Latest post on Left Futures

If this is a recovery, why are we getting poorer?

At a certain point this year GDP will finally recover its pre-recession peak, 6 years or more after the recession. This will be the longest British slump in living memory and the most severe downturn since the Great Depression.

The government and supporters of austerity are keen to emphasise the fact that the economy is growing. The latest piece of supportive commentary comes from the IMF, which is projecting 2.9% GDP growth for the British economy in 2014, the fastest growth projected for any G7 economy.

Politically this is entirely understandable. Yet the problem remains that support for the Tory Party continues to flat-line at around the low 30s as a per cent of the opinion polls. Economically this reflects two different forces at work in the economy.

The economy is expanding at a very moderate pace, especially in light of the depth of its previous slump. But the majority of the population are continuing to experience a decline in living standards. Logically, it follows that as total output is growing, a minority must be experiencing a rise in living standards.

This is exactly what is happening currently. This widespread disaffection with or hostility to the government is fuelled by the general decline in living standards. The minority bedrock of support for the Tory party currently is cemented by a rise in living standards for a certain proportion of the population.

The chart below (Figure 1) shows the level of per capita GDP and Real Adjusted Household Disposable Income (RAHDI). RAHDI takes into account all the income of households, interest, rent, and social security as well as wages, after inflation and direct taxes are deducted. It is adjusted for the change (reduction) in public services.

While GDP per person peaked at just under £25,500 in 2007, RAHDI continued to grow and even in 2010 it was still above the 2007 level. That is, wages and benefits grew a little in the first part of the recession and taxes did not increase. The effect of the austerity policy is to push down both wages and social security entitlements so RAHDI fell continuously from 2010 onwards and it fell again in 2013.

Fig.1 GDP Per Capita & RAHDI, £ Thousands (Source: ONS)

Yet the ONS also reports that real household wealth has risen by £1,560 billion between 2007 and 2012, reflecting the rise in financial assets such as stock markets as well as the rise in home prices. This is an increase in financial wealth equivalent to one year’s GDP in Britain in the space of just 5 years. A further rise seems certain to have taken place in 2013.

This increase in financial wealth (shown in Figure 2 below) has occurred at the same time as living standards for the majority have fallen, as measured by RAHDI. The dual effect is a function of government policy in which VAT has risen, public services have been cut and public sector pay and pensions been cut in real terms, while the corporation tax rate has fallen from 28% to 20% and there are innumerable schemes to subsidise consumption, most notoriously ‘Help to Buy’ which has fuelled a further overheating of house prices. Only owners of two or more homes have any direct interest in rising house prices.

Figure 2. Real Household Wealth (2010 prices), 1997 – 2012 (Source: ONS)
No ‘consumption-led growth’

While this situation has highly negative and potentially dangerous economic consequences, the current dynamic in the British economy does serve to illustrate an important point about economic theory, with immediate and significant consequences for the incoming Labour government.

There is no such thing as ‘consumption-led economic growth’. Economic growth is a function of the amount and quality of the capital and labour deployed, as well as some contribution from technological change (‘Total Factor Productivity’). As consumption is not an input to growth, it cannot ‘lead’ it.

Most of the population is currently experiencing falling living standards while GDP is edging higher. This is because the main component of growth is consumption. This is shown in Figure 3 below.

In the latest data for the 4th quarter of 2013 GDP is still just over £22bn below its pre-recession peak. The only major expenditure component of GDP which is still significantly lower is investment (Gross Fixed Capital Formation). Investment is nearly £51bn lower. By contrast, government spending and net exports are both higher than when the recession began and household consumption is just under £7bn below the pre-recession peak. Consumption, including consumption by government has recovered. Household consumption by itself will recover at some point in 2014.

Fig. 3 Real GDP & Component, Q1 2008 to Q4 2013
At the most fundamental level all output can only either be consumed or it can be saved for investment. If output stagnates and consumption grows this can only be by reducing investment. Borrowing to consume simply postpones the reduction of investment in exchange for increased current debt.

This also explains why the current dynamic in the economy cannot be sustained. The accumulation of debts to finance consumption cannot continue indefinitely. The debt will be regarded as unsustainable either by the borrower (currently households) or by the lender (banks or their credit card companies).

At the same time, the continued shortfall in investment means the capacity of the economy is barely growing at all. Unless the capacity of the economy increases, that is the productive forces of the economy are developed, then there can be no increase in living standards.

