|SocialismToday Socialist Party magazine|
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.
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.
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.
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.