Squeezing ordinary people's finances always leads to disaster

Prem Sikka

The UK economy is flatlining, unemployment is rising and around 13.2 million people live below the poverty line. The prospects of building a sustainable economy remain distant. The common factor behind these grim statistics is that the purchasing power of ordinary people has been severely eroded and without adequate resources people cannot buy goods and services produced by businesses.

The UK gross domestic product (GDP) has increased from the 1976 figure of £621bn to around £1.5tn, but the share going to employees in the form of wages and salaries has declined. In 1976, the amount of wages and salaries paid to UK employees, expressed as a percentage of GDP, stood at 65.1%. By the end of 2011, it was around 54% (see table D of the Quarterly National Accounts). This rate of decline is unmatched in any other developed economy. With many people now facing wage freezes and loss of pension rights, the employees' share of national wealth is set to fall below 50% of GDP.

The above figures are not the whole story, because a disproportionately large slice of the shrinking cake has been taken by wealthy elites. A study by the Resolution Foundation noted that in 1977, for every £100 of GDP, employees in the bottom half of the earnings distribution received £16. But by 2010 it had fallen to £12, and after taking out bonuses their share declined to just £10. In contrast, the top 10% of earners increased their share from £12 per £100 of GDP to £14, and after taking account of bonuses, it rose to £16.

In principle, the state can boost the spending power of low and middle-income households through redistribution, but that possibility is constrained by the erosion of tax revenues. In 1981-82, tax revenues expressed as a percentage of GDP stood at 45.5%, but by 2011-12 they had declined to 37.8%.

So where has the national wealth gone? Well, it has been transferred from employees and the state to corporations and their controllers. In the mid-70s the average rate of profitability before interest and tax at current replacement cost stood at 3.9%. Now, despite one of the deepest recessions, it is still averaging around 11-12%.

The seeds of the disastrous position were primarily sown by the policies pursued in the 1980s and 90s. Mass unemployment and government-led attacks on trade unions severely eroded the ability of employees to maintain their share of national wealth. The current UK trade union density of 26.6% of employees is considerably less than 69.2% for Finland, 68.4% for Sweden, 66.6% for Denmark and 54.4% for Norway. Unlike Scandinavian countries, UK employees and unions are not permitted to elect directors and are excluded from corporate governance arrangements, therefore they have not been in a position to protect workers' share of national wealth.

The comparative demise of manufacturing has resulted in the disappearance of reasonably well-paid skilled and semi-skilled jobs. These have been replaced by less well-paid service-sector jobs. Privatisation and outsourcing of work has contributed to low wages.

Successive governments have appeased corporations and wealthy elites through tax cuts. The rate of corporation tax has declined from 52% of taxable profits in 1982 and will reach the lowest ever rate of 22% in April 2014. The top marginal rate of income tax has declined from 83%, plus a surcharge of 15% on investment income, in 1978-79, to 45%. Rather than effectively tackling organised tax avoidance, successive governments have shifted taxes to labour, consumption and savings, as evidenced by higher national insurance contributions, higher VAT and the failure of tax-free personal allowances and income tax bands to keep pace with inflation. The result is that households in the bottom 20% of income bracket pay 35.5% of their gross income in direct and indirect taxes, compared to 33.7% for the top 20% of households.

The massive transfer of wealth is camouflaged by government rhetoric on the need to rebuild the economy and control inflation. Here are some reflections from Sir Alan Budd, a key economic adviser to the Thatcher administration: "My worry is … that there may have been people making the actual policy decisions … who never believed for a moment that this was the correct way to bring down inflation. They did, however, see that it would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes – if you like, that what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed the capitalists to make high profits ever since."

In his analysis of the 1929 Wall Street crash and the ensuing economic depression, liberal economist JK Galbraith identified "bad distribution of income" as the biggest cause of the crisis. Yet history is repeating itself. It is hard to discern any government policies that are designed to increase the employee share of GDP.

Despite the banking crash, the government's not-so-bright idea for economic recovery is that by 2015 ordinary people will somehow increase their personal borrowing by another 50% from £1.5tn to £2.12tn. Clearly, no lessons have been learned from history.

• This article first appeared on Guardian Comment is Free
  

Measuring the economy - rethinking the growth obsession

Yesterday the OECD predicted the UK economy would contract in the first quarter of 2012. It led the news for a while (pre-Galloway), vying for contention with pricier pasties and petrol pump panic.

