Thursday, 10 April 2014

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

By Michael Burke

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.

Wednesday, 2 April 2014

Investment not Trident

By Michael Burke

The Campaign for Nuclear Disarmament has produced a new pamphlet, People Not Trident. It argues against the colossal waste of funding needed to a replace the Trident nuclear weapons system. It makes the case that the £100bn saved could be used to invest in a whole host of sectors, housing, education, international development, the switch to renewable energy, and so on.

The full pamphlet can be downloaded here (pdf).

Almost no area of government spending has been spared from the axe of austerity. Housing, health, education and social security payments have all been cut. Pay and pensions, public sector jobs, even support for people with disabilities have all been hit.

Yet the one important exception to this is the government’s commitment to the replacement of the Trident nuclear weapons system. Yet the total cost of replacing Trident amounts to £100 billion.

To put this in context, £100bn on replacing Trident is approximately equivalent to a full year’s public sector deficit, on current performance.

Chart 1. Budget deficits and Trident replacement costs compared

In the most recent Financial Year the underlying deficit[i] was £110bn. Yet the proposal is to spend £100bn on replacing Trident - almost exactly equivalent to a single year’s budget deficit. This is despite the fact that the stated aim of the Coalition has been to reduce that deficit.

A wide variety of organisations, campaign groups and activists (including the current author) have contributed to the pamphlet to show what could be done with all, or even a fraction of the £100bn that would be wasted on replacing a weapons system of mass destruction,.

Crucially, investment in all these areas has a beneficial spin-off on output in other sectors, on prosperity and on jobs. In the jargon these are known as the ‘multiplier effects’. By contrast, Trident and its possible successor has none of these effects. The economic effect of nuclear weapons systems is a fraction of the initial outlay. This is because immensely high-tech equipment such as this can only be used in the event of global nuclear conflagration. It cannot be used to improve economic activity.

Only a government which wanted to intimidate the rest of the world would waste £100bn in replacing an unaffordable nuclear weapons system. A government committed primarily to the well-being of its citizens would not even consider it.

[i] These data are for underlying deficit. In line with Office for National Accounts practice they exclude two important accounting items; changes to the treatment of the Royal Mail Pension Fund and the impact of the purchase of UK government securities by the Bank of England

Friday, 21 March 2014

Labour will inherit a crisis not a recovery

By Michael Burke

For once it seems that the widespread reaction to a Budget was correct. Chancellors usually bury bad news in the detail of a Budget released long after their speech. However the dire electoral position of the Tories means that the main changes were announced with a flourish. The personal income tax rate threshold was raised to £10,500 a year, which the Institute for Public Policy Research has shown mainly benefits the highest earners. In addition, the annual amount of tax-free savings was boosted to £15,000 a year, which is actually close to the average (mean) disposable income in Britain. This was a Budget to shore up the Tory vote among higher earners and savers and staunch the defections to UKIP.

Osborne did nothing to address the economic crisis. This is not because the crisis is over or a self-sustaining recovery is underway. That is a dangerous delusion. Even the forecasts from Office for Budget Responsibility (OBR), which has proved to be significantly over-optimistic on growth since it was established, project only an annual average growth rate of approximately 2.5% over the next 5 years.

Embedding poverty

SEB has previously shown that a huge gap has accumulated between the current level of economic activity and the previous trend rate of growth. Even if 2.5% GDP growth materialises that gap will not close. At best it will not widen further. The poverty and misery arising from the current crisis will become embedded in the economy.

To arrive at its forecasts the OBR has made the following assumptions:-
  • Wages will only rise half as fast as GDP growth
  • Average real wages (after inflation) will not rise at all, yet
  • Non-wage incomes (salaries, interest and rent) will rise sharply
  • House prices will rise by over 30%, and
  • Stock markets will rise by 27%
Even under the OBR’s forecasts it is clear that all the benefits of projected growth are claimed by high earners, the rich and the owners of capital. Even if all these gains were spent by the rich (which is never the case) this would be insufficient to power the growth the OBR is projecting. The main contribution to growth envisaged by the OBR over the next period is a rise in household debt. This is shown in the chart below (Chart 3.33 in OBR data).

Fig1. OBR Projection of household debt

Reversing the post-crash trend, the OBR assumes that households will increase their debt on average from 142% of their incomes currently to 166% by 2019, close to levels preceding the crash. Under these officially-sanctioned forecasts most households will see no rise in incomes, only a rise in debt. They will be worse off in 5 years time than they are now.

It is not necessary to enumerate all the ways in which this forecast might be proven wrong, if for example there are increases in interest rates or inflation picks up because the currency falls, and so on. The key point to note is that for most people the crisis will be an enduring one, at least a decade long.

Causes unaddressed

The crisis will continue because its root cause has not been addressed. Currently the fall in investment is approximately three times as large as the entire fall in GDP since the begnning of 2008. Investment has fallen by £58bn and GDP is still £21bn below its previous peak in the 1st quarter of 2008.

In fact, while GDP inches ahead in the longest-ever recession, investment (Gross Fixed Capital Formation) continues to decline. In addition, as the statisticians refine their understanding the most accurate position, the data for investment has mainly been revised lower. This is shown in the chart below (Chart in the OBR data).

Fig. 2 Business investment & its revisions

Total investment in Britain is one of the lowest of all the industrialised economies over a prolonged period (as shown in Fig.3 below, Chart G in OBR data). Business investment is currently equivalent to just 8% of GDP, also one of the lowest. Yet the OBR is effectively forecasting that the problem will disappear.

