Britain after the budget
Alistair Darling no doubt cursed his timing as he
announced the budget while ominous clouds gather around the world
economy. In denial mode, he claimed that Britain was well-placed to
weather the storm. Yet the levels of personal and household debt, and
the dominance of the finance sector, mean that Britain faces a severe
battering. ROBIN CLAPP reports.
THE WORLD ECONOMY is at a decisive turning point.
Recession has gripped the US and fears abound that the slowdown may be
deeper in character and impact than any seen since the 1980s. Some
economists fear that the ‘big one’ is here – a reference to the spectre
of the pre-war Great Depression.
The credit crunch is testimony to the exhaustion of
the long-promoted, conservative, free-market world view, which saw
bankers, speculators, hedge funds and private equities enriching
themselves beyond their wildest dreams through the utilisation of
obscure and ultimately fraudulent financial instruments. Martin Wolf, a
prominent and perceptive champion of globalisation, wrote despairingly
in the Financial Times on 12 December: "What is happening in credit
markets today is a huge blow to the credibility of the Anglo-Saxon model
of transactions-orientated financial capitalism".
New Labour has, of course, been one of the loudest
cheerleaders for the unfettered forces of neo-liberal capitalism. One of
Gordon Brown’s first measures as chancellor in 1997 was to give the Bank
of England the right to operate independently. Company taxation has been
slashed, which has encouraged an explosion of private equity buyouts.
Former prime minister, Tony Blair, long ago boasted
that businesses should locate to Britain where labour costs are low,
labour practices flexible and regulations sparse. The British economy
was refashioned into a finance centre where the rich might make money
without interruption, attention or annoying distractions like punitive
taxation rates. The City of London was marketed as a giant off-shore
hedge fund for those who wanted to dabble in risky derivative trading.
The stupid economy
THE TUNE HAS changed in the City since the bursting
of the bubble. Now the deputy governor of the Bank of England refers to
the global financial insecurity as the world’s "largest-ever peacetime
liquidity crisis". Banks and hedge funds are starting to fire staff and
reduce bonuses, which will cause the London economy, responsible for 20%
of national GDP, to decline sharply.
Billionaire George Soros, who famously bet against
the Bank of England on Black Wednesday in 1992, has added his voice to
those who warn that Britain is very exposed to the growing crisis. He
has pointed out that there is an urgent need to increase the regulation
and oversight over financial markets, whose excessive freedoms have
caused the end of an era.
The Guardian’s Larry Elliott has echoed this
warning: "It is an exaggeration, but not much of one, to say Britain is
dependent on speculation… Britain uses its brains to develop products
that have no intrinsic value and have helped to take the global
financial system to the edge of the precipice. That’s a stupid economy".
The UK finance market is the most similar to the US
and therefore very susceptible to downturns in the housing and financial
sectors. The growth in average house prices in Britain has been greater
than that in the US, the current account deficit is larger in relative
terms and, where American consumers have borrowed heavily, British
shoppers have plunged into even deeper levels of debt to finance
spending. If the banking crisis persists, it is not just the housing
market and the public finances that will be threatened, but also the
value of the currency and the rest of the economy. The whole economy is
propped up on borrowing.
Over the past decade, financial services have grown
much faster than the economy as a whole, whereas manufacturing has
barely developed. The number of workers in manufacturing jobs today is
just over three million, the lowest figure since 1841. At the start of
this decade, the financial sector – made up of banking and securities,
insurance and specialist services like ship broking – made up 5.5% of
national output. By 2004 that share had jumped to 8.3%. Over the same
period manufacturing dwindled from 17.9% to 14.1%. The financial
sector’s expansion has, until recently, continued to surge. By 2006 it
made up 9.4% of the economy, according to provisional estimates. This
expansion has meant that a sector worth almost a tenth of the economy
has been responsible for 30% of overall GDP growth over the last three
years.
As a centre for international finance, London is the
world’s leader. Its foreign-exchange markets are huge, with over twice
New York’s share of trading. It dominates off-exchange dealing in
derivatives and in 2006 boasted the most new share issues by value. It
is a magnet for international investment banks with Bear Stearns alone
having until recently employed 1,500 in Canary Wharf.
The budget
IN THE BUDGET delivered on 11 March, chancellor
Alistair Darling boasted that the British economy had been so
fundamentally transformed since 1997 that, from having been one of the
least resilient, it is now one of the best placed to withstand the
effects of the present economic maelstrom. Recognising that the slowdown
in the US will nevertheless have some impact upon the British economy,
he forecast that GDP growth will slow this year to between 1.75-2.25%,
down from 3% last year. According to Darling, by 2009 it will edge up to
between 2.25-2.75%, returning almost to last year’s rate by 2010.