The state of the economy is a vastly more important issue than both of those things, yet the way in which it is reported perhaps explains why people are more interested in pasties - and perhaps why they're right to be.

Firstly, we should define 'recession'. A technical recession is widely agreed to be two consecutive quarters of 'negative growth'.

Negative growth is a ridiculous term: economists' jargon when the English language provides ample alternatives: contraction, shrinkage, reduction. I personally favour 'contraction'.

At the end of each quarter (of a year, i.e. three months), the government (and indeed governments around the world) announce the level of economic growth - the change in our gross domestic product (GDP).

GDP is value of all the goods and services produced which includes private and public consumption, government expenditure and investments, as well as exports less imports.

So if there is economic growth then GDP has risen (relative to the last time it was recorded). If GDP has declined, then there is contraction (aka negative growth).

So back to the OECD, which predicted that in the first three months of 2012 the UK economy will have contracted by 0.1% - following a contraction of 0.3% in the last three months of 2011.

Leave aside that many close watchers of UK economic trends think the OECD has got it wrong anyway (especially after the economic boost of all the panic petrol buying), but even if the UK economy has contracted by 0.1%, what does that mean?

Well we know what it means technically: that the value of all the goods and services produced has contracted by 0.1% in the last three months. And if that is for a second consecutive quarter, as would be the case in the UK currently, then it would be a technical recession.

Somewhat illogically the economy is not in recession if it contracts by 2% in one quarter, grows by 0.1% the next and then contracts by 1% the one after. Yet two consectutive quarters of 0.1% contraction are a 'recession', even though the former case is worse.

So it's clear to me we should change our definition of recession to something that more accurately tells us the state of the economy: so how about a technical recession being redefined as contraction over an annual basis. In other words, if we look at the average of the last four quarters (or year, as most people know it).

But what does any of this mean to anyone personally or - to be less individualistic - to a community or to the economy?

Is growth that relevant? What does Mr Wilson or Ms Patel do when they hear the economy has contracted by 0.6%? A: About the same as they do when they hear the FTSE has dropped 1%. Fuck all, because it doesn't really much matter (and there's not much they can do about it).

What matters to people is their own living standards, the inequality in their community, the level of unemployment. And surely we (as fellow socialist readers of this blog) want an economy and economic measures that treat people as paramount.

So here's what's important: how does the change in your income relate to the change in inflation? That matters whether you're in waged work or receiving out of work benefits. It measures whether your living standards have risen or fallen.

Or what about the gap between rich and poor? Numerous researchers including Wilkinson & Pickett and Danny Dorling have shown the damaging effects of inequality on life chances through a variety of metrics.

And then there's unemployment - undoubtedly bad because of what it means for the individuals concerned, and also economically inefficient because it means we are paying for talent to be left idle (receiving benefits) instead of enabling that person to contribute to the economy (pay taxes).

So instead of measuring badly what matters less, why not prioritise measuring what matters most:

• Living standards
• Inequality
• Unemployment

Because next month (on 25 April), despite the OECD's prediction, I suspect that the news will be reporting that the economy has returned to growth (probably only 0.1-0.4%) and Osborne will be welcoming it as a new dawn and an endorsement of austerity - only for the economy to contract in the second quarter.

This obsession with growth encourages politicians (as those from all parties did) to ignore rising inequality and do nothing about unsustainable debt-fuelled growth.

As Ann Pettifor said on Newsnight (watch online) (discussing the OECD prediction) the government should have used the budget "to spend on infrastructure, which would create jobs to create the income to pay back the debts".

That way, we'd reduce unemployment, increase living standards, reduce inequality and, also, generate stable economic growth.

The reality is that Osborne's austerity policies mean rising unemployment, falling living standards for most, and rising inequality. Bad for people and bad for the economy.

If we, as the left, want a new economy then we should be emphasising new ways of measuring its performance too.

King: Recovery will not happen soon

From today's Morning Star by John Millington



Bank of England governor Mervyn King admitted today that the economy would not recover to pre-recession levels for at least the next three years.



Mr King gave a damning assessment of the economy at a packed press conference in London, claiming that it was vulnerable to "headwinds" from enormous debt overhangs from public and private debt.



He also warned that despite any countermeasures taken by the government, Britain would remain vulnerable to fluctuations in energy and other import prices.



"The outlook for growth in the world economy has deteriorated and, largely as a consequence, near-term growth prospects at home are somewhat weaker," he said.



