantial savings, were given in the form of a £1,000 tax-free allowance for basic rate taxpayers and £500 for higher rate (40%) taxpayers. Many will benefit from the change in rules for ISAs (tax-free savings accounts) from the autumn when savers will be able to withdraw and replace money held in their ISA without eroding the annual subscription limit, which in 2015-16 will be £15,240. All these measures are designed to appeal to traditional Conservative voters.

First-time buyers will get up to £3,000 to help them get on the housing ladder through a Help-to-Buy ISA. It represents a 25% subsidy to first-time buyers. A maximum initial deposit of £1,000 can be made with a maximum monthly contribution of £200. It will take four and a half years to build up £15,000, or a 10% deposit on an average-priced British home. This latest housing subsidy can only fuel further increases in house prices and could make it even more difficult for first-time buyers to afford a house by the time they have saved an adequate deposit. Good propaganda but it makes little economic sense. Cutting the deficit plays second fiddle to winning the election.

There were additional measures designed to use funds targeted by the Labour Party for policies it had already announced, such as the cut in student tuition fees and financing social care, should it win the election. The lifetime pension allowance is to be reduced from April 2016 from £1.25m to £1m, saving around £600m. The bank levy is to be increased from 0.156% to 0.21% of Banks’ balance sheets from 1 April 2015. This will raise an extra £900m a year and be used by the Conservatives to finance their own tax giveaways.

Budgeting to win an election

Most of the Budget attempted to emphasise what the Conservatives regard as their important achievements, which would be undone if other parties were to defeat them. In doing this Osborne constantly overplays his hand. Osborne claims that by the end of 2015 ‘living standards will be higher than when we came to office’. That all depends on how you measure them. Osborne chooses to use Real Household Disposable Income per capita. On this measure, however, it will only be true at the end of 2015 and only with a 3.1% increase in living standards this year. The Resolution Foundation argues that this measure is flawed as it includes items that are not usually considered as income ‘such as imputed rents, as well as incomes of universities and trade unions’. Its own analysis suggests that average household incomes remain 4% below their pre-downturn peak and still some way below their 2010 level. The Institute for Fiscal Studies (IFS) said living standards are still more than 2% below the 2009-10 level (The Guardian 19 March 2015). Finally Ed Balls, Labour’s Shadow Chancellor, says that on the usual measure, the ONS household income survey, households are now on average £1,127 worse off than in 2010 (Financial Times 19 March 2015) .

Osborne smugly informs us that with 2.6% growth, Britain grew faster than any other major advanced economy in the world last year. ‘That is 50% faster than Germany, three times faster than the eurozone – and seven times faster than France.’ But there was no mention of the fact that the level of GDP is nearly 5% lower today than the OBR’s initial forecast in 2010, or that Britain’s growth in the last quarter of 2014 was behind that of Germany and Spain. The OBR says that the modest upgrade in its forecast for growth announced in the Budget has nothing to do with the government’s economic management or falling oil prices, but was due to higher than expected immigration.

Osborne proclaims that Britain has the highest rate of employment in its history and there are a record number of people in work. He fails to tell us that 4.6 million people are self-employed, accounting for 15% of those in work, the highest figure for 40 years. Millions of workers are in insecure jobs. Two-thirds of those who found work are taking jobs for less than the living wage.

As has been argued in previous issues of FRFI, Britain’s sham recovery has been driven by debt-fuelled consumer spending and inflated house prices. Claims of ‘rebalancing’ the British economy, away from consumption towards exports and investment, have no substance. The economy is still around a sixth smaller than what it would have been if pre-crisis trends had been sustained. The employment performance has come at the expense of a collapse of productivity growth. The UK’s real GDP per head is 32% below that of the US and well below that of Germany and France. The average British worker produces less in five days than the French worker produces in four. Unsurprisingly the word ‘productivity’ found no place in the Budget speech.

This Budget, says Osborne, ‘takes another step to move Britain from a country built on debt, to a country built on savings and investment’. This is fantasy. In the third quarter of 2014, Britain’s balance of payments deficit reached a record level of £27bn or 6% of GDP. Net trade, according to the OBR, will make no positive contribution to growth in any of the next five years. The ratio of household debt to household income is expected to reach a record level of 171% by 2019, higher than the pre-crisis peak of 168% in 2008. Infrastructure investment has fallen 8.5% since 2010, and capital spending, which includes new projects and maintenance, has shrunk by a third since the coalition came to power in 2010. Business investment fell in the last three months of 2014. Finally, public sector investment has halved as a share of GDP since 2008-09. What Britain is in fact facing is a permanent low-pay, low productivity and debt-fuelled economic ‘recovery’.2 These are the characteristics of a decaying capitalism. Whichever party wins the election, they are not going to change this.

1 All quotes, unless otherwise indicated, are from the Budget speech.

2 A lot of information in this article is taken from the Financial Times Budget 2015 on 19 March 2015 and The Guardian Budget Special on the same date.

