Gradually but relentlessly the world economic crisis is deepening. The OECD, organisation of the 30 richest capitalist countries, warns that unemployment in its member economies could rise by 25 million as the crisis progresses, with economic growth falling by an average of 4.3% this year. International trade is in freefall with trade volumes expected to fall by a huge 13%. The 16-nation single currency eurozone’s GDP fell 2.5% in the first quarter of 2009 and a record 4.6% on a year ago. Unemployment across Europe could reach 26 million in 2010 or 11.5% of the labour force. The US economy fell at an annualised rate of 5.7% in the first quarter of 2009. The British economy is expected to slump by around 4% this year with unemployment reaching three million by the end of the year. Growth in the underdeveloped countries will fall from 5.8% in 2008 to just 2.1% this year, driving millions more into desperate poverty. David Yaffe reports on the growing impact of the crisis.
With interest rates in the main imperialist economies close to zero, the risk of deflation is ever present. Prices are falling in the US (–0.62%), Japan (–0.3%) and Britain (–1.2%), and are no longer rising in the eurozone. Deflation can be ruinous for highly indebted borrowers, as the real value of their debts will rise.
The IMF estimated in April that global financial sector losses had reached close to $4,400bn and they will almost certainly increase. To avoid immediate financial meltdown governments have so far provided around $8,900bn to prop up the banks. This is less than a third of their financial needs. The bounce in the world stockmarkets since early March 2009 is the result of the unprecedented intervention by central banks and governments of the main capitalist nations, in what one financial commentator has called ‘the most far-reaching socialisation of market risk in world history’ (Martin Wolf Financial Times 22 and 29 April 2009). Yet the unwinding of the unprecedented debt in the public and private sectors of the main capitalist economies has barely begun. This ‘deleveraging’ process, when it really gets underway, will have devastating social and economic results and the imagined ‘green shoots’ of recovery will rapidly wither away.
The G20 summit came and went. It achieved very little other than giving the British Prime Minister, Gordon Brown, the principal role on a world stage for a few days. Divisions between the major imperialist powers were played down or hidden. Although it has been claimed that new money of $1,100bn would be injected into the global economy, including a $500bn increase in funding available to the IMF, an increase in Special Drawing Rights of $250bn and a total of $250bn for trade assistance, the Financial Times (3 April 2009) has argued that new commitments appear to be below $100bn, and most of the money was in train before the G20 summit anyway. In addition extra money, created through the imperialist-dominated IMF, generates serious problems for underdeveloped countries because of the conditions placed on their loans. Sharp budget cuts and trade surpluses demanded by the IMF are exactly the reverse of the fiscal expansion being promoted within the rich imperialist nations. In addition around 44% from the IMF’s Special Drawing Rights funding goes to the richest G7 imperialist nations.
British crisis deepens as divisions widen
The British economy has been in recession since the last quarter of 2008. Predictions for the decline in national income in 2009 range from the government’s optimistic –3.5% to the National Economic and Social Research’s –4.3%, which would be the fastest fall since 1931. Britain is experiencing a deep recession which will have serious economic, social and political consequences for the majority of the British population.
Unemployment increased by 244,000 in the first quarter of 2009 to reach 2.2 million, 7.1% of the labour force. This is the highest unemployment rate since Labour came to power in 1997. In March alone the increase in unemployment was 115,000, a record rise, with half the increase amongst the under-25s. The jobless rate for 18–24-year-olds is now 16.1%, up 3.9 percentage points on a year ago; more than double the increase among 29–40-year-olds. By the end of the year around 1.25 million under 25-year-olds could be unemployed, as overall unemployment reaches 3 million.
House prices continue to fall and are now 22.5% below the August 2007 peak. Mortgage lending crashed to an eight-year low in April 2009, 52.4% lower than in the same month last year. House prices are expected to fall a good deal further, with one economist expecting them to fall by another 12% to 15% (The Guardian 28 May 2009). House building is at its lowest level since 1953.
Deflation hit the British economy in March when the Retail Price Index (includes certain housing costs, such as mortgage interest payments and council tax) fell below zero (–0.4%) for the first time in almost 50 years. In April it stood at –1.2%, the lowest level since 1948. The Consumer Price Index (excludes certain housing costs) is now falling rapidly and was 2.3% in April, down from 5% last summer. Average earnings in the first quarter of 2009 were down 0.4% on a year ago. This was mainly due to lower bonuses. If these are excluded, average earnings rose 3%, the lowest rise since 2001, when comparable records began.
These broad figures conceal growing inequality and class divisions. Britain is a more unequal society than at any time since records began in the 1960s. Poverty and inequality rose for three successive years up to 2007/08 according to the latest report from the Department of Work and Pensions.1 Since the last election the number of people living in poverty (below 60% of the median income after housing costs – AHC) has increased by 1.4 million, from 12.1 million in 2004/05 to 13.5 million in 2007/08, from 21% to 23% of the population. This includes 400,000 more children and makes risible the Labour government’s pledge to halve child poverty by 2010. The poorest 10% of the population have seen their share of household income (AHC) fall from 1.7% to 1.4%, while the top 10% have seen their share rise from 29.1% to 30.8%. The ratio of the top 20% to the bottom 20% of household income per week has increased from 4.8:1 to 5.2:1. The deepening crisis can only exacerbate these developments as millions more people are driven into poverty.