"The intensification of sovereign fiscal concerns has been associated with renewed funding stresses for banks which are contributing to high borrowing spreads, tight credit conditions for households and smaller companies and exceptionally weak credit and money growth in the UK."



The Bank of England governor also said that the euro-zone disaster in recent weeks had raised challenges for Britain.



"The greatest risks to the prospects for global demand come from the euro area and the substantial challenges faced by several member countries as they seek to ensure the sustainability of their fiscal positions and preserve the stability of their banking systems," he said.



Slashing growth forecasts, Mr King said that inflation was likely to hit 5 per cent by autumn and not reduce by 2013 at the earliest.



"Inflation has been pushed up by rises in energy and import prices and the increase in the standard rate of VAT," he added.



Mr King also said that Bank of England monetary policy could do "very little."



In a stark omission, Mr King refused to speculate on the prospects of a double-dip recession and added living standards would only be squeezed further if import and export prices rose.



Leap co-ordinator Andrew Fisher said: "Demand has been suppressed by unemployment, falling wages of those in work and consumer inflation.



"Until those issues are addressed - and there is no prospect of that from this government - then the crisis will continue and exacerbate.



"Politicians are proving themselves entirely powerless in standing up to those destroying our economies - the speculating financiers, bankers and corporate executives hiking prices to maintain profit margins."

GDP figures expose Osborne's economic ineptitude

GDP figures today show the economy grew by a pitiful 0.2% in Q2 of 2011, throwing the OBR's growth estimate way off course - meaning Osborne must now focus on growth (but more likely will announce more cuts to deal with an expanding deficit).

In advance of the formal announcement, commentators had been expecting GDP growth to be within -0.5% to 0.5%. This in itself tells a story. Low expectations reflect the failure of George Osborne's economic strategy - his cuts have suppressed growth, as well as causing the inevitable misery: pain without the gain.

All of this has been entirely foreseeable and predicted. Those on the left have rightly argued that unemployment is the main issue Osborne should be addressing, rather than his deficit obsession. Like my Nan used to tell me 'take care of the pennies and the pounds will look after themselves', a new maxim should be 'take care of unemployment and the deficit will take care of itself'.

Osborne's failure to create jobs and growth domestically is being compounded by the failures elsewhere in the world. The eurozone (always unviable IMO) is floundering as the reality of one monetary policy for such clearly different and divergent economies is made clear. Nevertheless there are some common truths for those countries most in crisis: the first being routine and endemic tax evasion and avoidance; the second being the deregulation of the finance sector; and the third, and least commented on, being an absence of manufacturing base in the economy.

This latter point is now being exacerbated by the growth of the BRIC countries (Brazil, Russia, India and China) particularly the latter. The effect on Europe and North America to the new reality of China as a major manufacturing economy (and the other three also catching up) is huge - and has the effect has been exacerbated in the US due to NAFTA, which had already decimated US manufacturing industry. In the UK, manufacturing has dropped by 9% since 2008 Q1.

With none of the three issues: tax justice, financial regulation and manufacturing policy at the heart of any western government's programme, the future economic prospects look bleak however today's GDP figures are spun.

Download the full ONS data and analysis


* Royal Wedding - a final word on the frippery ... in November 2010, the Telegraph reported that the Royal Wedding would boost the UK economy by as much as £620 million. When retail sales figures were published previously, and GDP figures today, the consensus switched to blaming the extra bank holiday for hitting the economy. The ONS today said "There were a number of special factors which may have affected economic activity in the second quarter, including the additional bank holiday for the royal wedding", but later says: "Sales in April may have been boosted by the royal wedding, before falling back in May". So the royal wedding as a special factor may have been a boost to the economy. Regardless, it's effect was minimal and Osborne's strategy is failing.


Update: and back to a serious point, good analysis of the GDP figures and reasons for UK's economic malaise by Unite General Secretary Len McCluskey on the Guardian website, "there is no plan for growth beyond an entirely dogmatic trust in the private sector. The possibilities of, for example, using the state's stake in major banks to drive investment are simply ignored."

Bad news and more bad news?

Hugo Radice on the UK's latest GDP figures, and how they relate to the global economic context.