Fight Racism! Fight Imperialism! 244 April/May 2015

Marx Emasculated

Karl Marx

Michael Heinrich An Introduction to the Three Volumes of Karl Marx’s Capital (Monthly Review Press, New York, 2012)

This book has gone through nine editions and is widely used in German universities. It has the stamp of approval of academic Marxists: the back cover is peppered with effusive praise: ‘a “must-read” in our time of crisis’, ‘The best introduction to Capital I have read’, ‘A brilliant presentation of Marx’s Capital’, ‘the best short introduction to Marx’s Capital to ever appear in English’, ‘The best and most comprehensive introduction to Marx’s Capital there is’.

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HSBC: rotten ripe and ready to fall

Britain’s biggest bank, HSBC, plays a pivotal role in the world drug and arms trades, in bribery, embezzlement and tax avoidance. Herve Falciani worked as an IT engineer for HSBC’s Swiss subsidiary in Geneva. In 2008 he stole information on 30,000 accounts. Falciani described the secret stash: ‘This money comes from mafia, drug traffickers, blood diamonds and tax evasion. Once known, no one, and I’m talking about governments, were motivated to do anything, even when it was possible. We had over $500bn in assets that were not supposed to be there.’ Falciani was arrested in France in January 2009 and handed the files to the French finance minister, now head of the IMF, Christine Lagarde. On the ‘Lagarde list’, as it has become known, royalty mingled with sports stars, East European bankers with cycling dopers, Conservative Party donors with Middle Eastern defence ministers; all manner of wealthy customers of the world’s local bank - and all with something to hide. Identities were disguised: names include Captain Kirk, Painter, Captain Haddock and a Mr Shaw.

Falciani said that he and the French authorities agreed to cooperate with other national tax bodies but that while those of Spain, Belgium and the US took this offer up, the British did not. HSBC is facing criminal investigations and charges in France, Belgium, the US and Argentina, but not in Britain. On 18 February Swiss prosecutors raided HSBC’s Swiss offices, ‘This is the first time there has been such a public investigation’, said one Swiss professor. ‘We are looking for everything and anything we can find – documents and files’, the Swiss prosecutor explained. Falciani has been appointed as tax advisor to Podemos in Spain.

Through the ingenuity of HSBC, bank managers can become accomplices of the dealer on the estate; street crime is inserted into the profits of international finance. ‘In France, an HSBC manager…was able to run a cash pipeline in which plastic bags full of currency from the sale of marijuana to immigrants in the Paris suburbs were collected. The cash was taken round to HSBC’s respectable clients in the French capital. Bank accounts back in Switzerland were manipulated to reimburse the drug dealers,’ (The Guardian 9 February 2015).

If measured by assets owned, HSBC was the world’s second biggest bank in 2014, after the Industrial and Commercial Bank of China; HSBC’s assets amounted to $2.664 trillion compared to the UK’s gross domestic product of $2.621 trillion. This amount of money means lots of power and influence. HSBC employs 254,000 people.

The bank was formed by British merchants in 1865 from proceeds of the opium and tea trades. By the late 19th century the Hong Kong and Shanghai Banking Corporation (HSBC) was Britain’s leading bank in the Far East, it was banker to the colonial government in Hong Kong, chief source of foreign loans to the Chinese government and, in partnership with the Foreign Office, devised British policy in the region. British government ministers were shareholders in the bank. One of its founders, Sir Thomas Sutherland, became MP for Greenock. By 1900 the bank had become an institution for ‘changing young gentlemen into bank clerks’. Through mergers and takeovers the bank moved in to the Middle East and US. In 1999 HSBC bought what became its Swiss subsidiary. It was fined $1.9bn in 2012 in the US for laundering Mexican drug cartel money and breaking US sanctions on Iran. In 2014 HSBC paid US and British regulators $618m for attempting to manipulate foreign exchange rates and is still under investigation for currency market rigging.    

In 2005 when the European Union and Switzerland introduced new rules to tackle secret offshore accounts and tax dodging, HSBC contacted selected clients and advised them on how they could avoid the consequences of the rules. Among those to benefit from HSBC’s expertise was Stanley (now Lord) Fink. Fink amassed a fortune of £180m through financial speculation with the hedge fund Man Group. He has given some £3m to the Conservative Party since David Cameron became its leader and served as its co-treasurer from 2009. Fink has 11 directorships, properties in London, France and Spain and a 60% stake in three luxury Alpine hotels; he ‘now enjoys helicopter lifts up mountains in Italy to tackle challenging runs’, (Financial Times). When confronted with disclosures about his HSBC Swiss account, Baron Fink of Northwood remarked that ‘everyone does tax avoidance at some level’ and that his own tax arrangements were ‘vanilla’ and ‘mild’. Dozens of such characters litter the Lagarde list, parasites wallowing in wealth. They include Zac Goldsmith, Conservative MP for Richmond Park, who reportedly inherited between £200m and £300m from his father's reported £1.2bn fortune. Another is the Conservative peer Lord Sterling. In 2010 Sterling suggested that cruise passengers using his company, Swan Hellenic, at Portsmouth should not mix with 'ordinary' ferry passengers who were mostly 'semi-lager-louts' or 'lorry drivers smelling of BO'. ‘Excess and immoderation become its true standard,’ wrote Marx on capitalist accumulation of money.      

