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Britain isn’t booming – it’s in a crisis

Chancellor Phillip Hammond

The latest UK GDP data confirm that the British economy remains in a crisis. As government spokespersons never tire of telling us the opposite, and are dutifully echoed by the majority of the media, then it is important to set out the factual case on the economy and to explain where the discrepancy between rhetoric and reality arises.

Once the factual analysis is made the following points are clearly established:

  • The UK remains in a crisis
  • On key measures of the living standards of the population, the UK is in the worst position of all the advanced industrialised economies
  • Fundamental economic factors mean that this crisis is set to deepen
  • The project of austerity will be resumed with a vengeance in response to Brexit

The UK economy grew by just 1.8% in 2016. This is below the average growth level since the recession, which itself has been miserably weak. On a calendar year basis, the recovery began in 2010. Since then GDP growth has been an average of 2%, so 2016 was among the slower years in a poor recovery.

In the 7 years prior to recession, from 2001 to 2007, GDP growth averaged 2.75%. The effect of compounding means that even apparently small differences in growth rates have a large impact on levels of economic activity over time. In the 7 years since recession, a growth rate 0.75% lower leads to a GDP level that is nearly 5.5% lower.

Incomes stagnate, wages fall

Most people do not care about GDP levels, for the very reasonable idea that what matters to them is their own living standards. Of course, without GDP growth its level cannot rise and it is therefore extremely difficult to raise living standards in aggregate. But rising GDP is by itself no guarantee of generally rising living standards (Chart 1 below).

Chart1. UK GDP and Per Capita GDP Growth, % Change, 2000 to 2016

In a society with expanding population per capita GDP will always necessarily grow more slowly that GDP growth itself. But the change on this measure has been dramatic. The beginning of this period saw growth rates in per capita GDP in excess of 3%. In 2016 it was one-third of that level, at 1.1%.

Again the cumulative effect of compounding apparently small differences in growth rates is very substantial. In the 7 years prior to the recession the level of per capita GDP rose by 16%. In the 7 years since, this measure of average output per person has risen by just 8.7%. If the period of the recession is also included, when per capita GDP fell, then the increase in per capita GDP since 2007 has been just 1.9%. No wonder most people believe the economy remains in a crisis.

But the actual situation for workers and the poor is even worse than this data suggests. Severe recessions of the 2008-2009 type are caused by a fall in profits. Although workers are clearly not better off from a recession, the statistical effect of a sharp fall in profits is frequently to lower the profit share and so raise the labour share of national income.

In Marxist terms, the initial effect of falling profits lowers the rate at which surplus value is extracted. The purpose of austerity is to reverse this phenomenon, by driving down wages, raising taxes and lowering public spending that benefits workers and poor, at the same time increasing hand-outs to businesses and the rich, cutting their taxes and increasing privatisation of publicly-owned assets to boost profits, and so on.

Chart 2 UK Nominal Profits, £ and Labour Share of National Income, %

 

As we have already noted, per capita GDP has risen by just 1.9% since the recession began. But this is not shared evenly. At first, the effect of falling profits has been to raise the labour share of national income (as shown in Chart 2 above). Austerity is designed to reverse that and has been partially successful. In 2007 labour’s share of national income was over 51%. Now it is just over 49%.

Crucially, the labour share data is based on the compensation of all employees, including very senior management, whose total compensation has risen. Taking wages alone, the picture is even worse. The chart below is taken from the Financial Times. It shows 4 categories of countries in the OECD. The UK is on its own, the only country where the economy has expanded since the recession but where wages have also fallen.

Chart 3. FT- UK Alone in GDP Expansion and Wage Contraction

Running on empty

The GDP data reveal that the outlook for the economy is deteriorating. In a capitalist economy growth is determined over the medium-term by the accumulation of capital, first as profits then as investment. But profits growth remains weak and business investment actually contracted in 2016!