These sunny projections were immediately pounced
upon by more sober bourgeois economists. The chief UK economist at
French bank BNP Paribas commented: "Do I think it’s realistic? No, not
at all". Ben Broadbent, UK economist at Goldman Sachs summed up
Darling’s doublespeak very aptly: "They have highlighted the risk of a
continued credit crunch without letting it affect their central
forecast. And when you get to forecasts for 2009, you find they are
reporting a return to trend growth. They are expecting a rather rapid
normalisation". PricewaterhouseCoopers’ economist John Hawksworth added
that the rapidly worsening international position could mean that growth
may plummet to just 1% this year and half that in 2009.
It is already apparent, as a result of the debacle
surrounding the collapse of Northern Rock and its subsequent
nationalisation, that the British economy is severely exposed to many of
the same threats that presently engulf the US. Darling may have sought
in his budget speech to soothe fevered brows by emphasising the
watchword ‘stability’ 23 times, even sending former Tory chancellor Lord
Howe to sleep, but his performance indicated just how unprepared New
Labour is to successfully circumnavigate these dangerous economic
rapids.
He reported that tax revenues would be £5.4 billion
lower in the next fiscal year than previously anticipated and £7.5
billion lower in 2009-10. The shortfall will mainly be as a result of a
rapidly weakening housing market, while lower share prices will reduce
revenues from stamp duty and capital gains tax. The budget tightening
that had been planned for the coming year has been scrapped as Darling
belatedly recognised that extra government borrowing will be necessary
in order to take the strain of a slowing economy.
According to the Institute for Fiscal Studies, the
government will have to borrow £20 billion more than planned six months
ago. In particular, it projects that there is at least a 50% chance that
the ‘sustainable investment’ rule, which limits total public-sector net
debt to 40% of GDP, will be breached in the next few years. The
government’s own budget figures suggest that it will be just £2.8
billion below the level within three years – and that is excluding the
effect of Northern Rock and the proposed inclusion of some of the costs
of private finance initiatives as a result of a change to international
accounting measures.
If the limit is breached, it will severely restrict
New Labour’s scope to increase capital spending on building more
schools, hospitals and roads. Already there is speculation that Darling
has pencilled in an extra £12 billion worth of cuts in the next spending
round which begins in 2010-11, a fact picked up on by delighted Tories
eyeing an election victory with a ready-prepared cuts package courtesy
of Brown and Darling.
Banking crisis
THE FORCED NATIONALISATION of Northern Rock
signalled a humiliating retreat for Brown. Immersed in debt as a result
of its overexposure to some of the same subprime linked financial
instruments as US banks, its rescue will nonetheless inevitably lead to
job cuts and home repossessions. There was little chance that a
private-sector buyer might be found willing and able to restore the
bank’s fortunes and repay the government promptly its £55 billion in
loans and guarantees.
Northern Rock’s collapse has been a devastating blow
to the notion that private is good, public is bad. Within the City,
bankers and financiers watch with horror as share prices crash
downwards, the value of the pound diminishes against other currencies
and the housing market, upon which much of the economic bubble has
depended, begins to stagnate and even fall.
Concerted efforts are being made by central bankers
to inject liquidity into the system in order to get the banks lending to
each other again. But the stock exchanges continue to oscillate wildly,
reflecting growing uncertainties about undisclosed debt and the seizing
up of growth. In one day, Barclays’ shares lost 9% of their value and
HBOS, a whopping 12.5%. On 6 March, The Economist demanded to know why,
given that British banks have just declared such handsome profits, are
their shares so volatile? Carefully the writer asked: "What matters more
than investors’ pain is that credit is tight and will remain so until
the worst is known. It is time for plainer speaking". In other words,
what debt still lies undisclosed on banks’ balance sheets?
Drowning in debt
BEHIND THE HEADLINES is the pervasive fear that
banks are overexposed to investments linked to the US subprime mortgage
market, while the growing mortgage crisis is another time-bomb, with the
Financial Services Authority estimating that nearly a third of all
mortgages sold in Britain in the last two-and-a-half years put the
borrower into a high-risk category.
The UK is highly sensitive to movements in the
housing sector, which in the last decade has been driven primarily by
speculation rather than by fundamental changes to the economy. The cost
of rebuilding every home in the UK in recent years has been rising at
nothing like the annual double-digit inflation rate for house prices.
Sixty percent of Britain’s total wealth is now tied up in property and
credit has been loosened so much that almost 55% of borrowers are using
more than 50% of their pre-tax income to service debt. Average household
debt, including mortgages, stood in January at £56,234 and average
personal debt grew by almost 10% last year.
Previous housing booms have all ended with prices
plummeting by 30% in real terms. A repeat would spell disaster for those
whose borrowing is tied to their home’s value. The Royal Institution of
Chartered Surveyors has already warned that repossessions are taking
place at the rate of 123 a day.
As the credit crunch has worsened, stagnating
domestic house prices have been accompanied by contraction in the
commercial property fund market where prices fell by 4.7% in December,
the biggest monthly fall for 20 years. In the buy-to-let sector, which
now accounts for 7% of all mortgages, investors have become spooked and
are dumping properties back on the market in order to secure first-mover
financial advantage.