Too big to fail, too big to jail

The scope of HSBC’s reach into public life in Britain is enormous and makes a mockery of claims to democracy and accountability. Her Majesty’s Revenue and Customs (HMRC) received the files on the HSBC Swiss accounts in 2010. In 2011 the head of tax at HMRC, David Hartnett, told MPs on the Treasury select committee that HMRC had received a disc with 6,000 names ‘all ripe for investigation’. The following year Hartnett resigned from HMRC and took up a position with HSBC. So far HMRC has brought just one prosecution to court over HSBC-arranged tax dodging. From 2003 until 2010 Stephen Green, salary over £25m a year, served as chief executive and then chair of HSBC. He resigned from HSBC in 2010 to become Baron Green of Hurstpierpoint and was appointed Minister of State for Trade and Investment in 2011. HMRC was asked to vet Lord Green for his suitability to be a government minister, it did not tell the government about HSBC’s engagement in tax evasion, although it had thousands of files confirming this, and Lord Green was not asked whether he had any knowledge of the crooked scheme.

On 17 February 2015, Peter Oborne announced that he had resigned from the Daily Telegraph where he was its chief political commentator. Oborne recounts that in 2012 the Telegraph ran six investigative articles on HSBC accounts in Jersey, consequently ‘HSBC suspended its advertising with the Telegraph…HSBC, as one former Telegraph executive told me, is “the advertiser you literally cannot afford to offend”’. Of the latest scandal to hit HSBC, Oborne says: ‘You needed a microscope to find the Telegraph coverage.’ Oborne describes journalists’ emails deleted, reports and documents destroyed, all relating to HSBC. He laments the ‘collapse in standards’ and concludes, ‘There are great issues here. They go to the heart of our democracy, and can no longer be ignored.’ Oborne’s resignation offers a glimpse into the real nature of the ruling class media and news in Britain: it is hired and bought. What else are we not told about HSBC and the rest of the financial gang? Most journalists understand what their paymasters want and are willing to do what they are hired for, with no questions asked. Oborne’s elevation and status no doubt deluded him with notions of self-importance and public service, but the power resides with money, not with journalistic celebrity.    

Following the latest HSBC scandal Labour Party leader Ed Miliband accused David Cameron of being ‘a dodgy prime minister’ and promised a tax evasion clampdown in its first finance bill if Labour is elected to government. In 1994 Shadow Chancellor Gordon Brown denounced those who exploited tax loopholes as a ‘something for nothing elite’ and the ‘undeserving rich’. Brown said a new Labour government would ‘take action against the tax abuses and avoidance’. What happened? In 2005 Brown told the Confederation of British Industry annual dinner that regulation would be ‘not just a light touch but a limited touch’ applying to ‘the regulation of financial services and indeed the administration of tax’. One of those with an account at HSBC in Switzerland is a Saudi prince and arms dealer. In 2006 when Britain’s Serious Fraud Office attempted to investigate BAE Systems’ slush funds and to access accounts which might prove bribery of Saudi officials, Labour Prime Minister Tony Blair ordered the investigation shut on grounds of national security.

What worries the City and the British ruling class is not what HSBC has done but that it has been caught out. The Director General of the National Crime Agency warned that ‘many hundreds of billions of pounds of criminal assets’ are being laundered through the City of London. This posed a threat to national security and the economy, he said, because of the damage being done to the reputation of the City. What the ruling class fears is that HSBC has given rival centres of financial power a means of challenging the City’s global role.

It would be hard to better the assessment of Alan Hinnrichs of Dundee on the letters’ page of The Independent:‘This is not a system that can be reformed. Its rampant criminality is not the result of “bad apples”. Illegality and corruption are intrinsic to the system. The multimillionaire financiers, rather than being feted as economic titans, deserve to be frog-marched to prison.’

Trevor Rayne

Imperialism targets Russia

The US and European Union (EU) attempt to subordinate Russia continues. In this context the collapse in world oil prices is being used to try to bring Russia to its knees; it may also accelerate the descent into war. Russia is largely dependent on oil and gas exports. Oil sold at $115 a barrel in June 2014 but on 26 January 2015 it was selling at under $50 a barrel, a fall of over 55%. As oil prices dropped so the Russian rouble has fallen by 42% against the US dollar. Russian President Putin reacted: ‘We all see the lowering of oil prices. There’s a lot of talk about what’s causing it. Could it be an agreement between the US and Saudi Arabia to punish Iran and affect the economies of Russia and Venezuela? It could.’ Trevor Rayne reports.

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Unending economic crisis sharpens class divisions

The international agents of the dominant imperialist powers are eager to declare an end to the Great Recession precipitated by the financial crisis of 2008. They desperately want to announce the success of the austerity programmes imposed on millions of working class people throughout the world. Reality will not conform. Their policies have not only failed, but are being challenged ideologically and politically as mounting opposition starts to confront the centres of capitalist power. David Yaffe reports.

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