On the face of it, the fall in UK national output (GDP) reported on Tuesday just adds to the mounting bad news for everyone, not least Chancellor George Osborne. Fears about a ‘double-dip’ recession, which would officially arrive if a further decline takes place in the first quarter of 2011, now look considerably more likely. Not surprisingly, most Red Pepper readers will now be concentrating their energies on the fight against the cuts. But for us as much as for employers and the Tory government, it’s important to keep a close eye on current developments in the economy. So what exactly does all the bad news add up to?

First of all, we live in a world in which the financial markets pretty much dictate the government’s policies, or at least their room for manoeuvre. Osborne’s attempt to blame the fall in GDP on the bad weather seemed to cut no ice in the City. There, the pundits and the speculators mostly concluded that the recovery had now stalled, and that the Bank of England would therefore delay the long-expected increase in its official lending rate of 0.5%.

Looking back on the growth recorded for July-September 2010, it now seems all too clear that the sudden boost to construction activity in that period owed more to a rush to complete current contracts before the spending cuts hit local authorities and government departments alike; so the sharp fall in the last quarter was as much a case of back to normal as the result of the big freeze.

In any case, last week’s unemployment figures made grim reading, back above 2½ million, with a particularly big rise in youth unemployment - and this well before the public sector cuts start hitting home in April. What is more a host of recent attitude surveys, among households as well as businesses, have suggested growing pessimism about our economic prospects and therefore a reluctance to make any big spending commitments. Add in the unexpected attack on the coalition’s lack of a growth strategy from the outgoing CBI chief Richard Lambert, and Osborne surely couldn’t maintain for much longer that shiny smile and confident air.

But although there obviously is a Plan B somewhere on his desk – to slow down the spending cuts and encourage the Bank of England to pump more cash into the banking system – the Chancellor is terrified that a change of direction would be seen by his masters (that’s the financial markets, remember, not us) as a sign of ‘weakness’.

Osborne himself has cited the International Monetary Fund’s latest update to its World Economic Outlook, issued on January 25, in support of his policies. The IMF, he said, approved of a robust approach to restoring the public finances. Well, yes, but only up to a point. The IMF update didn’t actually discuss the UK as such, and they qualified their approval of spending cuts by putting them in a wider context:

“A host of measures are needed in different countries to reduce vulnerabilities and rebalance growth in order to strengthen and sustain global growth in the years to come. In the advanced economies, the most pressing needs are to alleviate financial stress in the euro area and to push forward with needed repairs and reforms of the financial system as well as with medium-term fiscal consolidation. Such growth-enhancing policies would help address persistently high unemployment, a key challenge for these economies.” (Update, p.7)

Now the Eurozone governments have, with a lot of delays and haggling, begun to sort out the debt problems afflicting their ‘periphery’ (that is, Greece, Ireland, Portugal and Spain). They have created a Financial Stability Facility which has just successfully issued the first zone-wide Euro bond. The Chinese government in particular is keen on this development, because they want to diversify their own bond purchases away from the USA. But the markets, which as always in an uncertain recovery are particularly prone to rumours, fads and panics, are still worrying away at this issue. Oddly enough this is good news for Osborne, since problems in the Eurozone make British government bonds more attractive to investors.

However, there are two other global issues which we need to keep an eye on. The first is the one raised by the IMF, namely ‘reforms’ of the financial system. Last week (22 January) the chair of the Independent (sic) Banking Commission, Sir John Vickers, gave a lecture on the progress that the Commission is making on this. Given the often-stated views of the Governor of the Bank of England – and most academic commentators – it was hardly surprising that he highlighted the need to segregate the risky activities of ‘investment’ banking (issuing and trading financial assets of all kinds) from the activities of ‘commercial’ banking (dealing with payments and routine borrowing by households and firms).

The British Bankers’ Association spokesperson, Angela Knight, immediately announced that if new regulations were brought in that were too tough on the banks, they would up sticks and relocate abroad. Short of revolution (not a bad idea?) the way to head off this threat is to make sure that pretty much the same regulations are brought in everywhere, and especially in the USA, UK and the Eurozone. In the more than two years since the collapse of Lehman Brothers, progress on this has been painfully slow. In the USA, legislation was finally passed in July 2010 (the Dodd-Frank Act), but implementation is still being delayed, making because the banking lobby made sure that the proposals were incredibly cumbersome and riddled with contradictions. In the Eurozone, progress is also slow, partly because so many banks are massive holders of those dodgy Irish, Greek, Portuguese and Spanish government debt; so any financial squeeze on the banks threatens efforts to calm down the bond markets.

