The long term implications of last week’s budget

Many people have described last week’s budget as against the young and for the pensioners I think this miss's the glaring point that it was for me probably the most class based pro elite budget George Osborne has come to the house of commons with to date. The long term implications for this budget and what it could do to the economy could be wide and quite stark. I do think the grounds are being laid now for the next economic crisis around the globe and the UK will not be able to avoid this so much this time. China which has a huge shadow banking system worth an estimated 50% of GDP is very unstable and that isn’t starting to mention the USA with its huge debt overhang and the euro crisis which on the face of it seems like it has gone away although things are still not right across the single currency. We have seen austerity budget after austerity budget since 20011 from the coalition government and even on George Osborne’s own omission he has failed to eliminate the deficit this parliament which he promised to do. The reason why our loyal opposition is not making more of this you ask? Well they too are wedded to the same financial path of austerity as the Tories and the lib dems. They are all quite literally in this case all in it together. Some may think the recent "recovery" if you can call it that is cause for optimism but I’d be far more cautious personally. "The scars of 2008 remain and the UK economy is in big trouble with austerity and declining living standards here to stay. Below are five things about this year’s budget; a document which outlines a ‘recovery’ based on presumptions that, quite simply, aren’t going to happen 1. Low interest rates are setting the stage for another bubble just like the one that preceded the crisis of 2008. Yesterday Mark Carney, the governor of the Bank of England, criticised the BoE and his predecessor, Mervyn King, when he said that its almost exclusive focus on low inflation meant it had failed to also keep an eye on financial stability. In other words the BoE had no problem stoking bubbles with low interest rates if that meant it also kept a lid on inflation. Interestingly enough Carney also pointed out that “It doesn’t take a genius to see that similar risks exist today”. He noted how risks were brewing because of the current period of of ultra-low interest rates – historically without precedent – saying that this could breed “potential complacency and excessive risk-taking” in financial markets. Sound familiar? Near 0% interest rates are necessary for any growth at all in the UK at the moment but they are also creating similar conditions which led to the last financial crisis. 2. The OBR is plucking numbers from the air on projected productivity gains (again). The economy can grow for a while yet, especially if unemployment falls to 5-6%. Alongside big numbers entering work (and workfare) is however the unresolved (and often ignored) problem of falling productivity. If and when unemployment does fall as low as 5-6% productivity *will have* to increase for growth to continue. The Bank of England expects productivity (output per hour worked) to go up in the next quarter as does the Office for Budget Responsibility. Indeed the OBR is today saying that they anticipate 1.2% productivity growth in 2014 and 2.2% growth the following year. The only problem is that this’ is completely at odds with all the data since 2008 and all of the BoE’s predictions over the same period. Where do those numbers come from? My guess is that it’s a case of the OBR and the Bank of England collectively sitting on their hands and saying ‘productivity has to go up sooner or later, right?’ For more on why productivity matters for any prospective economic ‘growth’ check out the recent video we did for #NovaraTV 3. Its also making ridiculous claims on future wage growth. Sooner or later the Bank of England is going to have to increase interest rates. That will probably happen later this year and if wages are still not keeping up with inflation by then (as has been the case for the last six years), consumer demand - and growth – is likely to take a hit. If wages don’t grow this year and rates go up, even by half a percent, that has huge consequences for the economy. As I recently wrote on the LRB blog: “Late last year the bank reported that average outstanding mortgage debt remains high, at £87,000, and that any rate rise not accompanied by an increase in real wages would cause serious problems. The number of households ‘most at risk of financial distress’ would double to nearly one in six if their mortgage rates went up by 2.5 per cent and their incomes did not improve.” Wages have been in decline for six years. If it stays that way and interest rates begin to inch back towards their historical average (even that of the recent past) the government has big problems. Wage growth is now crucial and without it any increase in interest rates might prove politically difficult. Furthermore the projected increases in household consumption - around 2.5% between 2014-18 – make little sense if interest rates are going to go up even a few percent. 4. … and on exports. The OBR expects export growth of 2.6% in 2014, rising to 4.7% in 2015 and 5.0% in 2016. In 2012 exports of goods and services increased by 1.1% (with imports increasing by 3.1%), while in 2013 that figure was 0.8%. That was in the context of reasonable global growth with the US and the BRIC economies seeing more demand than they probably will after 2015. In spite of that the OBR is projecting increases in UK exports not seen in the last several decades. That is all within a context where one of the UK’s biggest exports - oil – is seeing falling output. The projected numbers on UK exports - averaging around 5% over the period 2014-18 – is utter nonsense and without precedent. Seen alongside falling North Sea output I would argue it is impossible. While industry surveys have been pointing to increased export orders for a while, Samuel Tombs, an economist at Capital Economics, claimed these have been “misleadingly upbeat . . . we would not place too much weight on them”. The OBR is making claims for the next half a decade on the back of confidence surveys and figures for very short period – it’s a bit like when your mate shows you a video of a 12 year old wonder-kid on YouTube saying they are going to be better than Cristiano Ronaldo. 5. …and yeah, on fixed investment. Business investment is still 26% lower than it was in 2008 and while there was a dramatic increase in business investment in the final quarter of 2013 – 8.5% – that was the outlier in the data, not the norm. The OBR is now confidently predicting that kind of growth in business investment not just for the next three months, or even the next year, but all the way through to 2018. Compare that to 0.7% growth in business investment in 2012 or, worse still, the 0.5% contraction in 2013. It’s a bit like saying that your best striker scored a hat-trick in the last match of the season and is therefore going to score 150 goals next year. Clutching at straws doesn’t do it justice. The UK, in spite of a massive currency devaluation in 2008, still has a major trade deficit and if there is any truth in this year’s budget it is the realisation that the UK is not going to become a net exporter any time soon. Alongside that massive trade deficit – and exports of goods fell in the three months to November last year – is a budget deficit of over £100 billion. The Treasury is now saying that that deficit will be eliminated by 2019 with a small surplus being run that year – a ‘return to normal’. This is of course complete nonsense: the UK has only run five budget surpluses since 1980 and that was with the bonanza of North Sea oil and the cash garnered from privatisation of, well, pretty much everything. It doesn’t take a genius to work out that budget surpluses - without outlandish projections of growth, investment and productivity gains – are impossible. Final point. This data states that by 2020 households will be as indebted as they were when the economy tanked it in 2007/08. Less ‘march of the makers’ more march of the mickey-takers." 5 things about this year’s budget came from the excellent Aaron Bastani Over at novara media on residence Fm every Friday afternoons. Always a top listen http://wire.novaramedia.com/2014/03/front-bubble-and-bluff-5-things-about-budget2014/