The UK has had many failed experiments in attempting ‘consumer-led growth’, and the current failure is set to come to an end. Without rising incomes, which must be based on rising output to be sustainable, then all attempts to force Consumption to lead the economy end in a debt-fuelled failure. As Investment is key to the growth of output, only Investment can lead the economy higher on a sustainable basis.

In 2016 Household Consumption accounted for almost the entirety of recorded GDP growth. GDP expanded by £35.5 billion last year, while household consumption rose by £34.6 billion. As we have seen incomes and wages have not risen to keep pace with consumption. In fact incomes have stagnated and over the medium-term wages have fallen. The growth in investment (GFCF, Gross Fixed Capital Formation) was just £1.4 billion over 2016.

This continues the post-recession trends in the UK economy. Startlingly, there has been no growth in Investment (GFCF) since before the recession! In 2007 the real level of Investment was £313 billion. In 2016 it was just £310.6 billion (Chart 4).

Chart 4. UK Real GDP and Components, 2007 to 2016, £ billion

SEB has repeatedly argued that it is not possible for Consumption to lead the economy. If it were possible, rising Consumption alone would be sufficient to induce rising Investment. But that is clearly not the case in the British crisis. The combined rise in Consumption from households and government since 2007 has been over £110 billion. But Investment has in fact contracted. The proponents of Consumption-led growth have no credible explanation for these developments.

Without Investment, and with Consumption forced to retreat without the support of rising output and incomes, then the medium-term outlook for the economy must be a gloomy one.

Tory way out of the crisis

Brexit poses a new problem in the British economic crisis, and one which will exacerbate the current trends of low investment and falling real wages. It is also likely to lead to job losses in key sectors.

The CBI estimates that 90% of UK exports to the EU will be hit with either tariffs or non-tariff barriers, or both. This would be a very large blow to UK businesses and their profits. The question that arises is therefore, how to increase profits in an environment of contracting access to key markets? The answer must be to do more of the same, driving down wages, increasing taxes, privatisation, reductions in social spending, and so on. The promise of the Tory government to its business supporters will be that all this can be accelerated once freed from the shackles of EU protections for workers’ rights, consumer standards or environmental regulations.

It is doubtful whether this can work. If output continues to grow very slowly, then labour’s share of national income must fall sharply in order to boost profits sufficiently to revive investment. The share of the total social product which benefits workers and the poor must be cut exceptionally harshly, and so on. But the probability of failure will not prevent the project from being initiated. It will be a Poundland Thatcherism, draping vicious anti-worker and anti-poor policies in the cloak of nationalism and ‘getting the country back’.

The rhetoric about Britain’s great economic performance is simply that. It has no factual substance. Living standards have fallen since the crisis. The UK is in a unique position among the advanced industrialised countries as GDP has expanded but wages have contracted. This is a conscious strategy to revive profits. Until they revive sufficiently, investment will not recover. But the new challenge of Brexit means that this project must be redoubled. From the perspective of the Brexit-supporting Tories, there must be a compensation for business to off-set the loss of access to its major market.

The struggle over the direction of the British economy is set to be a prolonged one.

20 Comments

  1. Mervyn Hyde says:

    We are as Steve Keen keeps pointing out, borrowing to survive.

    People are subsidising low wages with lending and getting into higher and higher levels of debt.

    This as we know is unsustainable.

    In the short term Brexit may mean loss of jobs, there are those that think another referendum to stay in would stabilise the economy and stop the possible haemorrhage of industry and commerce into Europe, I personally believe that is delusional, Europe is also in a state of collapse, fragile economies backed by the likely-hood of far right fascist groups gaining more influence will increase the prospects of a deepening recession.

    It was said by Lenin that if you want to lead the country, then you must lead the argument, the way we do that is to recognise what actually achievable, and what needs to be done to achieve it.

    The state of play in this country (although not unique to it) is that we have been told government is bad at creating wealth and only the private sector knows best, that the market is a perfect instrument will lead us to get the best value possible and generate real wealth for all.