The second big issue is the tensions between China and the USA. Basically, for years there has been a dollar merry-go-round:

• ..... the US runs a big trade deficit with China, paying for the imports in dollars;
• the Chinese government then lends the dollars back to the US – mostly through buying US government bonds;
• the US government uses this money to keep taxes low, leaving households and businesses with more money to spend;
• and they spend it on Chinese imports.....

For years, US pundits have pointed out the irony of the richest and most powerful country in the world becoming financially dependent on what remains one of the poorer countries. But the vast majority of US citizens either don’t pay any attention to international affairs at all, or they just blithely assume that what Uncle Sam wants, he is entitled to get.

However, Chinese President Hu’s state visit to Washington last week brought the issue forcefully to a head. Treasury Secretary Geithner yet again called for an increase in the dollar exchange rate of the renminbi, to try to correct the trade imbalance. But the global context has changed dramatically since 2007. While the USA, as well as other major rich economies, have suffered sharp recessions and then slow jobless recoveries, China and other so-called emerging economies like India, Brazil and Russia took a smaller hit from the financial crisis, and rebounded quickly. Even Africa has in recent years experienced much faster growth than the rich countries.

This is a truly world-shaking shift. Back in the 1970s, the newly-confident post-colonial states of the Third World proposed, in the UN and other fora, a New International Economic Order. The idea was to place their development agenda at the heart of the international economic and financial order, using the leverage of their control over the supply of oil and other raw materials. At first the rich states tried to ignore these demands, so when oil prices were indeed raised sharply, they were plunged into inflation and stagnation. But from 1979, led by the UK and the USA, they took their revenge.

New economic policies of ruthless financial stringency plunged the Third World into a massive debt crisis and the ‘lost decade’ of the 1980s. Neoliberalism was unleashed across the globe, forcing debtor states to adopt policies that favoured capital (including foreign capital) over labour and private profit over state initiatives. And after the collapse of the Soviet bloc and the USSR in 1979-81, this leaner, meaner sort of capitalism became the universal norm.

The great irony is that the success of this strategy – from a capitalist point of view, that is – turned out to create formidable competitors. The Chinese and other new capitalist powers are rapidly increasing their share, not only of world consumer markets, but also of available raw materials. New Chinese, Indian and Brazilian transnationals are displacing the tired old US, Japanese and European firms. China has in recent years outstripped the World Bank as a source of so-called ‘development aid’ to Africa (as always, the ‘aid’ comes straight back to the donor in the form of orders for their goods).

In these circumstances, the power structures of global capitalism have become more and more outdated. The role of the dollar; the permanent seats on the UN security council; the inter-state bureaucracies in Geneva and New York; the voting systems in the IMF; these and countless other practices are being called into question.

For the American people, it is especially hard: that famous ‘city on a hill’ is bankrupt and crumbling, unable to be a beacon for anything except xenophobia and lax gun law. With the Tea Party Republicans on the rise, threatening everything from bombing Iran to hanging Julian Assange, there are plenty of reasons to be fearful.

Fortunately, help is at hand. For the great irony is that America’s real rulers – the corporate rich – have invested massively in the new capitalism of the East and the South. Knowing full well that the newly-confident ruling classes of those regions fully share their own ideology and objectives, they will ensure that the new American nationalism remains a matter of rhetoric alone. The dollar-go-round will not be abruptly halted.

How does all this impact upon working people in Britain? Well, it makes the outlook a bit better for exports and unemployment. But under the government’s present policies, Mervyn King told us on 25th January what to expect: declining living standards for years to come. As he said, such a long period of decline hasn’t been seen in Britain since the 1920s. As he must surely know, but didn’t say, this strikes at the heart of the political love affair of the so-called middle classes with consumerism and free-market individualism, a key element in the post-1945 political settlement.

What can the left do about it? Well, obviously fight every redundancy and every pay cut. But also, please, this time round, recognise that workers all over the world are in exactly the same situation. We are being urged to accept pay cuts so that we remain ‘competitive’, that is, put workers abroad out of a job instead. And they in turn are being told just the same thing by their own rulers. Time for an old, old slogan: workers of the world unite!

This article first appeared on the Red Pepper website

Osborne's weather excuse doesn't cut any ice

Yes, the snow had an impact. Undoubtedly. But even without it the ONS concedes that 'growth' would have been "flattish", i.e. no growth.

