Despite trillions of dollars being thrown at the global financial system by the dominant capitalist states, the crisis of capitalism continues to deepen. By the end of October 2008, according to the Bank of England, the world’s financial companies had lost $2.8 trillion. The US is almost certainly in recession. It has the highest unemployment rate for 25 years. Japan and Germany, the world’s second and third largest economies, are in recession, as is most of the European Union. This crisis threatens to be on an even bigger scale than in 1929. No part of the world capitalist system will escape its consequences.
Desperate measures on an unimagined scale have been taken by the world’s leading capitalist powers and their central banks to limit the fall. In its recent Economic Outlook, the OECD, the intergovernmental organisation of mostly rich capitalist nations, puts Britain among countries such as Hungary, Iceland, Ireland, Luxemburg, Spain and Turkey as most vulnerable to the global financial crisis and falling house prices. David Yaffe reports on the growing economic and political crisis of British capitalism.
Desperate times
The British economy contracted by 0.5% between July and September 2008. A deep and long recession is certain. Unemployment increased by 140,000 to 1.82m in the three months to September, reaching 5.8% of the workforce. House prices have fallen between 14% and 15% over the last year. Mortgage approvals have fallen by more than half on a year ago. The fall in house prices, according to the Treasury, will continue until 2010 and will reach 25% relative to incomes from the previous peak. More than 30,000 homes have been repossessed this year so far and 168,000 borrowers are at least three months behind on repayments. The stockmarket – FTSE 100 – has fallen around 40% from the summer of 2007. It is highly volatile. It was below 4,000 points for some days in both October and November. Workers have seen their pension funds cut by nearly a third over the last year as the stockmarket has plummeted.
The pound has reached a 12-year low against other currencies, briefly touching the lowest level against the euro ever and falling to a six-year low against the dollar – a fall of nearly 25%. Foreign investors are now withdrawing funds invested in British assets. Over the last two months more than £100bn, three quarters of the capital that foreign investors brought into Britain over the last four years, has been withdrawn. If this continues it will have devastating consequences for the British economy, accelerating the run on the pound, and turning recession into depression.
The Icelandic banks’ collapse in early November has left local authorities and other public bodies with severe cash flow problems. More than a quarter of UK councils – 108 local authorities – had put around £800m in now defunct Icelandic accounts. For some councils this is equivalent to around a tenth of their budgets. Other public bodies with frozen funds include 15 police authorities with £95m, charities, housing associations and universities. Transport for London had £40m on deposit. These deposits, unlike those of individual savers, are not underwritten by the government or any other scheme. The government used anti-terror laws to freeze Icelandic banks’ assets in this country in its negotiations with the Icelandic government over British investors’ funds. This abuse of anti-terror laws is a sign of things to come.
The outlook is bleak. As we go to press the banks have now pulled the plug on Woolworths, one of the most familiar sights on the British high street. 840 stores will disappear, leaving up to 30,000 workers redundant. MFI, the furniture store, has also gone into administration. DSG, the old Dixons group, which operates Currys and PC World, lost £30m in the six months to the end of October 2008 compared with a £52m profit over the same period in 2007. Job losses are inevitable and its future could be in doubt. UK credit insurers are withdrawing insurance cover for suppliers, as more companies fail to pay their suppliers.
A surge of job losses is on the way. The CBI expects unemployment to reach 2.9m by mid-2010. More than a quarter of employers are preparing to make workers redundant, according to a recent survey (Financial Times 31 October 2008) – managers, white collar workers and skilled non-manual workers are most likely to lose their jobs as private sector services are expected to suffer the biggest jobs cut. 62,000 jobs in the City are expected to have been lost by the end of 2009; 10,000 jobs are to go at BT. The proletarianisation of the better-off sections of the working class is underway. They will join tens of thousands of low-paid workers who are losing their jobs.
