|SocialismToday Socialist Party magazine|
Issue 176 March 2014
Britain’s gloomy economic outlook
The Con-Dem government claims that the economy is on the mend – and that its severe austerity which has brought misery to millions is the price worth paying. Yet stagnant living standards, rising debt and speculative bubbles give the lie to that claim. HANNAH SELL writes.
According to the government Britain has entered the sunny uplands of economic growth. Mark Carney, governor of the Bank of England, has declared that the economy is on course for 3.4% growth in 2014, although the ‘market consensus’ is a lower 2.6%. Does this mean that Britain has finally weathered the economic storm which began with the meltdown of the financial system in 2008? Are we entering a period of healthy growth? No, far from it. While we may see formal economic growth in the next year, the UK remains among the weakest of the world’s major economies. Even the Bank of England’s more optimistic forecast would leave the economy only marginally bigger than it was in 2008. Right now it remains 2% below its 2008 peak, with manufacturing down a massive 9%.
There is no prospect of a recovery in the living standards of the majority. Unemployment has fallen slightly but underemployment has not, with more than eight million people still unable to find enough work to make ends meet. Once adjusted for inflation, real incomes fell by more than 7% between 2009 and 2012, the biggest three-year drop on record. Only the devastated economies of Greece and Portugal, alongside the Netherlands, have suffered a greater fall in wages than Britain. The treasury predicts that it will take until 2018 for real wages to return to their pre-crisis level – a real lost decade for workers’ living standards.
Nor is this a process that began in 2008. During the ‘boom years’, wages stagnated as the share of national income taken by the working class steadily decreased. Larry Elliott and Dan Atkinson pointed out in their book, Going South, Why Britain Will Have a Third World Economy by 2014 (Palgrave Macmillan, 2012), that in the first seven years of the millennium, on average workers in Britain saw their wages rise by just 0.43% for every 1% increase in national output. This compares to a 0.89% rise per 1% increase in national output for most of the 1990s, and an almost one-to-one ratio during the 1960s and 1970s.
The working class has been hit hardest, but big sections of ‘professionals’ have also suffered from wage restraint. Over the last 40 years the wages of two sections of the middle class – doctors and some of those in the financial services sector – have increased markedly in real terms, but others – including academics, teachers, engineers and scientists – have seen their wages pushed down. They have been increasingly driven down into the ranks of the working class, even if they are not yet fully conscious of this. Overall, if the share of wealth taken by wages had remained static since the end of the 1970s, British workers would have taken home an extra £60 billion a year – £1,000 for every man, woman and child in the country.
Continued austerity is a real factor in limiting the prospects for economic growth. Consumer spending accounts for about two thirds of the economy and, despite some limited growth, it remains weak. Lack of real increases in incomes meant that the last boom was massively fuelled by credit. Elliott and Atkinson wrote that, in the five years up to the collapse of the bubble, the UK economy increased by £300 billion, which was slightly less than the equity people withdrew from their homes in the same period: "In other words, if consumers had not been able to use their homes as cash machines there would have been no growth".
Debt and austerity
Today, the moderate increase in consumer spending is a central factor in the return to formal growth. Larry Elliott wrote in the Guardian (30 December 2013): "The main reason the independent Office for Budget Responsibility is now expecting national output to grow by 1.4% in 2013, rather than the 0.6% predicted in the budget, is that consumers are spending more. Projections for business investment and exports – the two sectors that were supposed to lead to a rebalancing of the economy – have been cut since the spring".
However, the increase in consumer spending is not based on wage increases – they are continuing to be squeezed. Instead it is an easing of credit conditions that has allowed some increased spending, alongside one-off PPI compensation payments. The Bank of England’s ‘forward guidance’, promising not to raise interest rates in the near future, is designed to reassure markets that credit conditions will remain ‘easier’ for a while. It is also a reflection of a decrease in inflation in the UK economy, mainly as a result of worldwide deflationary pressures.
Nonetheless, there are real limits to how much extra spending credit can create unless wages actually start to increase significantly. Britain’s population still has a giant debt overhang from the previous boom. The ratio of household debt to income has fallen during the recession from its peak of 163% in 2008 to 137%. However, this remains extremely high: at the same level as in 2004, which was at that stage the highest in history.
The government has also attempted to re-inflate Britain’s housing bubble in a short-sighted gamble to try to win the general election. This has alarmed big sections of the capitalist class with its recklessness. Nor will it have the same impact as in the last boom. The myth of Thatcher’s ‘property owning democracy’ has died and cannot be resuscitated. Housing today is one of the biggest problems facing working- and middle-class people, particularly in London and the South East. House prices already mean that buying a home is out of reach for an entire generation. The average age at which people now buy their first home is 37. An increase in house prices is a poisoned chalice for homeowners when it means that their children and grandchildren are priced out of the market until they die.