The reality is that George Osborne's own 'crowding out' explanation for the crisis and recovery strategy (as previously denounced by LEAP) undermined the economy in Q4 of 2010.

As I said when speaking to reps from the Northern Irish public sector union (NIPSA) earlier this month, there are 3 problems with Osborne's economic strategy (you can download my powerpoint presentation from the NIPSA website).

Firstly, is Osborne's own 'independent' Office for Budget Responsibility, which said in June 2010 that if 600,000 public sector jobs were cut, the knock-on effects would mean 700,000 private sector jobs would be lost. In the CSR in October he said that actually only 490,000 public sector jobs would go. However, the Chartered Institute for Personnel and Development looked at his figures and estimates that in fact there will be 725,000 public sector job losses as a result of the £80billion cuts.

Secondly, unemployment is rising. Long-term unemployment (those unemployed 12 months or more) is now at its highest since February 1997 and youth unemployment is the highest on record. The private sector is not 'crowding in' to the space left by the public sector.

Thirdly, Ireland. What Osborne is implementing in the UK has been tried in Ireland: it doesn't work. The public sector been slashed, corporation tax is lower than almost anywhere else in Europe and the economy is in a death spiral.

In Q1 of 2011, we have the VAT rise, rising inflation, rising unemployment and declining capital spending from central and local government to impact on the figures. And there's be no snow for George to hide behind.

Latest growth forecasts show gloomy future for Britain

From the Morning Star

Economic growth forecasts have been revised down to 0.7 per cent in the latest quarter, according to figures released today.

The Office of National Statistics found that growth in the construction, mining and quarrying industries all fell and there was a recorded fall in service industry output.

The drop indicates that 2011 will be another tough year for the public, with the VAT rise to 20 per cent to dampen consumer spending, on top of the effects of government spending cuts.

Left Economic Advisory Panel co-ordinator Andrew Fisher said that prospects for the economy were "grim."

He added that, in the long term, Britain could be in the same situation as Ireland, which recently took out a controversial IMF loan to help keep its struggling economy afloat.

"Continued slow growth - or even a slip back into recession - will encourage the coalition government to make further cuts and could send the UK into a spiral similar to Ireland's.

"It is clear that the labour movement needs to force a major shift in economic policy in 2011 to prevent misery for millions."

More at diggersland blog.

Osbornomics unravels

Look beyond the big society rhetoric and there's a very flawed theory at the heart of George Osborne's chancellorship. It was outlined in the June 2010 Budget, when Osborne advoacted:

"An economy where the state does not take almost half of all our national income, crowding out private endeavour"

This 'crowding out' theory managed to infiltrate the independent Office for Budget Responsibility which stated in June that although the government's cuts would cost 600,000 public sector jobs, with a knock-on loss of 700,000 in the private sector, the private sector would also create 1.6 million jobs over the same four year period (a net gain of 300,000 jobs).

However, a report published by Pricewaterhousecoopers today shows in fact that the private sector will only create 1 million jobs over the four years, so that becomes a net loss of 0.3m jobs. It undermines Osborne's claim that cutting the public sector can be compensated by private sector growth (definitely not in a weak economy). I think the PWC report still might be a bit optimistic.

Data released since the Budget seem to be proving the PWC right and Osborne wrong. Both the IMF and the Bank of England have downgraded UK growth prospects. As the Morning Star points out, both the British Chamber of Commerce and British Retail Consortium have warned that growth in the service sector had been "slow" and was showing no signs of picking up before the VAT rise in January next year.

BCC chief economist David Kern said: "The dismal performance of the service sector is particularly disturbing since it occurs even before VAT is due to rise to 20 per cent."

It goes to show cutting the public sector won't 'make room' for the private sector, but will sap demand and weaken the private sector too.

For an excellent brief history and demolition of 'crowding out' theory see Aditya Chakrabortty's piece in the Guardian earlier this month.

Update: There's more on this story in the Morning Star, with quotes from Len McCluskey and Dave Prentis.

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."

Tories fail the tax test

Prem Sikka

What is the Conservatives’ big idea on job creation? Make public sector workers redundant and reduce people’s welfare rights through cuts. However, they have captured press headlines. Shadow Chancellor George Osborne told the Conservative Party conference that, if elected, the Tories would offer tax breaks to new businesses for the first two years of their life by waiving National Insurance contributions on the first 10 people employed in any new business and create 60,000 new jobs. Conservative leader David Cameron has described the policy as the “biggest, boldest programme to get people working”. Predictably, the Confederation of British Industry agrees.