    The reality has been totally the opposite.

    So what can we do about it? Well over the last thirty years we have all sat back waiting for those great private sector providers to keep their promise and create all these wonderful jobs, in essence whilst they have received massive incentives of tax reduction (as well as tax havens), cheap state assets, and unrestrained profits at record levels.

    In a nutshell, they have creamed whilst we all pay.

    So instead of sitting around waiting for these most benevolent purveyors of wealth, to make up their minds how and what they will invest in, we should by now recognise that has not happened and never likely to, so should take the bull by the horns and start planning our own futures.

    It should be obvious by now, but apparently isn’t that we don’t need the private sector, they operate on the periphery of the economy and are not central to it.

    The government is central, and what most don’t know is that the government creates all the money we have in circulation, yes they issue it through the private banks as debt, but do not have to and can issue it directly into the economy, the only thing standing in our way is ignorance.

    If we don’t create jobs then what is a certainty is that the private sector will not and is destroying more jobs as we speak.

    Need is the mother of invention, so long as we have a government dedicated to meeting the needs of people, we will have a successful economy.

    Carry on as we are, and poverty will inevitably increase.

  2. JohnP says:

    At last some useful stats from the thoroughly neoliberalism supporting Mr O’Leary. But he’s missed entirely the growing time bombs of both the re-inflated property and personal debt bubbles in the UK- which has driven most of the current , slowing, consumer spending “Best GDP growth figures in the EU” illusion. Nevertheless the crisis in UK business investment and the UK’s closely related dire low productivity relative to major competitors are well illustrated.

    A pity that the entire underlying reason for O’Leary’s faux “leftish” rhetoric, with Marx being name-checked for added credibility, is actually to enable O’Leary to yet again bore on about the dire consequences of Brexit.

    Yet ALL the dysfunctional features of the UK economy cited by O’Leary, and many more , ie, regional imbalance, gross sectoral imbalance towards finance and services, the property and debt bubbles, the massive fall in tax income from the rich and corporations, the disastrous training record of UK business , the ever increasing trend towards low skill, low wage businesses, feeding off unlimited cheap labour supply, are features of the neoliberal UK business model, and its relationship to the neoliberal EU.

    NOTHING from O’Leary at all, as usual, as to what alternative , even radical Left Keynsian, state-led, economic strategy , might pull the UK out of this long-established, EU “Four Freedoms” driven, toxic economic model ! Because of course that crucial radical Left Keynsian , state-led alternative economic strategy could not be carried out at all within the neoliberal straightjacket of the EU/Single Market !

    O’Leary’s proffered “sympathy for waged workers”, and his entire article, is just concealment for another of his endless arguments for staying in the EU – with no change to the eventually fully privatised, Big Business oriented, smashed trades unions, tax dodging, economic and social system this status quo arrangement supports.

    1. JohnP says:

      A minor point at first sight but an illustration of the supposed “expertise” of O’Leary as an economist being much less than he likes to project , with his endless graphs. O’Leary claims as an apparent universal “fact ” that :

      “In a society with expanding population per capita GDP will always necessarily grow more slowly that GDP growth itself. ”

      Not always true at all ! Only when the population increases but its GDP growth is based on current, or even falling, productivity and profit rates. It is quite true that in the specific historical situation of the current neoliberal, increasingly low skill, low wage, service industry-driven UK economy,
      where the Tory’s much boasted about “jobs miracle” is based on poverty wage (tax credit subsidised) self employment and unskilled precariat zero hour contract jobs, the crude growth in GDP has not helped the UK’s low productivity crisis at all. BUT this is entirely down to our current low wage, low skill, low investment, ever lower productivity, short termist gains,-oriented economic “growth” model.

