A remarkable insight has just come, not from the ETUC, but from the EU employers which is worth listening to. Their view is that Britain is steadily turning into a third world country – low pay, low productivity, low growth, low capital investment, heavily indebted, and sinking.
Manufacturing has been hollowed out by foreign competition, the deficit on the traded goods account has been increasing massively, R&D is slipping, the wage share has plummeted, inequality has ballooned, and an over-dominant economy is steadily financialising the whole economy.
To cap it all, wages and even median incomes, driven down by globalisation, deregulation and the growing power of huge agglomerations of private capital able to wield enormous financial muscle in the form of private equity, can no longer provide an adequate base of aggregate demand to keep the capitalist machine going.
In the view of the Federation of European Employers this has two key destructive results. One is that instead of productive investment in plant and machinery to feed a manufacturing recovery, firms find it more profitable to invest in financial assets and indeed not necessarily to invest in the UK at all but to make their manufacturing base abroad and through transfer pricing and other devices maximise their financial gains (and minimise their tax) offshore.
This can only accelerate the UK downward spiral, and Osborne’s policy of cutting the tax for multinationals which open a financial company in a tax haven from the current 23% to 5.5% in 2014 can only reinforce it further. The other perverse effect is that the abundance of cheap labour encourages employers to expand output by hiring or hanging on to low-paid employees (hence the rise in part-time, temporary, under-employed workers over the last year) rather than trying to keep costs down by investing in in new plant and machinery.
In his latest mini-budget Osborne has worsened this problem by cutting benefits and tax credits further, the brunt of 60% of which will fall on persons in employment rather than out of work, thus lowering still further the crucial level of demand in the economy.
Of course it has been a neoliberal axiom that a higher profit share will generate higher investment, and thus increase growth and employment. Empirically however that is not what has happened – and many of the premises of neoliberal theory need to be checked in practice because they are often assumptions which are either wholly or partly fictitious.
In this case the profit share rose from 25% to 30% during 1980-2010, but contrary to neoliberal presumptions investment fell over the same period from20% to 15% and is still stubbornly falling. Osborne’s adamant refusal to stimulate demand in budget after budget, thus keeping demand on the floor and removing the incentive to invest, has again exacerbated this fundamental flaw in current British economic policy.
