Reply #59: The UK economy slumps

[Ghost Dog]

The U.K. economy slumped in the first quarter of 2009, in the biggest contraction since the rise of Margaret Thatcher in 1979. GDP fell 1.9% after declining 1.6% in the previous quarter.(Note 1) Particularly vulnerable to the crisis of the world’s financial system, the UK with the greatest dependency on financial investments of any nation in the world has seen the revenues of its banks and finance houses slump, while at the same time desperately trying to recapitalise its banks against their current losses.

U.K. business services and finances shrank 1.8 %, the most since records for the category began in 1983. Manufacturing contracted 6.2 %, the most since at least 1948. This is the first time GDP has contracted by more than 1 % for two consecutive quarters since modern records began after World War II. UK unemployment rose in March to the highest level since Gordon Brown's Labour Party came to power in 1997.

Debt, debt, debt

Alistair Darling, New Labour’s chancellor, forecasts that the budget deficit this year will rise to £175 billion ($257 billion) or 12.4 % of GDP, the highest of any G20 nation. But Labour’s money has not been first of all directed towards reflating the economy, saving jobs or staving off crisis. Its Keynesian reflationary measures like its VAT cut and car scrapping scheme are only around 2% of GDP, amongst the lowest of any of the major powers. Rather Labour has spent £1.4 trillion ($2.1 trillion) bailing out British banks.

The government has approved the sale of a record £220 billion of gilts, or government debt, in the current fiscal year - 50 % more than last year, more than doubling government debt, which will rise from around 37% of GDP to around 80% of GDP. As debt is paid for out of taxes, this will put an ongoing pressure on government revenues and serve as a perpetual excuse to cut public spending.

It will be supplemented by so called quantitative easing, the Bank of England is printing £75 billion to buy bonds after it cut the key interest rate to 0.5 %, the lowest since it was founded in 1694. This aims to reduce interest rates by lowering the price of guilts without adding to the debt burden. Unlike the sale of gilts, It increases the states assets at no cost or devalues its debt by the same amount. Indeed the effects of quantitative easing are built into the government’s estimates for nominal (i.e. not real) GDP growth after 2011. New Labours forecast growth rates, roundly derided as too optimistic, are based on an accounting trick by increasing the money supply by around 5% of GDP, the nominal value of GDP will increase by the same amount.

Markets not happy

But the UK is not the USA. Debt holders know when they are being taken for a ride and as the Bank of England has opened the printing presses, the pound, gilts and U.K. corporate bonds have fallen on concern Britain will lose its AAA credit rating. Moody’s Investors Service said the government is “taking risks” with public finances. Britain’s “balance sheet is deteriorating rapidly, due to a combination of weakening revenues” and bank bailouts, “the maintenance of the government’s AAA ratings relies on the assumption that the current deterioration of debt affordability metrics is reversible over a foreseeable horizon,” if the government chooses “to operate with a structurally higher level of indebtedness, this would likely have rating implications over time”.

By printing money the UK government devalues the debt it owes. That's no good for the City. The financiers are determined that they will not be the ones to pay for the crisis that they created.

Battle postponed

The scale of the crisis was anticipated in Alistair Darlings budget earlier this week. Darlings strategy is simple. He aims to ride out the worst of the recession with unprecedented levels of government borrowing before making the working class pay a couple of years down the road. The predicted contraction of public services in 2011 and on is, as the Institute of Fiscal Studies have shown more severe than that attempted under Thatcher in the early 1980s. Its even worse when the effect of rising debt repayments are dialled into the calculation.

Darling’s pledge to raise taxes on the rich has been hailed as the return of class politics. It is not. Darling will increase the top rate of income tax from 40% to 50% and close loop holes for pensions with the aim of producing an estimated £7bn from the ultra rich financiers, who will now control the UKs state finances. But only so that he can pay them a part of what he now owes them.

Oh and Kate Moss and Wayne Rooney may lose £500,000 a year.

The real victims of the states indebtedness will be the workers. Darling aims to postpone the class war for a couple of years – at least on New Labour’s timetable – he wants the assault on public services will start in 2011, when he hopes that the world economy will once more be on the upswing.

For the first time in a decade, whoevers in power, there will be a major class wide assault on public services. The piecemeal privatisation. The cushioning of PFI with new money. The replacement of public with private services. That’s all over.
Darling’s budget is a declaration of war.


(1) Note unlike the USA the UK does not report its GDP at an annual rate. To get the equivalent with the US multiply by four, so this quarter was -7.6% annualised.

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