The fact that sections of the capitalist class – including the head of the Confederation of British Industry (CBI), John Cridland – have called for pay increases is partly a reflection of the revolt that is brewing from below over the issue of pay restraint. But there is another reason that it is being raised. It reflects awareness that an increase in incomes would increase the market and therefore improve prospects for economic growth. That is not to suggest that wages will be raised without a struggle by the working class. It is one thing for the bosses’ organisation to recognise the general economic benefit of an increase in wages, quite another for individual capitalists to cut across their own profits by raising their employees’ wages. According to the CBI’s own poll, only 7% of its members intend to raise salaries by more than inflation.
Meanwhile, there is no prospect of an end to austerity – huge cuts in the public sector – leading to a slashing of the social wage and the throwing of hundreds of thousands more public-sector workers out of work. Osborne and the Tories’ continuing austerity policies – threatening a further £25 billion-worth of cuts – are not simply ideological, although that is clearly an element. They represent the drive by British capitalism to use the economic crisis to dramatically lower the share taken by the working class, including the social wage – if they can, down to pre-war levels. At the same time, they hope to partially overcome the long-term problem of capitalism in this epoch: the lack of profitable fields to invest their huge profits. They hope that the privatisation of public services, particularly the NHS and education, will provide new investment opportunities.
Slow inglorious decline
For decades British capitalism, once the most powerful economy on the planet, has based itself on encouraging a low-wage economy, dominated by the finance and service sector. There is no possibility of this changing. Just 20% of workers in Germany and 30% of those in France are classified as low skilled; in Britain the figure is 60%. Manufacturing today accounts for only around 12% of output, compared to 25% in 1980. The hollowing out of manufacturing industry in advanced capitalist economies is a global trend, but Britain has gone further than most. Only France, the US and Greece has a service sector which makes up a bigger proportion of the economy than Britain. The UK has not run a surplus in manufactured goods for more than three decades. Britain is not yet Greece, but it is increasingly a third-rate power, continuing a slow, inglorious decline down the league table of global capitalism.
For a period the Con-Dem government talked of ‘rebalancing the economy’ and encouraging a ‘march of the makers’. This was never more than wishful thinking and has now been completely jettisoned. Despite sterling being devalued by 25% between 2007 and 2012, UK manufacturing has been too weak to take advantage. Now a certain strengthening of sterling is creating an even worse situation. In 2010 there was a surplus in services, but it was nowhere near enough to make up for the £98.46 billion deficit on trade in goods. Within this total by far the biggest single deficit was in the category of ‘finished manufactured goods’ – £59.8 billion. Similar figures could be given for every year since.
While profits in the non-financial corporate sector have recovered – in 2012 they were £1.6 billion higher than in 2008, according to the Office for National Statistics (July 2013) – levels of investment remain very low. In an unwinding of the history of British capitalism, increasingly, what manufacturing exists is very small scale. Over the last 25 years there has been a doubling of the number of manufacturing companies employing ten or fewer workers and they now account for 75% of all factories. Meanwhile, there are now no more than 2,000 factories employing more than 200 people, after a halving of their numbers since the early 1980s.
The government’s Department for Business, Innovation and Skills (BIS) gives the impression that British manufacturing may be small but is increasingly high-tech, featuring "low carbon, industrial technology, digital and advanced materials such as composites". In fact, British manufacturing remains more low-tech than other advanced economies. Its biggest manufacturing sector – both in terms of gross value added and numbers employed – is the production of food, beverages and tobacco.
There are exceptions. Rolls Royce, the second biggest maker of aero engines in the world, employs 40,000 people in the UK. Its order book has quadrupled since 2003. However, far from driving an economic recovery, it has just issued a profit warning for 2014, mainly as a result of global cuts to defence budgets and the strengthening of sterling. The chemicals and pharmaceutical sector is the other relatively strong sector, with one in five of the world’s biggest selling prescription drugs produced in Britain. This includes the British-owned giant GlaxoSmithKline. However, the other major pharmaceutical companies with bases in Britain are foreign-owned.
The domination of foreign-owned companies is even more complete in the car industry where, today, not one of the major car manufacturers is British-owned. UK car production is predicted to surpass the previous record (set in 1972!) of 1.92 million units by 2017. There are only around 180,000 workers directly employed in the sector, a tiny fraction of the numbers employed in car production in 1972 – when those working at British Leyland alone equalled those employed across the entire industry today.
The remaining car workers are incredibly productive, giving a glimpse of how it would be possible to meet humanity’s needs while cutting the working week in a socialist planned economy. Under capitalism, of course, it means longer hours for a few while others are thrown on the dole. The productivity of modern car workers is also an indication of their potential industrial muscle, while the global character of the industry means that international solidarity is an important aspect of conducting a successful struggle in this sector. There are clear limits to growth in this sector. Lack of markets was a huge problem for the car industry even before the economic crisis hit. Around 80% of cars produced in Britain are exported, mainly to the eurozone, where living standards continue to be squeezed hard.