Fig.3 Total investment as % of GDP in industrialised countries

The OBR forecasts that business investment will rise by 50% in the course of the next 5 years- which has never happened in Britain outside of war. This means investment will be growing approximately 5 times as fast as the rest of the economy- even though, according to the OBR, there will be a tremendous profits squeeze, with profits falling from 33% of GDP in 2012 to 27% in 2018. These are outlandish forecasts. Only a policy to control and direct investment could produce such results.

Meanwhile, minimal wage growth, rising household debt and the investment slump are all related. It is impossible to create new, high-skilled high pay jobs without investment. The government can boast that one million jobs have been created in the last two years. But less than half of these have been for full-time employees and many of those are on zero hours or minimum wages. In order to finance any increase in spending at all, workers whose real wages are falling are obliged to drawn down savings or take on new debt.

This is the mess that the Tories will bequeath to Labour. Only a thorough break from the policies of austerity can solve it.

Tuesday, 18 March 2014

That Tory recovery in perspective

By Michael Burke

This week George Osborne will announce his latest Budget. The specific measures in this Budget were not published at the time of writing. But it is a fairly safe assumption that he will boast that the economy is on track, and that there is a recovery. This is simply an exercise in redefinition.

The economy grew by just 1.9% in 2013. This is following a period of historically slow growth, the deepest recession in living memory and the weakest recovery on record. Yet many commentators and not just explicit supporters of austerity seem to believe this means we are automatically on track for a genuine recovery with all that means for growing jobs, rising real pay and improving living standards.

Unfortunately both the celebrations and the optimism are misplaced. Of course this does not mean that the economy will never grow again. It is even possible that growth will be a little better in 2014 than it was in 2013. But after most recessions the economic rebound is usually fairly strong. After a very steep recession the recovery should be very strong. That is not the case currently.

Annual growth in GDP of just 1.9% in 2013 is the best since 2007. But that is really a measure of the crisis of the economy and how badly policy has failed.

Prior to the current crisis, in the 20 years to 2008 the average annual growth rate of GDP was a little under 3%. In the same 20 year period from 1988 to 2008 only 3 years have seen worse growth for the British economy than last year’s 1.9% and all of those were associated with the recession under the Tories in the early 1990s (the ERM crisis).

So, a growth rate associated in the past with crisis is now redefined as recovery and heralded as success. Crisis is redefined as success; stagnation is now growth.

Current growth rates also remain well below the previous trend. That means the gap between where we are and where could or should have been is actually getting wider. It would take many years of sustained growth above that 3% rate in order to close the gap between the actual level of GDP and its previous trend. No major forecasting body suggests anything like that is going to happen over the next few years. The chart below shows the trend growth of Britain’s GDP in from 1988 to 2008.

Fig.1 Trend GDP Growth From 1998

This growing gap matters because it effectively means living standards cannot significantly recover without altering the current structure of the economy. Instead, the misery of the economic slump will become embedded as a long-term feature of the economy.

In all probability living standards for most people will not rise for several years and for many they will fall further unless growth accelerates significantly. Austerity policies have the effect of ensuring that the lion’s share of any recovery goes to a minority of the population.

Most Budget coverage is a deluge of minutiae about minor changes to the tax system. But the most important fact is this: talk of recovery is entirely misplaced. For the overwhelming majority of the population austerity policies mean that living standards will continue to decline.

Tuesday, 11 March 2014

The People's Assembly National Recall Conference 15 March 2014

The People's Assembly National Recall Conference

15 March 2014, 10AM - 5PM

Emmanuel Centre, London SW1P 3DW
Register for the conference:
Conference PackClick here

Motions Document: Click here
The final motions document will be available on the day. If we've missed anything out please

Conference Highlights include:

National Union of Teachers General Secretary, Christine Blower, will be discussing how we make the teachers' strikes a success and how we bring that energy into the demonstration on 21 June.
Kirstine Carbutt, a leading Unison member in Doncaster who has just organised a seven day strike against Care UK, will be relaying her experiences on how to organise successful workplace action.
PCS general secretary Mark Serwotka and the People's Charter will be proposing an alternative to austerity.

Francesca Martinez will be closing the conference talking about why we need a mass movement.
Steve Turner, Unite the Union Assistant General Secretary, will report from Unite's community membership strategy and will be chairing part of the day.

Natalie Bennett, leader of the Green Party, will be addressing the conference about how we bring climate change issues into the anti-austerity movement.

Dr Jackie Davis will propose plans to campaign against the sell off of our NHS.

Lindsey German from the Stop the War Coalition will talk about why the anti-war campaigns need to remain high on the agenda.

And trade unionists, community activists, students and pensioners will be debating the next steps in the campaign against austerity.

As well as being the democratic body of the People's Assembly, we want to use the conference as a way to strengthen and grow the organisation. So please do get in touch with trade union branches, campaigns and community groups locally and ask them to send delegates. We will be sending out a formal invitation and model motion which can be adapted to send to local organisations in a following email over the next few days.

We have set the delegate entitlement for local People's Assembly groups quite high to ensure newer activists are able to attend the conference.

Details in brief:

People's Assembly Delegate Conference
Date: 15 March 2014 Time: 10am - 5pm

Venue: Emmanuel Centre, Marsham Street, London, SW1P 3DW
Nearest tubes: Westminster, St. James’ Park, Pimlico
Buses: 88, 87, 3, 11, 24, 211, 148, 507, 53, 453, 12, 159

See the Emmanuel Centre website for detailed maps:

How to book your delegates places:
Book your places through our eventbrite page for the People’s Assembly Delegates Conference now:

Should you require another format please let us know.
Please do get in touch if you have any questions. We have set up a special email address for all communication to do with this event:

Google map and directions
CONTACT Clare · · 0208 5256988
TICKETS £5.00 GBP · Purchase tickets