      BUT, In an economy being progressive state-directed and encouraged towards a high tech/high value added manufacturing (in its broadest sense , including commodity production that appears “intangible” like software and consultancy) , based on high skills and ongoing high skills training/apprenticeships (the “German model”) , and a high level of investment in productivity enhancing automation, GDP growth would indeed be matched by enhanced profit rates arising from improved productivity, and per capital GDP would indeed rise, even as population increased.

      This doesn’t assume that the extra profits are shared out amongst the mass of the of the population of course – “averages” are very misleading things statistically – not without a legally unshackled and militant mass trades union movement to force a share of the bigger GDP and profit “cake”. Across Europe and the US pretty much all of the gains from productivity growth profit increases since 2008 have accrued to the capitalist class.

      Nevertheless it is the neoliberal, financialised, service industry and financial industries dominated , UK model that has produced the current UK economic crisis – a model the EU is specifically structured to maintain. Any attempt by a Left government to break out of the current, dysfunctional, laisse faire , sectorally unbalanced , UK economic model – involving as it would, significant nationalisation of key sectors, including banking, and the use of tariffs and other protective measures to safeguard key strategic industries , like Steel, is prohibited by the EU and Single Market Rules. And the availability of unlimited cheap labour supplies discourages the utilisation of productivity enhancing capital investment, and an ever greater preponderance of sweatshop, low wage, low skill, businesses.

      O’Leary is deeply dishonest in his constant selectivity and skewing of the figures to try and endlessly “prove” that leaving the EU will be a disaster. In fact both the EU and the Tory Brexiters have the same neoliberal desired end point, just different timescales. Socialists should have a completely different desired end point – and this , planned, high tech, high skill, high wage, economic objective cannot be built within the straightjacket of the EU.

      1. Mervyn Hyde says:

        There are I fear too many pro EU supporters that see the EU through rose tinted glasses.

        What we should be doing is contemplating how we really do take our democracy back instead of engaging in the farce around a hard or soft Brexit.

        The Tories will do whatever is politically expedient for them, our job should be to expose them and promise to do whatever it takes to bring power back to people.

        That means kissing goodbye to our special relationship with Trump and concentrating on investment and job creation here.

  3. Robin Edwards says:

    I do not believe we can talk in terms of crisis or depression or even recession any longer as these are things that happen to living or otherwise viable things. Capitalism is dead. What we are going through now is The Great Dissolution of Capitalism as it decays and disintegrates. Bannon, Trump’s right hand man, believe we are heading for an American civil war and a global war that is going to make America great again. He is deluded. Creative destruction has been replaced by simple destruction. He hankers for the 1950s but I think it is not too much of a stretch to describe these people and the ruling elites they work for as deluded idealists.

  4. Susan O'Neill says:

    O Leary has omitted several points of note in this article. We have recently had a budget that effectively promotes corporatism by attacking the small businesses – those who should have received investment and we have in opposition a Labour Party still governed by a majority of right wing neoliberals who would, given the opportunity, do little to change the pro austerity ideology. The pseudo Left(because Marxism would never have allowed the land and resource grab currently underway in the ME in concert with the US and other EU countries)have yet to acknowledge that unless we can halt the manic and outrageous Russophobia, we will miss out on the best opportunity to commit to a radical but economy saving alliance currently on offer. Investment in the economy is crucial to stabilize the economy and we do not have any means of achieving it with the two party system currently dominating the political scene. Corbyn and his small band of left leaning politico has no support and McDonnells plan will be sunk before it is allowed to surface. Capitalism is dying, but it is small consolation when it is corporatism that is barging it out of the way. This corporate led assault is as much to do with our alliance to the US and the IMF as it is the EU. Even if we should be able to achieve a healthy Brexit deal(unlikely with the Tories in charge of it)we will still be grovelling for trading partners unless we lobby against the illegal sanctions currently being levied against Russia. The referendum was a democratic vote to leave the EU and we must seize the initiative and denounce their petty US pleasing sanctions in order to make our way in trade negotiations beyond the confines of the EU and into markets which are not governed by Trade agreements with either the US or Canada.
    Just thinking out loud, but we are concerning ourselves with the minutia rather than the whole picture. When will O’Leary give us an article in which he accepts that we who voted remain, must embrace the future as dictated by a democratic vote? It isn’t helpful if we cannot unchain ourselves from the past, the truth is, that even if Britain had voted to remain in the EU, that circus would and will fail in a near future and we have to be looking elsewhere now if we are not to sink with it.