Desperate measures
Banks, the government and the state
A great deal of nonsense has been written about governments throughout the world, especially in the US and Britain, taking a stake and in some cases ‘nationalising’ banks and other financial institutions. It is important to recognise the process that is taking place. What we are seeing is a further consolidation of finance capital and the state – that is, the further development of state monopoly capitalism (imperialism). This crisis of capitalism has seen the underwriting of the debt of the banks and financial institutions by the state on a scale like never before. The process has entered a new phase. Wall Street has always been at the heart of the US state just as the City has been at the heart of the British state. The crisis has raised this to a new level of intensity. To see this as a development that is in the interests of the working class is patently absurd.1
In early October the British government launched a £400bn rescue plan – equivalent to nearly 30% of GDP – to get banks and financial institutions lending again. It said it would invest up to £50bn in the banks, offered guarantees covering £250bn new bank debt and added £100bn to the existing Bank of England short-term loan scheme. There would be a fee for the guarantees. The government sponsored the takeover of HBOS by Lloyds TSB to create a new banking monopoly and injected some £37bn into these two banks and RBS, giving the government a stake of around 44% in the former after the merger takes place and 58% in the latter. All these banks are trading below the price at which the government has agreed to buy the shares. The government at present is carrying a loss of around £5bn.
Barclays refused to accept a government bail-out, preferring to raise capital from oil rich countries in the Middle East at a higher cost in order to keep the government’s influence to a minimum. It had, in fact, nothing to fear. On 10 November City Minister Lord Myers stated that the bail-out banks would be free from Treasury scrutiny, ignoring previous promises made by government ministers. The government stake in the banks will be controlled by UK Financial Investments (UKFI), chaired by the chairman of J Sainsbury and former Lloyds TSB director Philip Hampton. The aim is to keep the banks’ stakes at arms length from the government. As Philip Hampton and John Kingham, who will run UKFI, said: ‘our job [is] to manage the taxpayer’s investments, not to manage the banks’ (Financial Times 14 November 2008). The government was, after all, socialising the debts of the banks so that they could return to their central parasitic role in the British economy as quickly as possible and so ensure that ‘London will retain its rightful place as the financial centre of the world’ (Gordon Brown).
By the end of November 2008 the government was still desperately pleading with the banks to start lending to small businesses, personal consumers and home buyers at an adequate level again. The Bank of England governor called it ‘the single most pressing challenge to domestic economic policy’. Banks, including the ‘nationalised’ Northern Rock, were vigorously repossessing the homes of those who had fallen behind with their mortgage payments, despite pleas from government ministers for more protection. It is clear who is calling the shots.
The pre-Budget report
On 8 October six of the world’s most important central banks took unprecedented action and announced simultaneous interest cuts of 0.5 percentage points. The Bank of England cut its rate to 4.5%. On 6 November British rates were cut further by 1.5 percentage points to 3%, the largest cut the Bank has ever made and the lowest level of interest rates since 1954. The G20 summit in the middle of November came and went with little of consequence other than the vain intention of cooperative action to stimulate the world economy and maintain an open economy (avoid protectionism), with a decision to meet again in April 2009.
Still the economic conditions deteriorated. Monetary policy was having little impact and the banks were not really cooperating. The Labour government had little option but to gamble its future on a £20bn fiscal stimulus designed to take the economy out of recession by summer 2010. This came in an emergency budget on 24 November 2008, under the guise of a pre-Budget report. The Chancellor’s aides maintained that it is coincidental that his economic plan dovetails neatly with an election in 2009 or June 2010 at the latest.
The contents of the pre-Budget report were both economic and political. The fiscal stimulus would come from a cut in VAT from 17.5% to 15%, to operate from 1 December 2008 until the end of 2009. The £120 increase in income tax allowance to compensate for the removal of the 10p tax band would be made permanent and increased to £145 from next April. Every pensioner is to get a one-off payment of £60 on top of the £10 Christmas bonus. The child benefit increase due in April 2009 will come three months earlier and an increase of £25 in the child element in tax credits due to come in April 2010 will come in 12 months earlier. For business, the rise in corporation tax for small businesses for next year has been dropped; empty commercial properties with a rateable value less than £15,000 – 70% of empty properties – are to be exempt from tax, and finally multinationals will be allowed to repatriate foreign dividends tax-free from April 2009, costing the taxpayer £275m in 2011-12. On the spending side, £3bn on capital projects due in 2010-2011 will be brought forward and there will be a £1.8bn package to help the housing sector with extra money for social housing and for people struggling to meet their mortgage bills.