Wealth chasm
THE BLAIR YEARS have encouraged a huge growth in
wealth disparity, articulated recently in the obscene words of business
secretary John Hutton: "Rather than questioning whether huge salaries
are morally justified, we should celebrate the fact that people can be
enormously successful in this country. Rather than placing a cap on that
success, we should be questioning why it is not available to more
people".
The results have been predictable. Wealth is now as
unfairly distributed as it was before 1945. In two decades the earnings
of an average FTSE 100 chief executive have gone from 17 times the
average employee’s pay to 75.5 times. The Economist annual survey says
income is "distributed more unequally than in almost any big rich
country except America". Even the boss of Marks and Spencer has been
prompted to observe recently that "the West End can’t get enough of
diamonds. But the poor are getting poorer". Tax avoidance scams continue
to multiply like mushrooms for the super-rich capitalists. The Inland
Revenue has calculated that total tax avoidance may be in excess of £41
billion a year, or the equivalent of £1,500 for every household.
Not only is London today one of Europe’s most
prosperous regions, but also it is one of the biggest city economies in
the world. In a recent ranking by accountancy firm
PricewaterhouseCoopers, London’s GDP was sixth highest ahead of several
national economies, including those of Sweden and Switzerland.
In 1997, London was 30% richer than the UK average.
By 2006, it was 41% more prosperous. West inner-London is
four-and-a-half times as rich as the British average. The other London,
that lived in by tens of thousands of workers struggling to get by in
the face of public-sector cuts, transport congestion, rising prices,
overcrowded homes and jobs without rights and decent conditions, is
contemptuously passed over by these millionaires.
Yet a British Social Attitudes survey revealed that
76% of voters are outraged by this rising inequality, and even the
Financial Times on 8 March was forced to caution the boardrooms and
bankers "that if they do not act to curb the worse excesses themselves,
regulators are likely to be under fierce pressure to do something".
In this context, Darling’s budget pronouncement,
that the 114,000 rich foreigners who have lived in Britain for more than
seven years and who claim ‘non-domiciled’ status will have to pay a
£30,000 annual charge from April if they wish to retain this status, is
a pathetic response. These non-doms will still be able to shield their
overseas earnings and capital gains from tax and have been assured that
there will be no more government interference with their wealth for the
duration of this parliament. Stronger measures against these property
developers and hedge fund players had already been shelved, but the rich
still whined that this new requirement would create the perception that
Britain no longer welcomed foreign talent.
Making the poorest pay
EVEN BEFORE UNEMPLOYMENT begins to rise again,
official statistics show that relative poverty has grown for the first
time since new Labour took office in 1997, with 12.7 million people
living in households with incomes lower than 60% of the median after
housing costs. Health inequality too, as measured by life expectancy and
infant mortality, has got worse since Labour came to power, a government
report admitted on 13 March.
Poor families miss out on council tax rebates worth
£1.8 billion a year because the rules for claiming relief are too
complex and poorly advertised. The Local Government Association has
argued that 1.5 million children are living below the poverty line in
households that pay full council tax. Research by the charity Care has
shown that ‘in work’ families have been most disadvantaged by the
direction of tax policy over recent decades. While tax paid by a single
person with no dependants has risen by 16% since the 1960s, it has
trebled for a single-earner family with two children on 75% of the
average wage, and is much higher than the EU average.
One in five families with a disabled child is now so
poor that they have to cut back on food. Poverty rates among Pakistani
and Bangladeshi children are twice those among white children, while
black children also experience higher rates of poverty than the average.
In 1999, Blair pledged to halve child poverty by 2009, with a view to
eradicating it completely by 2020. Since then the number has fallen by
600,000, still leaving 2.8 million in poverty. The recent budget
unveiled measures to rescue another 250,000 children, but economic
downturn will shatter this unrealistic ambition.
New Labour continues to wield the big stick against
the sick and poor. All of the 2.6 million people who are claiming
incapacity benefits will have to take a rigorous test by April 2013 to
see if they are capable of working, while housing minister Caroline
Flint wishes to make radical changes to the way in which council housing
is organised, linking tenancy agreements with ‘commitment contracts’,
with a view to compelling jobless social housing tenants to ‘improve
their skills’ and find work.
A profound change is taking place in the world
economy and, flowing from that, the political situation. Britain is
particularly exposed and there is no possibility that it can insulate
itself from the impending economic ‘pandemic’. Rising food and energy
costs have increased inflation, while public-sector pay is being held
down or frozen. Darling will be forced to cut interest rates again, but
there will be no avoiding the reality that the party is over.
As the finance crisis impacts upon workers’ lives
through rising unemployment, further attacks on pensions and falling
house values, the illusion created by New Labour that globalisation has
provided stability and wealth creation for all will be decisively
undermined. The exact character of an economic slowdown in Britain is
not yet clear, but the jolt from one epoch to another will cause huge
questioning of the capitalist system. ‘Things can only get better’, sang
the Blairite spin doctors in 1997. But things are now getting worse,
much worse.
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