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

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.

9 Comments

  1. Mervyn Hyde

    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

    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.

  3. ”Europe is also in a state of collapse, fragile economies backed by the likelihood of far right fascist groups gaining more influence will increase the prospects of a deepening recession.”
    How does this reasoning apply to France? The “Socialist” Party’s presidential candidate Macron is the only one capable of beating the right-wing National Front. But Macron is the apostle of austerity, hence by the author’s reasoning the champion of the parasitical financial oligarchy, which unanimously refused to lend to Marine Le Pen’s campaign. A Le Pen victory in May would release France from the shackles of €-austerity imposed by the European Central Bank, the ringleader of the parasitical financial oligarchy.
    Consequently the French working class would likely profit by a National Front victory. If this reasoning is sound, then the conventional political spectrum has been inverted, since the right opposes the ruling oligarchy, which is in turn championed by the left.

    1. Mervyn Hyde

      In truth I don’t know much about Le Pen to say categorically what her policies are, but when you come to power on the back of attacking minorities it goes without saying that is heading for serious trouble, we know from our own experience that when you justify immigrants as the problem then right wing people react to type, and one of our Labour politicians suffered the consequences of that.

      I doubt Le Pen is a socialist and so won’t introduce radical solutions from the left and will probably do as all right wing governments have in the past, embrace the establishment and turn on the children that gave it power.

      Either way with Macron or Le Pen I can only see a breakdown in society, Austerity will kill off more of the economy. That said staying in the EU ties France to the Euro which automatically means more austerity. Leaving the EU under Le Pen would allow them to reinstate the Franc, but I suspect Le Pen would leave the power to create money with the Banks, thereby continuing along the path of austerity, banks need borrowers.

      As Robin Edwards points out, Capitalism is eating itself up, that was forecast hundreds of years ago, but it has taken the technological advances that we have today to bring that about, when capitalism doesn’t serve peoples interests, and merely seeks to exploit them, eventually people find through their experiences that there has to be a better way, we are at that point now, so it is up to us to deliver the alternatives.

      George Monboit has written about the Neo-Liberal agenda and showed how powerful American corporations have changed the political landscape over the past forty to fifty years, and this article by him, outlines how they achieved it, the institutions and lobbyists that are involved.

      https://www.theguardian.com/commentisfree/2017/feb/02/corporate-dark-money-power-atlantic-lobbyists-brexit

      If we are get our democracy back then we need drastic actions to take back control of our economy, that means taking control of money which is in the hands of the very people that crashed our economies in the first place.

  4. Robin Edwards

    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.

  5. “Minorities” my eye! It’s Islam, that’s the fly in the ointment. I am constantly amazed by the blindness of conventional liberals to the alarming penetration of Islamism and its attendant evils into Western society over the last four decades. Which was no accident , but instead the intended outcome of Sowdy Arabia’s unprecedented campaign to export Wahhabi liquidation theology on a worldwide scale. This effort has been very successful. It is masterfully recounted in the Wikipedia article “International propagation of conservative Sunni Islam”. It has been empirically proven that nature of the French aversion to North Africans and their ilk is RELIGIOUS in nature! It was discovered by means of the multiple job applicant technique.

  6. Islamists are expert at the art of passing Muslims off as “just one more (DUSKY!) minority”. Unless Western elites start showing some backbone, they will be acquiescing in the establishment of Mohammedan hegemony over the West, in the guise of reasonably accommodating vile and primitive superstitions. .
    It would be nice if the liberal elites could muster the resolve to take charge of the situation and permanently put the Salafilth Column in the West out of business without treading on the toes of sundry other segments of society. But what have you, those liberal elites abdicate their responsibility to restore order in a humane fashion. Accordingly the Fascists will have to do it. Such is the brutal mechanics of ideology.

    1. JohnP

      Excuse me comrade monitor/s of posts on Left Futures, but this is an article about the economics of the UK. Nothing in this article gives a rational , or legitimate excuse for “Senobia van Dongen’s” crazed paranoid rant against Muslims in Europe. “Mohammedan hegemony over the West” indeed !

      This sort of blatantly racist post needs to be “No Platformed”, or Left Futures will soon be awash with every Islamophobe nutter under the sun !

      1. Robin Edwards

        Only anti-Zionists get blocked here. Islamaphobes welcome it seems.

        1. Susan O’Neill

          Your comment is awaiting moderation.

          How in the world did an Islamaphobic rant ever become a rational response to the article given us by O’Leary?

  7. Susan O’Neill

    Your comment is awaiting moderation.

    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.

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