In Figure 4 below the contribution of private non-financial firms (PNFCs) to the development of the economy’s productive capacity is shown. The red line shows their level of investment (GFCF). The blue line shows their level of capital consumption, which is used up in the production process, through consumption of machinery or equipment, wear and tear and dilapidation. The net contribution is the difference between these two, which could also be regarded as the Net Fixed Capital Formation (NFCF), after taking account of capital consumption.

Fig.4 PNFCs Capital Consumption & Investment (GFCF)

So, in nominal terms the PNFCs net addition to productive capacity was just over £29bn in 1997. On this measure, Net Fixed Capital Formation rose to just under £43bn in 2008. It fell by more than half to £21bn in 2009. But it has continued to decline and fell to a new low of just £14.7bn in 2013. This is less than 1% of GDP.

The ideology that private sector will deliver prosperity is evidently false. The policy of government ‘getting out of the way’ of the private sector is manifestly a failure. Cutting corporate taxes and attempting to finance them by government spending cuts (or increased VAT) has simply led to a debt-fuelled upturn and a net decrease in firms’ investment. The increased reliance on consumption and decreasing role of investment is making most of the population poorer.

To prevent absolute declines in GDP in the near future, net investment (NFCF) must rise. That requires an outright increase in investment. Yet the private sector is clearly unwilling to do this. Therefore only the state can play the leading role in providing the necessary investment that can alone lead to prosperity.

This article was first published in Socialist Economic Bulletin.


  1. Robert says:

    This is going to get the public out to vote, we all know prices are going up wages and benefits going down and the rich are getting richer the poor getting poorer, it has been for the last 100 years.

    When has the working class ever enjoyed a good happy life style with good earning potential in the UK, the only time was under Blair and he let in five Million immigrants to stop it.

    The Tories are the Tories the question is of course what is Newer labour the One nation re-branded Progress party.

    Labour is battling with the Unions telling us that’s sorted now lend us some money otherwise we cannot win the next election pretty please, and we are supposed to swoon and Miliband the geek gets his money.

    Yes your graphs show what we all know and shock horror under labour they will show the same, the rich gets richer the poor get poorer.

    Nothing new here then.

  2. Rod says:

    “only the state can play the leading role in providing the necessary investment that can alone lead to prosperity.”

    In addition to supporting austerity Miliband appears to want a smaller state. Hence his recent ‘devolving power’ (probably to private sector-favouring quangos) proposals.

    Isn’t it about time we had an alternative to the austerity-loving, pro-corporate LibLabCon?

  3. David Ellis says:

    Even a tiny amount of economic growth in an economy this large would require eye-watering levels of investment and the profits would not cover the upkeep. Inflating assest values and spending all our savings doen’t count.

    Not only that but even a tiny amount of capitalist growth will require and even more extensive exploitation of the environment that we rely on for life. It requires that we complete the task of sawing off the branch on which we are sitting.

    So leave all talk of economic growth to the fantasists and the suicidal. Leave it to those who fear revolution and rightly worry that without growth capitalism as a mode of production is doomed either to plunge humanity into a New Dark Ages or fall to the revolutionary demands of the masses. No, for socialists there is only one slogan for our time: a massive redistribution of wealth from rich to poor as the basis for a new and sustainable society.

    We must share the available productive work for a regime of full employment with each paid the minimum of a trade union living wage and we must socialise the means of production under worker-elected management.

  4. David Ellis says:

    In fact so vast are the levels of investment needed today to turn a profit there are now only 85 individuals with more wealth than the bottom 3.5 billion people.

  5. jeffrey davies says:

    with George and carney fiddling the figures then its more of the same until their get shown up has fiddlers of figures but its those 99percent who aint rich getting to do the austerity measure bit it aint for the rich 1percent they keeping the car industry growing with buying posh cars austerity is only for us

  6. Robert says:

    Naughty I’m disabled I buy a New car every three years out of my DLA so does a million other disabled people.

    The issue is really when after a recession has the poor not paid the price even when we had a labour Government, Today the sick the disabled and the poor are the Jews of the EU again the German are not so quick well not as much. But the UK have for some reason decided they need somebody to blame and it’s people like myself.

    cars are not the issue is how a country sees it’s poor it’s unemployed or the sick or disabled.

    The rich got a dam sight richer under the labour party so you have to ask why.

© 2024 Left Futures | Powered by WordPress | theme originated from PrimePress by Ravi Varma