  5. Bazza says:

    I think Wolfgang Streekct in a New Left Review piece a while back perhaps nailed the crisis on its head – only quantitative easing is buying the rich and powerful time because “they haven’t a clue what to do.”
    (As with Brexit and an extra £60b of quantitative easing).
    We need state -led public investment, taxes on the rich and corporations, and I would like windfall taxes on big business, closing illicit offshore banking, a financial transaction tax, and more democratic public ownership.
    But the crisis and austerity was never meant to effect the rich with Tory tax cuts for: millionaires, corporations, hedge funds, private landlords with multiple properties,and few if any cuts for Tory Southern Councils etc.
    It was the poor including the working poor – working people in general and particularly in the North, East, West, Scotland and Wales who would pay face the full brunt as the crisis gave the ideological Tories the chance to reduce the size of the state and herald in the Era of Tory Neo-Liberal CHEAP LABOUR – privatisations, outsourcing, subcontracting, tendering, reclassifying as self-employed, zero hours etc.
    Our job is to expose the Tories as the Fake Champions of working people and true champions of the rich!
    We need to get our ideas over in simple language and as briefly as possible and to engage directly with the community perhaps best done bypassing the media.
    But be wary comrades the Right are using social media effectively to read people’s Facebook posts etc. so they can reinforce people’s prejudices and ignorance and it is having some success with Trump etc. as some would argue it perhaps builds is a nastier World but there is hope.
    We need to match the Right on social media etc. but also to appeal to people’s better nature.
    As a lovely human being who works in health with the homeless, refugees and the destitute recently said (and I think this is true for the World) “Most people want to be kind.”

  6. David Pavett says:

    There are many things about this article which make me doubt that TO’L has a grasp of his subject.

    (1) He says

    In the 7 years prior to recession, from 2001 to 2007, GDP growth averaged 2.75%. The effect of compounding means that even apparently small differences in growth rates have a large impact on levels of economic activity over time. In the 7 years since recession, a growth rate 0.75% lower leads to a GDP level that is nearly 5.5% lower.

    This seems to indicate that TO’L actually doesn’t even understand the basic arithmetic of compound percentages. I couldn’t quite believe this when I realised what he had done.

    2.75% corresponds to a multiplying factor of 1.0275. The compounding factor for seven years is 1.0276^7 = 1.209 which is an increase of 20.9% over the whole seven years.

    2% corresponds to a factor of 1.02 and 1.02^7 = 1.149 i.e. to a percentage increase of 14.9%.

    The difference between these is 20.9 – 14.9 = 6% and not “nearly 5.5%”.

    How did TO’L get “nearly 5.5%”?

    He must have done it by saying that 2.75% for seven years gives 7×2.75 = 19.25% and 2% for seven years gives 2×7 = 14%. The difference is then 5.25% i.e. nearly 5.5%.

    This latter calculation ignores precisely the compounding effect to which TO’L refers and seems to be good evidence that he doesn’t understand the basic arithmetic.

    (2) To give a radical ring to his piece TO’L says

    In Marxist terms, the initial effect of falling profits lowers the rate at which surplus value is extracted.

    But this is, “in Marxist terms”, nonsense. Profits are a consequence of surplus value and not a cause of it. TO’L claim is rather like saying the fact that a body accelerates causes the force applied to it to increase when it is clearly the other way round.

    There is much else I could have picked on in this piece but that will have to do. I don’t think that TO’L is a reliable guide in economic analysis. I would like Left Futures would look for contributions from economists who are rather more sure footed. Does anyone out there know such people?