Inequality in the UK and the upcoming budget 2014

As the UK government prepares to present an annual budget designed to cut welfare benefits further for the working poor and squeeze real incomes for the average earner, Oxfam reports the country's five richest families now own more wealth than the poorest 20% of the population. In its report, a Tale of Two Britains (mb-a-tale-of-two-britains-inequality-uk-170314-en-1), Oxfam said the poorest 20% in the UK had wealth totalling £28.1bn – an average of just £2,230 each. The latest rich list from Forbes magazine showed that the five top UK entries were the family of the Duke of Westminster, David and Simon Reuben, the Hinduja brothers, the Cadogan family, and Sports Direct retail boss Mike Ashley – between them had property, savings and other assets worth £28.2bn. These are Britain's own top oligarchs (aside from the Russian ones that live in London). Indeed, the 100 wealthiest people in the UK have as much money as the poorest 18 million – 30% of all people. The total wealth of these oligarchs rose £25bn last year to £257bn to surpass the £225bn held by the poorest 30% of British households. And remember household wealth consists of the ownership of a house or flat, pension fund and other possessions like cars. Total household wealth in the UK is £10trn, with the top 10% having £967bn and the bottom 10% just £13bn. The bottom 10% really have no wealth at all except old cars and a few personal possessions. Imagine a room with 100 hundred people. 90 people are so short they can hardly reach the door handle to get out. Another nine people are only high enough to get a drink from the table. But one person is so huge that his or her head hits the ceiling and bursts through it. Such is the scale of inequality and concentration of wealth. Even the top 10% of wealth holders really own only their house that they live in along with maybe a reasonable pension. It's the top 1% or even the top 0.1% who really have wealth in stocks, bonds and commercial property and businesses etc. You see what really matters is not personal wealth but the ownership of the means of production. That gives you power as well as wealth - this is what oligarchs have. What is decisive for capitalism is surplus value (profit, interest and rent), not wage income or spending. Control of that surplus is key. The main feature of the last 100 years of capitalism has not been growing inequality of income. The main feature has been a growing concentration and centralisation of wealth, not income. And it has been in the wealth held in means of production and not just household wealth. What will we see in The chancellors budget tommorrow afternoon ? Well very little to help the poor it goes without saying. I'd predict some more tax cuts including a raising of the tax bands again to £12 k which will be championed by the government in raising the poorest tax thresholds whilst doing nothing to help them with the cost of living. We are also told there will be a extention of the rather fruitless "help to boy" scheme the tories have pushed which has inflated the propety bubbled even more rather than actually helped anyone. This coupled with plans to build a new Garden City in Ebbsfleet in Kent totalling around 15,000 homes is a drop in the ocean to the amount of homes we do need. I am not sure which type of homes these will be but i am sure they wont be cheap and available to all. Now we know from marxist economics that rising inequality is not the cause of economic crisis under capitalism even though inequality cannot and should not be ignored. This is more a consequence of a crisis than a cause of one in the first place. A correlation between rising inequality, slower growth and economic recession does not prove causation. , that instead rising inequality has been a consequence of capitalism trying to avoid slumps from declining profitability by trying to squeeze more out of the workforce in increased surplus value - during the neoliberal era. We can safely say that whatever George Osborne comes up with any rhetoric or fiddling the figures tommorrow we know that inequality will continue to grow under capitalism as it struggles to pull itself out of a crisis one of the deepest for hundreds of years if not ever.