So what sectors of the UK economy could drive a return to growth? Carney has argued that: "By 2050, UK banks’ assets could exceed nine times GDP, and that is to say nothing of the potentially rapid growth of foreign banking and shadow banking based in London". He continued: "Some would react to this prospect with horror [but] a vibrant financial sector brings substantial benefits". His proposal would put Britain in the same situation as Iceland in 2007, but on a far bigger sale. The prospect of a repeat of the 2007/8 meltdown, but with even more catastrophic consequences, is inherent in this strategy. Big sections of even the financial capitalists are aware of this, but the frenzy for profits means that these worries are pushed to one side.
During the last boom the financial services sector grew more than twice as quickly as the economy as a whole. In 2011 the sector contributed 9.4% to total economic output, compared to just over 5% a decade earlier. In 2010 it had a balance of payments surplus of £26.64 billion, bigger than any other sector, apart from earnings on foreign direct investment.
However, while the financial sector is becoming ever more central to the economy, it is only one part of the broader service sector. Parts of the service sector are related to manufacturing – for example, servicing machinery. In 2005, the UK manufacturing sector accounted for around 14% of the total value of service exports (Manufacturing in the UK, BIS, December 2010). Nonetheless, it is possible to conclude, in general, that the more parasitic the service the stronger it is in Britain’s economy. The broad category of business services now makes up nearly a quarter of the UK economy. This includes architectural engineering and design services, IT, and research and development companies. It also includes marketing and advertising and ‘real estate activities’. It is the latter which employs more workers than any other element of the whole sector, with more than half-a-million employed in it.
Another example of the short-sightedness of British capitalism is the government’s declaration that it is ‘going all out for shale’ in a desperate attempt to compensate for the running down of North Sea oil stocks. Oil production in Britain has fallen by more than two thirds since its peak, while gas production has halved. In 20 years there will be no oil left to extract, so the government is bribing cash-strapped councils to accept fracking in their areas.
In the US the price of gas has decreased dramatically as a result of the ‘shale revolution’. However, even if shale was extracted on a similar scale in Britain, it would be unlikely to have a similar effect given the relative self-sufficiency of the US energy market. Britain would have to pay the global price for shale gas, which the International Energy Agency predicts will rise by 40% by 2020. Moreover, this headlong rush for shale ignores the risks of water contamination and other detrimental effects on the environment that have led France and Germany to ban fracking. At the same time, spending on investment in renewable energy went down by over 8% in 2013.
The government dreams of a repeat of North Sea oil but, even on the most optimistic scenario, fracking would provide a much smaller cushion for Britain’s economy. Nor would 21st century British capitalism be any more capable of using a short-term ‘fracking benefit’ to develop the country’s economic forces than was the case in the 1980s. North Sea oil income was not invested in industry but was used to mitigate the disastrous effects of Thatcher’s policies of deindustrialisation and mass unemployment.
The need for real change
If real, sustained economic growth was on the cards it could have positive results for the prospects for class struggle in Britain. The mushrooming of the $15-an-hour minimum wage campaign in the US is partially linked to a growing confidence among workers due to the economic recovery, extremely limited though it is. But even US levels of growth, or the mere perception of such growth, does not seem to be likely in Britain. On the contrary, the extremely limited growth that has taken place so far is mainly based on a partial reflation of the huge credit bubbles in the UK economy. There are strict limits to this, and it will end in a new deepening of the crisis at a certain stage.
For the majority a continuation of austerity is all that British capitalism has to offer, whatever the colour of the next government. If Labour wins the general election outright, or a Lib/Lab coalition is formed, there will be no prospects of a real or sustained improvement in workers’ living conditions. Labour has repeatedly made it clear that it would continue public spending cuts in government. At the 2014 Hugo Young lecture, Miliband declared that "Labour would keep austerity" and "cut public spending" if it wins the election (The Scotsman, 10 February). So Labour will inherit the wasteland created by the Con-Dems and, far from rebuilding, will continue to slash and burn.
Miliband claims that Labour would encourage ‘responsible capitalism’, but this is utterly utopian. Capitalism is a system based on production for profit and not for social need. Throughout the time New Labour was in power the profits of British capitalism became increasingly reliant on the growing finance sector, huge credit bubbles and privatising public services. New Labour welcomed all of this, with Gordon Brown even declaring that ‘boom and bust’ had been abolished.
Now, in a period of deep-seated crisis for British and world capitalism, the current government’s talk of ‘rebalancing the economy’ has come to nothing. Instead, it has continued with what went before. Nor will talk of caring capitalism by a possible future prime minister Miliband do anything to change the increasingly parasitical character of British capitalism. Only a fundamental break with capitalism and the development of a democratic, socialist planned economy could bring real change.
A Miliband government acting in the interests of capitalism would become hugely unpopular. Miliband and Labour would be comparable with François Hollande, the most unpopular president in the history of France’s fifth republic, or even of Pasok in Greece which, having done the bidding of the troika, has been virtually annihilated electorally. The enormous anger that already exists among workers and young people in Britain will inevitably erupt at a certain stage into new mass struggles. The bankruptcy of capitalism will increasingly lead to many of those involved in those struggles drawing the conclusion that we need to take over the economy and run it on socialist lines.