    1. Robin Edwards says:

      Falling rates of profit are the result of increased constant capital over wages which means precisely the opposite to what the writer claims: the amount of surplus value extracted from each worker shoots up.

  7. Robin Edwards says:

    Steve Bannon, Trump’s closest political adviser, desperately wants to believe that capitalism can be born again, that a civil war and a new global conflagration can make America great again. Creative destruction so-called, the euphemism the ruling class uses for the periodic collapses of its economic system that drives workers onto the dole and into the trenches, will restore America to the position of global hegemon and the 1950s, the so-called Golden Age of capitalism, will live once more. He is a delusional, idealist, fascist freak show. From here on in with capitalism there is only destruction. The current political economic arrangements characterised by Pax Americana as established after WW2 and as modified by the neo-liberal revolution of the eighties and the subsequent collapse of the Stalinised Soviet Union have become an absolute fetter on capitalism’s further development. It is stagnant, sclerotic, super-monopolised, bankrupt and dead. Capitalist globalization is unravelling at a tremendous pace. All the institutions of Pax Americana from the WTO to NATO to the EU are crumbling fast. Anarchy is returning to the system of international relations. The era of war and revolution so long put on ice by the Cold War is back on the agenda and this time it is to the death. There are no possible political economic arrangements that can replace the current ones and give capitalism a new lease of life. Imperialism is the highest form of capitalism and US-sponsored globalization was the highest stage of imperialism. No mode of production passes into the history books until it has entirely exhausted all of its potential and energy. Capitalism has arrived and even surpassed that point. It is now as it was prophesied it must inevitably be in the end a case of socialism or barbarism, socialism or a New Dark Ages, socialism or death.

  8. Karl Stewart says:

    Note to admin/editor:

    Why are the racist postings from “Zenobia van Dongen” still up on this thread?

  9. Karl Stewart says:

    This is a quote from the Left Futures comments policy:

    “We’re on the Left. Racist, xenophobic, homophobic and sexist comments, and derogatory comments about people with disabilities or mental distress will be deleted.”

    Why are the racist comments from “Zenobia van Dongen” still up on here?

    1. JohnP says:

      There is apparently a lot going on with this Left Futures site, Karl. Many of us regular posters were recently subject to automatic exclusion. I had to change my username to recover access, as did David Ellis (for the third time in his case !).

      That may explain why the bonkers paranoid blatantly racist Islamophobic posts from the so-called “Zenobia van Dongen” haven’t been deleted and this quite obvious racist Troll excluded. The site may have been subject to a disruptive hacking attack. None of the more regular , non-racist, Right Trolls have been excluded though !

      The regular inclusion of the worthless , misleading graph-filled, “economic articles” from uncritical EU enthusiast, O’Leary, are less easy to explain away . That is down to a much more damaging ,fundamental, long term ideological/political “hacking attack” on the entire Left for 30 years by the neoliberal hegemony – of which O’Leary is a , probably unaware, representative and apologist !

      1. Karl Stewart says:

        It’s been flagged up now several times and I’ve tried messaging Left Futures admin direct, but no-one seems to be taking any notice.

        It’s quite worrying that a clearly racist Islamophobic and frankly downright fascist posting has been allowed to remain up on this thread for over 24 hours now.

        Message to Left Futures admin: Is there anybody there???

  10. Karl Stewart says:

    It’s now three days since the racist “Zenobia van Dongen” started posting his pro-fascist and Islamophobic rants on here and still the administrators of this site – if they exist – have taken no action.

    It’s a bit like allowing racists to paint racist grafitti on your own house and just leaving it there because you can’t be bothered to remove it.

    If there are any admin people or editorial people, please remove this racist rubbish from here.

  11. JohnP says:

    The racist posts have gone ! Hopefully the Zenobia Troll is permanently banned.

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