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