On the Chancellor’s very optimistic projections, economic growth will fall between 1.25% and 1.75% in 2009-10, rising again by 1.25% to 2% in 2010-11 and 2.75% to 3.75% in 2011-12. The self-imposed fiscal rules of previous budgets have been thrown to the wind. Public sector net borrowing will reach an enormous £118bn in 2009-10, more than 8% of GDP. The accumulated public debt will rapidly rise to more than £1 trillion in 2012-13, 57.1% of GDP, massively breaching Gordon Brown’s so-called ‘golden rule’ of not being greater than 40% of GDP.
Some have questioned whether, in the midst of a deep recession, investors will be prepared to finance the explosive increase in government debt (Martin Wolf Financial Times 28 November 2008). Already UK government bonds are among the most risky in the western world, second only to Italy, which has government debt of more than 100% of its GDP. To insure £1m UK government bonds against default will now cost £9,000 a year. This compares with £3,000 in September and £1,000 in May 2008 (The Guardian 26 November 2008). But desperate times require desperate measures.
There will be payback for all this, but after the next election. There will be at least six years of austerity, hitting working class people hardest. The VAT rate will go back to 17.5% in 2010 – a regressive tax that hits the less well-off working class the most. National insurance on employees and employers will rise by 0.5% and there will be a rise in the top rate of tax to 45% on those earning more than £150,000, breaking with Labour’s commitment in 1997 not to raise the income tax rate. In addition tax allowances will be reduced for those earning over £100,000 and withdrawn for those earning over £140,000. It is this which gave the liberal intelligentsia the smokescreen it needed to scurry back to the Labour Party.
The 45% rate of tax will hit around 290,000 people. It will raise only around £670m in 2011-12 and ‘almost nothing’ says the Institute for Fiscal Studies (IFS), if widespread tax avoidances measures are adopted. When Thatcher came to power in 1979 the top rate of tax was 83%. It was reduced to 60% and remained at that level until 1988, when it was further reduced to 40%. Raising it to 45% is simply opportunist and has everything to do with the next election. Lord Mandelson, spelt this out when he said that he ‘did not have a problem with it. It was purely a pragmatic question of how we would repay the borrowing. There would have been a public backlash if those who are so clearly better off and have gained so much in the last 10 years were not seen to be shouldering their fair share of the burden. This is not a matter of envy, spite or the death of New Labour’ (The Guardian 29 November 2008).
Fine words, but another smokescreen for what is really planned. As the IFS has pointed out from a close analysis of the government’s pre-Budget proposals, Labour is planning to dramatically squeeze public spending by some £37bn in the three years after the next election in order to reduce public borrowing. This will require job cuts, pay cuts and so-called ‘efficiency drives’ (privatisation and sales of public assets) which will have a dramatic impact on public provision in the years ahead.
Political struggles ahead
A crisis of this character will change the political landscape. Splits will occur in the ruling class, working class and middle class. The sheer size and importance of financial capital in the British economy raises important questions about the future of Britain as an independent imperialist nation and in that context the international role of the City of London.2 British banks have assets worth five times British GDP. To that must be added the vast assets of foreign banks which are located here. Together they are a ‘gigantic usury capital’ so important for the British balance of payments and hence for sustaining the living standards of the British people (see FRFI 194 and 205). It has become clear that Britain alone does not have ‘the muscle to support the vast international centre that is the City of London’ (Will Hutton The Observer 5 October 2008). Hutton believes Britain should join the eurozone. Other economic journalists, such as Martin Wolf of the Financial Times are totally opposed, reflecting real divisions in the British ruling class.
The working class movement has to be clear on these issues, as they become part of the political struggles ahead. For the present we know that we will face extremely hard and dangerous times as the crisis of British capitalism deepens. It is clear that the starting point of working class resistance in the coming years has to be a complete and irrevocable break with the British Labour Party. It has not and cannot change its spots. It will always be a ruling class party that serves the interests of British imperialism.
1 That is why we asked rhetorically in ‘Capitalism in crisis’ (FRFI 205, October/ November 2008): ‘Can anyone seriously call socialising the debt of failing banks and creating new banking monopolies a return to Labour’s “social democratic roots”?’ See FRFI 205 Oct / Nov 2008
2 For an initial discussion of this question in the context of growing inter-imperialist rivalry see ‘Britain: parasitic and decaying capitalism’ FRFI 194 December2006/January 2007. See downloads/FRFI194_07_10_parasitic.pdf
FRFI 206 December 2008 / January 2009
