Is the recession over in time for the election?

Andrew Fisher, LEAP Co-ordinator, assesses the economic picture in 2010.

By the time this issue of Labour Briefing adorns your doormat, Alistair Darling and Gordon Brown may be basking in the reflection of newspaper headlines declaring the recession over.

The figures released at the end of January 2010 are expected to show a moderate level of economic growth in the final quarter of 2009. If so, it will bring to an end to six quarters of decline (the longest UK recession on record) during which UK GDP shrunk by 6.1%.

As LEAP has regularly pointed out, the definition of a recession is woefully inadequate – especially for those on the left. But leaving aside the politics (very briefly), does 0.1% or even 0.5% growth really mean salvation if preceded by 6% of decline?

For those of us on the left however, the fact of more economic activity (i.e. the economy is growing) is not a central question. We are rightly more concerned about what is happening to poverty levels, inequality, and unemployment.

As we know, unemployment growth often lags a year to eighteen months behind the return of GDP growth – as it did in the recessions of the 1980s and early 1990s – and if the ‘recovery’ stutters or is slow then unemployment is likely to remain high for some time.

Unemployment is a central concern since both major parties are advocating programmes of sweeping cuts across the public sector. These cuts would be accompanied by a pay freeze, and a decline in public sector capital investment.

We have been here before and we know to what such measures lead. In the late 1970s, the Callaghan Government chose this path – they ultimately failed on all fronts: they froze pay, privatised and cut. The economy didn’t improve and Callaghan’s policies lost the election.

Nevertheless Brown – now apparently being pushed further by Darling – is going full throttle down the Callaghan route. Then, in 1979, the Tories took over, implemented a package of cuts, privatisation and anti-union laws, which is precisely what they are offering today – and with precisely the same economic misery in store: unemployment, inequality and further recession.

There is no doubt the Tory prescription for the economy and for working people is worse, but the problem for Labour is to the electorate it sounds like being asked whether they’d preferr to be stabbed or shot. Neither is palatable so the plurality of the electorate will no doubt do what it did in the last two elections: vote for neither.

The point of all this is to say that whatever the 2009 Q4 GDP figures bring, they will probably only be a false dawn, since the economic policy of all major parties seems determined to exacerbate the crisis.
But even without the economic incompetence of the political elite damaging the economy, UK capitalism is very much at risk due to its own internal problems.

The UK banks remain the most exposed in the world to US liabilities. Many US banks remain are vulnerable to the ongoing housing crisis, with delinquencies rising to unprecedented levels – one in eight US householders were either in arrears or being foreclosed at the end of 2009. This is driven by the high levels of unemployment in the States, with the U6 rate (which also includes involuntary part-time workers and marginally attached workers) still above 17%. Long-term unemployment is also at a record high with 4% of the US workforce out of work for more than 6 months.

If a further downturn in the US occurs then the risk of further UK banking collapse could not be excluded – and could any future Government possibly afford the sort of bailout needed? Politically, could it survive while cutting public expenditure?

But the housing crisis is not just of concern across the Atlantic. Here in the UK the chronic housing shortage has meant that prices have not declined as far as some predicted and many first time buyers might have hoped. Meanwhile all political parties are keen to freeze public sector wages, in a year when inflation is likely to top 4%. This contradiction cannot be sustained, and there will inevitably be calls for industrial action as living costs shoot ahead of pay settlements.

Whichever Government is elected will defend this madness in the name of cutting the deficit. By attempting to defend pay and jobs, workers and unions will be labelled unrealistic, and even greedy.

Yet the reality is the deficit is not actually a problem . . . relatively. Despite the fact that the Tory press screams ‘crisis’ preceded by ‘deficit’ on a regular basis, a massively unreported fact is that the UK has the smallest deficit of any G7 nation.

This is because New Labour has sought to fund so much of its public sector investment off the books – through PFI schemes and the like. The problem of New Labour’s economic alchemy – investment with no debt – is that, like regular alchemy, it doesn’t work.

