|SocialismToday Socialist Party magazine|
UK recession starts to bite
NO SOONER had the government pumped in £37 billion to bail out the banks than another more devastating crisis started to unfold. Friday, October 10, saw the FTSE 100 stock exchange index lose more than 7% of its value – the fifth biggest percentage fall in history – as figures revealing increasing unemployment confirmed the inevitable recession now hitting Britain. The credit crunch which threatened the very existence of major banks has now hit the real economy. Mervyn King, governor of the Bank of England, has confirmed what everyone expected and announced that the economy is now in recession. He added that it would be as bad as the recessions in the early 1980s or early 1990s. Jobs, homes, pensions and public services are all at risk.
According to the Office for National Statistics, the number of those without work who are claiming benefits grew by 164,000 between June and August, with 100,000 workers signing on in August alone. If those out of work but not claiming Job Seekers Allowance are included, then unemployment is 1.8 million, with projections of two million by Christmas. This adds up to the fastest rise since the recession in the early 1990s. The number of young people who are jobless is increasing but, because school leavers who cannot get jobs are not entitled to claim unemployment benefits, they are not included in unemployment statistics.
Job losses are concentrated in retail, catering, hotel work, manufacturing, financial services and construction – most of which serve the financial and housing market and areas which hard-strapped consumers see as non-essential spending. Half the job losses between June and August have occurred in London and the South East, where much work is dependent on the financial sector and services following the destruction of manufacturing industry. A further 120,000 workers in London will lose their jobs in the next 18 months. Reflecting the domination of the service sector 23% are in the retail or leisure sector. Middle-class professions, such as solicitors and architects, are already suffering job losses.
But areas such as the North East and North West, which are still suffering from the manufacturing cull in the 1980s, are starting out in this recession with already high levels of unemployment and poverty. Three areas in Birmingham have unemployment rates ranging from 12% to 19.3%. Car factories across the country are already on short-time working as sales decline across the world.
Britain will be especially badly hit from this recession as the British capitalist class, backed by Tory and Labour governments, has relied on the banking and financial sector, alongside the housing and credit booms, to provide it with huge profits. Because pension funds are invested in the markets these too will be affected by the crisis in the financial sector. The value of ‘defined contribution pensions’ (where there is no guaranteed level of payouts) has slumped by between 20% and 40% already. Unless these schemes are topped up by employers, many workers will be facing a poorer retirement than anticipated.
Rising unemployment will have severe consequences for many areas of the economy. Many who lose their jobs will join the thousands who have already had their homes repossessed (up 19,000 between January and June), unable to meet their mortgage payments. Two million people could suffer negative equity (when the value of a home falls below the mortgage on the property). Unlike the recessions in the 1980s and 1990s, there is even less social housing now for those who lose their homes. Even with lower house prices it is near impossible to get a mortgage as banks are still reluctant to lend or even pass on the full benefit of the recent cut in the base rate. The Northern Rock bank, nationalised by the government, has been particularly severe on homeowners struggling with mortgage payments. It is responsible for 21% of all homes repossessed in the first half of this year, revealing that the sort of nationalisation the government has implemented is not in the interests of ordinary people. Government ministers call for mortgage lenders to use repossessions ‘as a last resort’ by negotiating lower mortgage payments and breaks, but are facing opposition from the banks.
Much criticism has been targeted at ordinary workers who have taken out loans or credit secured on their homes. But, during the boom years for capitalism, profits expanded while workers’ wages were held down. Average earnings grew by just 3.4% in August, the lowest figure for five years, and well below inflation. Many public-sector workers have been offered even less, often tied to three-year deals. No wonder that many workers took advantage of the equity in their homes and easy credit to take a holiday, improve their home, or help their children get somewhere to live or a university education, as most wages could not cover such expenditure.
Loans and credit cards are now costing a lot more with the average APR on credit card purchases rising to 17.46% and a £5,000 personal loan costing 15.3% interest (up from 8.6%). Almost five million applications for new credit cards or personal loans were rejected in the last six months.
There is talk of the government using Keynesian measures to inject money into the public sector to slow down unemployment and limit the severity of the recession. But recent figures show that public-sector borrowing is already high: £37.6 billion in the second quarter – the highest nominal amount since records began in 1946. A recession will lead to lower tax receipts and higher spending on welfare benefits. Private Finance Initiative projects – New Labour’s flagship to build schools and hospitals using the private sector – are suffering already as loans become more difficult to get. Brown’s pledge when chancellor that public debt should be no more than 40% of gross domestic product (GDP) has now been breeched, with the government bail-out of Northern Rock alone taking it to over 43%.
Inevitably, there will be more cuts in the interest rate following the 0.5% cut last month bringing it down to 4.5%, possibly dropping to 2.5% next year. This is in recognition that inflation is not the issue at the moment. Oil prices have halved to $70 a barrel and other commodity prices will also fall due to less demand (although energy companies, in particular, are resisting passing price reductions onto ordinary consumers).
Brown’s Keynesian announcement that the government would spend its way through a recession does not seem so grand close up. It seems unlikely that the chancellor, Alistair Darling, will pump any new money into the economy and, instead, will only bring forward capital expenditure on projects already agreed. The outlook after 2010 (after the election) will be serious cuts in public spending. The support from Lord Mandelson, the new business secretary, for the partial privatisation of Royal Mail will lead to job losses and a worse service – the Communications Workers’ Union should remind the government of its conference decision to pull Labour Party funding if any privatisation is proposed.
There is even talk of raiding surpluses from public services, such as the £3 billion ‘surplus’ in the NHS! Government departments – such as Work and Pensions and Revenue and Customs – are facing cuts now which will include further job losses. Local government jobs and services are already being squeezed and many councils will be badly hit from their investments in the crisis-ridden Icelandic banking system.
So, while banks get bailed out at the cost of billions and are still resisting regulation, and one in four big companies pay no corporation tax, there is no announcement of new money for public services at this stage. Nonetheless, it cannot be ruled out that, as the recession unfolds, the government may decide to borrow and spend more than it is committing itself to at the moment.
The Ernst and Young Item Club economists predict that the economy will retract for a further three quarters, with a weak recovery in 2010. While this would be bad enough and bring severe hardship for many, a longer recession cannot be ruled out. Even when the economy stops declining, a period of zero growth would not allow production and consumption to pick up.
Whichever tactics the government choose to implement, a painful recession cannot be avoided as recessions and depressions are consequences of a capitalist economy. Working-class people are already angry about rich bankers and financiers getting bailed out while they face the prospect of harder times ahead. A layer is questioning the capitalist system itself and showing an ever-greater interest in a socialist alternative.