Does the policy make any sense? The Conservatives have not explained what exactly a “new business” is. Without details, tax policies cannot achieve their assumed goals.

We have all heard of fly-by-night operators who close one shady business and start another. The Conservative Party’s announcement must be music to their ears. They can all close one business and start another the next day to claim exemptions from employer National Insurance contributions regardless of their profits. Perfectly respectable businesses can also indulge in the same creativity by hiving off marketing, public relations and other activities to new subsidiaries – all to claim exemptions from national insurance contributions. Hairdressers, greengrocers, estate agents and corner shops can all do the same, too – without creating a single new job. The only people making any money will be accountants showing them how to lay the old business to rest and start the new one.

Every time any government or political party announces any special tax concessions to one section of business, they set off the avoidance industry in motion. In trade, these are called loopholes and are exploited by accountants and lawyers. The Tory proposal will do the same. They seem to have learnt nothing from past mistakes. Small businesses cannot create jobs on the back of a National Insurance holiday. Businesses need sustainable revenues and no one is going to take on an employee if trade is depressed. The idea that the Conservative plans will result in the creation of some 60,000 jobs is pie-in-the sky and simply unachievable. The Conservative Party has failed the first test of tax policy – that is, to design a policy that cannot easily be abused. They are planning to create another loophole.

Governments should stimulate the economy through more efficient and sustainable means. They can reduce business rates for small businesses. They can extend 100 per cent first year capital allowances, depreciation allowed for tax purposes, to all qualifying investment in plant and machinery. Currently, 100 per cent relief is available on capital expenditure on all plant and machinery (apart from cars) up to £50,000 a year only. The cost of extending the 100 per cent allowances for 2009-2010 would be around £5 billion. Her Majesty’s Revenue and Customs already has a well-established way of policing it. So there will be no new bureaucracy. The proposal would help to retool businesses and create jobs. It can result in orders for the dwindling manufacturing sector and build capacity.

The public sector is targeted by both Labour and Conservatives, but the private sector has singularly failed to create new jobs. Sacking people neither creates jobs nor provides the spending stimulus which our high streets need. Most of the additional jobs since 1997, nearly one million, have been created in the public sector and 75 per cent of these are held by women, mainly outside London. So any cull in the public sector will hurt women disproportionately and also blight the regions. Hardly any questions have been asked about the failure of the private sector to create jobs, even though it depends on the public sector for contracts in healthcare, education and many other areas

A key requirement for sustainable jobs is that people have spending power and that can only be achieved through progressive taxation that redistributes wealth. Ordinary people spend the largest part of their money on food, clothes, shoes and travel in British shops. This has a greater multiplier effect than billions thrown at rich bankers and others. Their speculation on the stock market and housing creates bubbles. At best, they might create some extra business activity for estate agents, accountants and lawyers, but the multiplier effect of their wealth is minimal.

Instead of public expenditure cuts that penalise teachers, nurses, cooks, care workers and security staff who have not caused the economic crisis or gained very much from the boom years, the Government should look at reforming the tax system. In 2007/8, pension contributions relief added up to £37.6 billion. 60 per cent of it went to those on higher rates of income tax and £10 billion went to just 1 per cent of the taxpayers earning more than £150,000 a year. By confining pension contributions tax relief to the basic rate of income tax, the government can release up to £22 billion a year.

Removing the artificial upper ceiling on National Insurance contributions can raise £5 billion. Currently, no National Insurance is paid on incomes above £844 a week.

Even the Conservatives know that speculators cause harm. Yet neither they nor Labour have enacted a Tobin tax on currency transactions. A modest Tobin tax at 0.005 per cent could yield up to $33 billion (more than £20.60 billion). To prevent leakage, this could be co-ordinated within the European Union and raise nearly $17 billion (in excess of £10.6 billion) or more, if higher rates are levied.

Derivatives, the complex financial bets on the movement of interest rates, commodity prices and exchange rates turned out to be the weapons of mass destruction. The global GDP is around $55 trillion, but the face value of derivatives at December 2007 was $1,148 trillion. A simple 1 per cent tax on these could raise more than $11 trillion and a significant proportion of that would accrue to Britain, Tobacco, alcohol and gambling are taxed because they are considered to be harmful. The same principle should apply to financial instruments, as there is now plenty of evidence that this form of reckless gambling has caused havoc.