When the PFI company collapses, all that debt suddenly transfers to the public finances, as happened with Brown’s PPP on the London Underground. As the last 12 years of PFI unravel so the UK debt will balloon or deep cuts will have to be made.

So what is a socialist response to the deficit? Firstly there is the £125bn of tax going uncollected through non-collection, evasion and avoidance. If only the Government would invest in HM Revenue & Customs, and legislate to close the loopholes then a fair chunk of this annual loss could be reclaimed.

If only one-sixth of this total could be reclaimed each year then that would halve the deficit within four years – without a single job or programme cut or a single salary frozen.

If a socialist government then wanted to make investments then some simple reprioritisation would free billions: cutting Trident, ID cards, ending the inefficiency of rail franchising, and scrapping the FireControl Project. It would also use public ownership of banking and other industries to generate a surplus to the Exchequer.

Since there is no short-term prospect of such a Government, this crisis is only going to deepen. The probably temporary emergence from recession will be a false dawn before a renewed and deep economic and political crisis takes hold.

*This article appears in the February 2010 issue of Labour Briefing

Vulnerability of UK economy cannot be under-estimated

The UK economy has now returned to growth, albeit moderately, following the longest period of recession on record (six quarters) in which the UK economy contracted by 6.1%.

John McDonnell MP, LEAP Chair, said:

"The confirmation that the UK has emerged from recession is of course welcome, but the fragility of the economy and its vulnerability to a 'double-dip recession' cannot be under-estimated.

"Harsh public spending cuts and job losses would risk sending the UK into a prolonged recession, with the human misery of mass unemployment, poverty, and homelessness. This would be the nightmare of a Tory government."

Andrew Fisher, LEAP Co-ordinator, said:

"The recession is not over for the 2.5m unemployed and the 1.8m families waiting for housing. Nor is it over for the millions more who have reduced their hours or taken a pay cut during this recession.

"The risk of a relapse into recession is acute – with the UK banks still exposed to the US housing market, and consumer demand here weakened by unemployment, pay freezes and short-time working."

Fiscal Irrelevance Bill

Yesterday MPs voted through the Fiscal Responsibility Bill which pledges to halve the budget deficit within four years.

Aside from the anti-Keynesian nonsense of the concept (cutting investment during a recession), and the brutal nature of the cuts envisaged by all three main parties, the most relevant aspect of the Bill is it's irrelevance.

Clauses 1 and 2 of the Bill set out targets for cutting the deficit. Clause 3 states that if an objective set by Clause 1 or 2 of the Bill is not met then the Government must come to Parliament and explain why not.

Very simple: a sensible government would report annually saying it was ignoring the objectives set under Clauses 1 and 2 as they would damage the economy, and public services. Job done. Forget about the Fiscal Irrelevance Bill. There's not even a need to repeal it.

Nevertheless, Bill or not, the political cuts consensus continues unabated, and it's good that LEAP Chair John McDonnell has tabled EDM 681 'Public Expenditure and the Deficit':

That this House notes that in his interview in the Financial Times of 19 January 2010 the Chancellor of the Exchequer has admitted to a planned policy of 17 per cent. cuts in expenditure across Government departments other than schools, health and the police force, the early withdrawal of the 50 pence tax rate and an end to the tax on bonuses; and therefore judges that this will mean that the ordinary people of the UK will be the ones who are to pay for the economic crisis, not of their making, and that many of those who, through their reckless greed caused the crisis, will walk away unscathed, receiving new bonuses and playing once again in the casino economy.

So far also signed by MPs Katy Clark, Jeremy Corbyn and David Drew - all of whom are supported in the LRC General Election Campaign.

Unemployment down, Employment down

A complex picture on unemployment was unveiled in the statistics released today for September to November 2009. Total unemployment on the LFS measure dropped slightly by 7,000.

The claimant count of unemployment (those actually claiming Jobseeker's Allowance) fell by 15,200 - which suggests the increasingly stringent conditionality and compulsion is taking its toll on jobseekers.