The budget plans for years of austerity
Chancellor Darling’s second budget had to take into account two important matters. First was the need to contain and then turn around the explosive increase in government debt, both to retain the confidence of those investors expected to finance it and to ensure that the British economy remains a ‘world centre for finance’.2 The urgency in doing this was revealed a month after the budget when Standard & Poor, the rating agency, downgraded Britain’s economic outlook from ‘stable’ to ‘negative’, calling into question Britain’s top-tier credit rating. A lower rating would push up the cost of borrowing. Second was a likely General Election in May or June 2010 and with it the importance, despite rapidly deteriorating economic conditions, of keeping onside a substantial section of the coalition which voted Labour back into office in 2005. The problem was to reconcile these two increasingly contradictory requirements.
The budget measures attempted to deal with this by postponing a dramatic squeeze on public finances until after a General Election. So after the £20bn stimulus to the economy already announced in the pre-Budget report in November 2008,3 any further stimulus in this budget had to be nominal. Pay back time would come later in the form of years and years of austerity after the election. Overall, Darling said, that there would be a fiscal easing (stimulus) of 0.5% of GDP this year followed by a tightening (squeeze) of 0.8% of GDP per year until 2013-14. On this basis, and with wildly optimistic growth projections for the economy – a decline of 3.5% this year, growth of 1.75% next year,4 3.75% in 2011 and trend growth of around 2.75% thereafter – the deficit will be £175bn in 2009-10 or 12.4% of GDP, falling to £173bn, then £140bn, £118bn and £97bn or 5.5% of GDP in 2013-14. Total government borrowing will be more than £700bn over a five-year period. Net debt figures are expected to be 59% of GDP in 2009-10, rising to a dramatic 79% in 2013-14, shattering Labour’s neo-liberal fiscal limit of 40% of GDP of previous budgets. Debt servicing costs will be between £35bn and £47bn a year, more than the annual transport budget and half the education budget (The Guardian 23 April 2009).
Public sector current expenditure is expected to grow in real terms by only 0.7% a year. However, costs have historically tended to rise faster in the public sector than in the economy as a whole by 2% per year. This means, on present budget plans, cuts in public services of around 1.3% a year. In addition, public sector capital investment will be halved (in cash terms) from £44bn this year to £22bn in 2013-14. As Financial Times journalist Chris Giles so graphically put it: ‘Get ready for dirty hospitals and crumbling schools’ (23 April 2009).
To get public sector borrowing down to levels acceptable to the financial markets, either taxes have to be raised and/or public spending cut to the extent of 5% to 6% of GDP. In this budget Darling not only squeezed public spending but also raised taxes, for the present, on high earners. The rate of tax on those earning £150,000 and above, around 350,000 people, would be raised to 50% from April 2010. Pension tax relief for these high earners will be gradually reduced from April 2011 to the basic rate of 20% that the majority of people receive. In addition personal allowances, worth twice as much as those of basic tax payers, will be withdrawn for those earning over £100,000 from April 2010. These measures will raise £1.2bn in 2010-11, £2.2bn the year after, increasing to £7bn by 2013-14. Even if these sums were raised, and high earners didn’t find ways of avoiding paying them, they would barely dent the overall deficit.
Economic commentators have called the measures pointless. London mayor Boris Johnson said they were a tax on London and Arsene Wenger, the Arsenal manager, worries that they would make the Premier league less attractive to professional footballers. The Prime Minister even told the CBI conference that it was not something that he and Darling wanted to do. But, he said, ‘we have to have a plan for sustainable public finances and included in that must be decisions we made about taxation’ (The Guardian 21 May 2009). This is a clear signal to the better off sections of the working class and middle classes that they are next in line for serious tax increases, but after the election when massive cuts in public borrowing will have to be made. The tax on the rich few is not designed to raise large amounts of revenue but to set a precedent for serious tax increases on a much wider section of the population.
The present crisis has already shown that the ruling and political elites have lost all credibility. They cannot continue to rule in the old way. Greed and corruption is being exposed in a context of falling living standards for increasing numbers of people. So far, however, there has been little sign of increased activity by the mass of people at the receiving end of the deepening crisis. Whoever wins the next election, the years of austerity ahead will change this situation as millions of higher paid workers confront the brutal realities of capitalist crisis already hitting the poorer sections of the working class.
1 Households Below Average Income (HBAI) 1994/95-2007/08
2 In his budget speech Darling said: ‘A successful economy needs a strong financial sector. We don’t want to throw away the many advantages that have come from our position as a world centre of finance. I intend that we retain that position.’
3 See ‘Desperate times desperate measures’ in FRFI 206 December 2008/January 2009. Online on our website.
4 The IMF, however, predicts that GDP will fall again by 0.4% in 2010.
FRFI 209 June / July 2009