These are just some of the ways in which revenue could be raised to reflate the economy and especially help the less well-off. A 10 per cent increase in income tax personal allowances would cost about £4.5 billion. A 10 per cent increase in the state pension may be another £10 billion. Money would be available to waive university fees, prescription and dental charges.

Resources could also be used to build a greener economy and a more balanced and diversified economy that favours manufacturing, science, technology and lifelong learning. But instead we now have the obsession with cuts and gimmicks such creating jobs through National Insurance contribution holidays.

*Prem Sikka is professor of accounting at Essex University. This article first appeared in Tribune

UK in deepest recession on record

GDP figures issued by the Office for National Statistics (ONS) yesterday showed that the UK economy is still in recession, after shrinking 0.4% in the three months to September 2009.

This means the UK economy has been contracting for 18 months, since March 2008 - the longest period of recession on record. The UK economy has now contracted 5.9% since the beginning of the recession.

John McDonnell MP, LEAP Chair, said:

"The recession continues to bite. In the real world people are losing jobs and experiencing increasing levels of poverty and hardship.

"The Government can no longer sit on the sidelines as spectators. It needs to take a more interventionist stance: nationalising the banks, and investing in manufacturing."

Andrew Fisher, LEAP Co-ordinator, said:

"Talk of recovery has been premature. The bailouts have worked to restore stock market confidence and bankers' bonuses, but the real economy is still suffering: unemployment is rising, homes are being repossessed, and wages are being suppressed. For most people, recession is going to be with them for a long time to come."

The economy: it's even worse than we thought

Three weeks ago we reported that GDP had contracted by 2.2% instead of the 1.9% originally reported.

Today the ONS has updated its estimate to a -2.4% drop in GDP in the first three months of 2009. The ONS also now says the recession began during the second quarter (Apr-Jun) of 2008 rather than during July to September, so that the recession has now been running for a whole year. This means GDP in March 2009 was -4.9% lower than it was in March 2008.

This is how the GDP figure for the first quarter of 2009 broke down across the different sectors:

• Construction: down 6.9%
• Service sector: down 1.6%
• Banking and finance: down 2.5%
• Manufacturing: down 5.5%

The recently published CBI Industrial Trends survey saw export orders fall sharply in June as the rest of our major trading partners continue to languish in recession too.

Out of recession?

In the last few days a number of analysts have suggested we may be 'on the up', Government Ministers have been wheeling out the cliches 'turning the corner', 'green shoots emerging'.

Today, LEAP was asked to comment on reports by the National Instutute of Economic and Social Research (NIESR) which states that the recession is over. They estimate that GDP has increased by 0.1% and 0.2% in the last two months. This is pretty minimal and within any sensible margin of error.

Others have pointed to UK manufacturing production having increased by 0.2% in each of the last two months. But looking at the data in absolute terms gives a different perspective. Output in February, the current trough of the credit crunch, was 13.9% below the 2008 peak. After two months of 'recovery', production is 13.5% below the peak.

Data from the rest of the world, especially the US, Germany and Japan continues to be negative - and the global recession will not recede until the major economies see an upturn. To look at the UK in isolation, without considering our major trading partners, is naive. Even if official figures (out next month) confirm a stabilisation, or even a moderate upturn, there is no inevitability that the subsequent quarter (summer to autumn) won't see a retrenchment.

However, this all rather misses the point for us as socialists. As LEAP said in our Red Papers April 2009 report:

"The effects of a recession on working people always lag behind the economic data of GDP growth. When the UK economy was entering the 'Lawson boom' of the mid-eighties, unemployment was reaching its peak.

"This highlights how we measure recession is skewed towards the dominant interests of capital. Why don't we start defining 'recession' as when poverty levels are over 10% or unemployment (ILO measure) over 1 million."

In short, just because the corporate profitability of UK plc might be being restored, it does not mean we will see an end to rising unemployment, rising repossessions and declining pay awards anytime soon.

Our comments appear in greater depth in the Morning Star.

Update: Ann Pettifor argues similarly on Comment is Free today that the recession is far from over.

Update 2: The CBI has today (15/06) also warned "Some commentators have been carried away by recent tentative indicators as evidence of 'green shoots'"

Update 3: Richard Murphy says on his blog today (16/06) "I don’t spy green shoots. I just see markets making merry on tax payers money which they are using for speculation, not lending. Which is why firmer control of banks is necessary". Quite.