However, the number of people in work fell by 14,000 in the quarter (to 28.9 million), so where have all these people gone? If 14,000 fewer people are in work and 7,000 fewer are out of work then that's 21,000 missing people . . . surely?

The answer lies in the number of people classed as 'economically inactive', which includes people who have taken early retirement or have given up looking for work. This increased by 79,000 in the quarter to reach a record high of 8.05 million, 21% of the working age population.

But behind the unemployment figures, another picture is emerging - those on involuntary short-time working (i.e. those who have cut their hours to stay in work). Today's figures revealed a fall of 113,000 in the number of people in
full-time jobs, to 21.21 million, compared with a 99,000 increase in part-time workers to 7.71 million.

Falling employment and increasing short-time working means less disposable income which is bound to filter through into tighter consumer spending. Likewise, average pay increased by 0.7% in the year to November 2009, while inflation hit 2.9% in December - further hitting the value of wages in people's pockets.

People falling out of claimant eligibility into the grey or black economy also means tax revenues are hit.

The true picture revealed today is not one of an economy that has 'turned the corner' or is 'on the up', but of an economy that is incredibly fragile.

Obama and the banks

President Obama's announcement last week that he would demand the US public's money back from the banks was telling. It told us that with a vital election coming up Obama knows when to bow to popular opinion.

In immediately rejecting it ("The Americans are doing something different" said Darling) it told us that New Labour are less concerned about public opinion - something the public reflects back to them in opinion polls regularly.

Obama went further saying the US bank bailout was "distasteful, but necessary". He also described bankers' bonuses as "obscene" and referred to the banks as "the very firms who owe their continued existence to the American people" - almost LEAP-esque . . . almost.

Gordon Brown told an audience in London yesterday, "We believe we will probably make a profit from what we have done in helping out the banks. Our aim is that no member of the public has to pay for the rescuing."

Really? So why is he pressing ahead with the Fiscal Responsibility Bill to halve the UK deficit in four years if we're just waiting for a windfall? Under Brown's Bill every member of the public will pay with worse services. Universities are already paying thanks to New Labour's cuts.

CIPD unveils a business manifesto for the rich

From today's Morning Star
by Lizzie Cocker

A professional management body has come under fire for demanding a freeze on the youth minimum wage and public-sector pay.

The influential Chartered Institute for Personnel and Development (CIPD) unleashed a string of attacks on the lowest-paid in its pre-election manifesto, which was launched on Tuesday.

It also recommended a removal of the default age of retirement and an abandonment of the 2011 employers' National Insurance increase.

The CIPD claimed that these proposals would be essential in tackling youth unemployment, which spilled over the one million mark during this recession.

But Left Economics Advisory Panel (LEAP) co-ordinator Andrew Fisher said that the current youth national minimum wage of £3.57 "is already a national disgrace and is 3p per hour less then was deemed acceptable 12 years ago for other workers."

Public-sector union Unison warned that such changes would not help the "lost generation" but fuel it.

Unison general secretary Dave Prentis said: "This 'manifesto' will not lead to economic recovery, it will lead to the exploitation of hundreds of thousands of workers.

"It is disgraceful that young people are being targeted by the CIPD and singled out as being 'lucky enough to have jobs.'

"Vulnerable young people, who are struggling to get by on a startling rate of just £3.57 an hour, should not have to pay the price for greedy bankers' mistakes."

Mr Fisher said: "For the CIPD to come out with a manifesto focused on pay cuts for the young and public-sector workers while proposing tax cuts for business is laughable.

"It is advocating a redistribution of wealth from poor to rich.

"Its approach is economically inept. Any money saved on pay would simply go to profits for bosses and dividends to shareholders, rather than on new job creation. You can almost hear the snorting and grunting as this CIPD nonsense was written from the trough."

The government is currently carrying out a review of the default retirement age which stands at 65 and a Treasury spokesman confirmed that the CIPD's "views will be fed into that review."

Bank Aid

There'll be a return to serious blogging soon, but for now Happy New Year - 2010 will be a bumpy ride - and here's a bit of light relief: