Britain can’t escape the world economic crisis (part 2)
In the last issue of World Revolution we published the first part of the report on the National Situation presented to the 16th Congress of WR in November last year. This examined the reasons for the increase in the rate of growth of GDP in recent years, concluding that it came from an increase in the absolute rate of exploitation of the working class and, in particular, from an extension of the working day through an increase in the rate of overtime, especially unpaid overtime. In the second part, published below, we go on to consider how the ruling class completes the task - once again at the expense of the working class.
Consumption and debt
The production of surplus value is only one half of the task for the capitalist. The other is its realisation.
Britain has maintained its share of the global market at about 5.2% for much of the last decade, due to the growth of the service sector that has compensated the continuing decline in exports of goods. This has been a significant achievement at a time when many other countries, including the US, have experienced a slow down. However, over the longer term Britain has experienced a significant decline. In 1950 it had 25.4% of the world market in manufactured exports. This dropped to 9.1% in 1973 and to 7.9% in 1992. Not only is the current level below that of 1992 but it includes both manufactures and services.
The overall balance of British trade has remained negative, although not on a scale to compare with the US. This makes it clear that the growth of Britain's economy is not the result of greater trade.
Nor is it the result of increased government spending, which has remained above 40% throughout the 80s and 90s. Today it is slightly lower than when the Conservatives were in power with the declared aim of rolling back the state. That said, there has been a growth in the fiscal deficit over the last few years, exceeding both earlier government predictions and the EU limit of 3% of GDP. This has been due both to increases in expenditure and decreases in receipts and was the main reason for the increase in National Insurance contributions announced in the 2002 budget.
The growth of the British economy has been based on the domestic market and the increase in private consumption.
"Growth has been led by private consumption since the mid-1990s with net exports acting as a drag on activity in every year since 1996. However, in nominal terms the excess of consumption over output growth appears unremarkable compared with many G7 countries. This underlines the importance of relative price changes following the rise of the real effective exchange rate by 25 per cent between 1996 and 1998. Although the household saving rate fell by around 3 percentage points between 1997 and 1998, between then and early 2002 the increase in consumption was largely underpinned by growth in disposable income. More recently, however, personal disposable income has slowed, partly due to tax increases, and private consumption has outpaced personal disposable income since early 2002. The housing market has become an increasingly important factor in two respects: the rise in housing wealth has almost entirely offset the effect of the fall in equity prices on household wealth since 2000; and mortgage equity withdrawal was running at close to a record high of 6 per cent of disposable income in the first half of 2003. As house prices have risen on average by nearly 15 per cent per annum since 1999, the vulnerability of consumption and the wider economy to an abrupt fall in the housing market has increased" (OECD Economic Surveys, United Kingdom, 2004, p.24-6).
The consequence of this has been an escalation in the level of indebtedness of large parts of the working class: "In the last quarter of 2003, British borrowers added a total of £16 billion to their mortgages, the highest quarterly figure on record. Credit card debt now stands at more than £44 billion - around 5% of Britain's annual economic output - and grew by 700 million in January alone, according to the Bank of England. Britain's total debt, including mortgages, is estimated at œ1 trillion" (International Herald Tribune, 28/04/04, cited in WR 275).
This is supported by figures from the OECD, which show that "The level of financial liabilities is now among the highest in the G7, second only to Japan in relation to disposable income and to Germany in relation to financial assets. The rise in household liabilities has been heavily influenced by developments in the housing market, with long term loans secured on dwellings making up nearly three-quarters of household financial liabilities" (OECD Economic Surveys, United Kingdom, 2004, p.47-8).
Household financial liabilities
The June 2004 edition of the Bank of England's Financial Stability Review shows that these trends have continued. Household debt has risen to about 135% of income while total borrowing is growing at an annual rate of about 14%. Unsecured borrowing - credit cards etc - grew rapidly between 1993 and 1997, peaking at an annual rate of 18% before dropping back to 12%. Secured borrowing - essentially re-mortgaging - rose more slowly but has now overtaken unsecured borrowing to stand at a rate of nearly 16% per year.
The 'health' of the British economy is based on the exploitation of the working class in work and its indebtedness outside. The importance of the housing market in funding the consumption that has led UK growth makes it particularly vulnerable to a collapse in house prices, as is currently being forecast in some quarters. The Bank of England has warned of households' "vulnerability to any unexpected rises in interests rates or falls in incomes" (Financial Stability Review, June 2004, p.17) The OECD is sufficiently concerned to devote a whole chapter in its latest survey of the UK to "Reducing the risk of instability from the housing market". It identifies a number of concerns, firstly that the level of debt repayment could cause difficulties leading to arrears and repossessions, as happened at the end of the 1980s. However, it considers this unlikely with the present level of interest rates, a view shared by the Bank of England (Financial Stability Review, June 2004, p.18). That said, the OECD recognises that "although the households with the highest absolute levels of debt tended also to have the highest incomes and net wealth, the youngest and lowest-income households increased their debt-to-income ratios by most - and from the highest levels - between 1995 and 2000. These are also the households most vulnerable to financial and other shocks likely to increase financial stress, such as unemployment or increases in interest rates" (ibid, p.49).
Secondly, it argues that "recent rates of house price inflation are unsustainable, and an abrupt change could have a large and rapid effect on consumers' spending" (ibid). Such changes, it argues, have a disproportionate impact on consumer spending and "an immediate levelling off in nominal house prices (i.e. zero house price inflation) would lead to a fall in the consumption-income ratio by about 2 percentage points over four quarters" (ibid). While it thinks that the impact would be limited "because of a partial offset as imports fall and due to the likely policy response" it is significant that it goes on to examine a scenario of falling house prices and concludes "an abrupt fall in the level of house prices, particularly if immediately preceded by a period of high house price inflation would be likely to have substantial effects on the real economy, and it is doubtful that monetary policy reactions would be able to impact quickly enough to offset them" (ibid, p50-51). The solution it recommends is for increases in interest rates to manage the decline. It also considers the government's review of house supply and possible reforms of the mortgage market.
While the issue of debt hangs over the working class today an even greater threat of poverty tomorrow comes from the gathering crisis over pensions. It shows that, even in the richest countries, capitalism is becoming less able to meet human needs.
A recent report by the International Monetary Fund (United Kingdom - Selected Issues, March 2004) summarises many of the issues. It begins by noting that, in common with many other developed countries, the population in Britain is ageing. The old-dependency ratio, which is defined as the ratio of the population aged 65 and over to the population aged 15 to 64, is set to rise by 60% over the next 50 years, from under 30% of the 15 to 64 population to over 40%. To maintain the current level of pension would require a rise in the total pension income of about 3% of GDP, increasing the total used in this way from 5% to 8% of GDP. However, published government projections plan no such increase, which means that the burden will be borne by the working class by paying more (through increased taxation or buying additional pensions), by working longer or by facing even greater poverty in old age. The British bourgeoisie has already begun to use all of these avenues:
- the 1980 Social Security Act switched the indexation of the Basic State Pension from either earnings or prices (whichever was the higher) to just prices, reducing its value from 24% of average earnings in 1981 to 16% in 2002;
- Social Security Acts in 1986, 1993 and 1995 made various changes to the State Earnings Related Pension that 'encouraged' members to opt out into private schemes;
- the increase in the retirement age for women from 60 to 65 that will be introduced between 2010 and 2020 will reduce the increase in the old-dependency ratio from 60% to 35%, with a consequent significant reduction in costs.
Such moves are on a par with those to create a 'flexible' labour market and to reduce restrictions on speculation, the movement of money and lending that were also initiated in the 1980s. The creation of such legislative and economic frameworks is one the main ways in which state capitalism operates in advanced capitalist economies.
Hiding economic fragility
In his speech to the Labour Party Conference Gordon Brown gave an overview of the government's achievements:
"No longer the most inflation prone economy, with New Labour, Britain today has the lowest inflation for thirty years.
No longer the boom-bust economy, Britain has had the lowest interest rates for forty years.
And no longer the stop-go economy, Britain is now enjoying the longest period of sustained economic growth for 200 years.
And no longer the country of mass unemployment, Britain is now advancing further and faster towards full employment than at any time in our lives.
And after decades of underinvestment, investment in schools is doubling, in policing doubling, in transport doubling, in housing doubling, and instead of œ40 billion spent on the NHS in 1997, by 2008 £110 billion for the NHS.
From being the party not trusted with the economy, this conference should be proud that Labour is today the only party trusted with the economy" (emphasis added).
The truth is that such a barrage of statistics and claims hides the fragility of Britain's economic position and falsifies the real situation of the working class. The most obvious example of the latter are the unemployment figures where all that has happened is that the part of the working class thrown out of work and never reabsorbed has simply been moved from unemployment benefit, where it is counted, to other benefits, notably invalidity, where it is not.
At the level of GDP growth, it is true that Britain has exceeded that achieved by its European rivals but it is still below that of America and Australia and, more significantly, it has also followed the global post-war decline in growth. The reversal in this trend over the last few years is not the result of a fundamental improvement in economic performance, as is clear from the below average level of productivity, but from the actions of the state in the preceding twenty or more years that has given Britain a relative advantage by increasing the exploitation of the working class.
One of the main ways it has done this is through the growth of debt. While state debt has remained constant, but relatively low, consumer debt has been allowed to grow substantially. Again, this is not an accident but the consequence of government policy to liberalise the financial sector.
State expenditure in Britain is on a par with that in other developed countries and current projects suggest an increase, which may be necessary if the anticipated slump in house prices leads to a reduction in the growth of consumer debt.
What underlies every aspect of the British economy is the action of the state; not as the owner and micro-manager of economic performance but as the setter of the context, of the direction, dynamic and pace of the economy. This is the reality of state capitalism in the 21st century and the British bourgeoisie practises it at a level befitting its history, experience and ruthlessness.
WR, November 2004