Agony and the ecstasy

The current growth of the UK economy is unsustainable, says Michael Roberts. Indeed, there is a danger of another slump

Last week, the Bank of England’s chief economist, Andy Haldane, put the cat among the pigeons with his speech on the British economy.1 Andy was ‘off message’ compared to the story painted by his boss, the useless, confusing and grotesquely overpaid Mark Carney.2 For months, Carney has been going around hinting that the BoE would hike interest rates soon because the UK economy was booming and he wanted to control the racy property market and avoid rising inflation (instead, inflation is now slowing fast).

In contrast, Haldane said that he was“gloomier” about the prospects for the economy than he was a few months ago and thinks that rates will have to stay lower for longer. Haldane described the state of the British economy as having ‘twin peaks’ of both agony and ecstasy.

The ecstasy part of it was that the UK economy is currently the fastest-growing of the top G7 capitalist economies, with unemployment falling to just (!) 6% of the total workforce, with annual inflation down.


Using these figures, chancellor George Osborne cannot stop boasting of the success of the government’s policies. And Janan Ganesh in the Financial Times was moved to complain about all the moaning and “miserablism” around. Ganesh told us moaners:

The country is now richer, freer, more roundly envied. Yet all talk is of decline … We should be ecstatic about Britain. Here is a country that responds to a secessionist threat to its existence by holding a free and fair referendum. It has evolved an economic model that is more hospitable to business than much of Europe and kindlier to the poor than America. It cuts public spending year on year without any civil disorder to speak of. Crime is falling. Unemployment is at six percent. The politicians are small-time, but basically honourable. The capital city is a miracle of the modern world.

Thank god, goes on Ganesh, that Britain is no longer like the terrible 1970s, when

we could hardly govern ourselves, much less look France and Germany in the eye as economic equals … when Britain really was run by elites: the troika of big business, organised labour and government, whose shambling corporatism eventually forced the world’s first industrial nation to send for the International Monetary Fund. The country is now richer, freer, more roundly envied ... Britain is a successful nation that does not know it - an enclave of stability and progress.3

This is the voice of a complacent member of the establishment (see Owen Jones’s new book4), writing from an office in the Pearson building, and no doubt comfortably a member of the top 1% of income earners. There is no mention at all of the agony side of the British economic ‘recovery’ since the end of the deepest slump since the 1930s.

We keep hearing that national income is higher than at the pre-crisis peak of the first quarter of 2008. However, in the meantime the British population has grown by 3.5 million (from 60.5 million to 64 million), so in per capita terms, UK national income is still 3.4% less than it was six years ago. And this is even before we talk about the highly uneven nature of the recovery, in which real wages have fallen, while people at the top have increased their share of wealth and income.

On wages, Haldane was brutally honest:

Growth in real wages has been negative for all bar three of the past 74 months. The cumulative fall in real wages since their pre-recession peak is around 10%. As best we can tell, the length and depth of this fall is unprecedented since at least the mid-1800s! This has been a jobs-rich, but pay-poor, recovery.5

Haldane has constructed what he called his “agony index”: a simple index of real wages, real interest rates and productivity growth. This shows that the British people and the economy have been in “agony” for the longest time since the 1800s, with the exception of world wars and the early 1970s. Yes, the 1970s may have been bad, as Ganesh argues, but the pain did not last as long as it has in the last seven years.

Blairite loyalist Alan Milburn - a former Trotskyist, but now sitting on the boards of large private equity firms - was appointed by the Tory-led government to the Social Mobility and Child Poverty Commission. The commission has now reported that the target to reduce child poverty by half by 2020 will not be met. The current government had “discredited existing child poverty targets and failed to put in place new ones”, creating an “unholy mess”. Milburn concluded: “It does seem that Britain is on the brink of becoming a permanently divided nation.”

According to the commission’s report, “absolute child poverty increased by 300,000 between 2010-11 and 2012-13” and “independent experts expect child poverty to increase significantly over the next few years”. In addition, “working poverty after housing costs is rising”. The report says 1.4 million children are now in “relative poverty” due to the effects of rising rents and mortgage costs since 2010. It adds that 20% of Scottish children and 24% of Welsh children live in absolute poverty.6

But back to the ecstasy - for the richest in our nation. The country’s five richest families now own more wealth than the poorest 20% of the population, according to Oxfam. A handful of the super-rich, headed by the Duke of Westminster, have more money and financial assets than 12.6 million Britons put together.7 The poorest 20% in the UK have wealth totalling £28.1 billion - an average of £2,230 each. The five top UK entries - 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 have property, savings and other assets worth £28.2 billion.

And this wealth gap is widening as a result of the ability of the better off to capture the lion’s share of the proceeds of growth. Since the mid-1990s, the incomes of the top 0.1% have grown by £461 a week, or £24,000 a year. By contrast, the bottom 90% have seen a real-terms increase of only £2.82 a week or £147 a year.

For the first time more working households are in poverty than non-working ones and the number of children living below the poverty line could increase by 800,000 by 2020.8 None of this is mentioned by Janesh Ganesh.

Profligacy and austerity

The Tory-Liberal Democrat government continues to apply policies of ‘austerity’ - ie, cuts in government spending, welfare and public services - along with the steady privatisation of the NHS and state education. Both PM Cameron and deputy PM Clegg trot out the spin that they ‘inherited’ a huge deficit and public debt created by the previous Labour government, and the austerity and low growth of the past few years was necessary in order to correct this.

This is a nonsense analysis. Yes, Britain’s annual deficit on government spending over revenues rocketed from 2007 and the public debt-to-GDP ratio rose. However, this was not due to Labour ‘profligacy’, but to the global financial collapse and the bailing out of the banks with government borrowing, and the subsequent decline in tax revenues and rise in welfare spending as a result of the ensuing great recession.

This all seems to be erased from history. I remember the then chancellor of the exchequer, Alastair Darling, coming on TV in 2008, staring like a rabbit caught in car headlights and telling us of a financial meltdown that was the worst thing to hit the economy for over 60 years. He said it needed emergency action by the government to help the banks. Darling, more recently the ‘saviour’ of Scotland, was soon accompanied by that other saviour of Scotland, Gordon Brown, then PM, who told parliament that he had ‘saved the world’ (whoops, he meant the rotten banks) by forcing through a merger of two of them, Lloyds and the Bank of Scotland, and financing it with billions of government cash (to be borrowed from the banks themselves!).

A recent IMF report has outlined the scale of direct government support for the financial system after 2007 in Europe and the US.9 The bailout of the banks alone has cost the British people over 10% of GDP and less than half of it has been recovered from bank repayments. Indeed, Andrew Haldane, the man at the Bank of England responsible for banking stability before becoming chief economist, has calculated that the major British banks have only taken a hit equivalent to 1/20th of low-end estimates of what the banks ought to pay for all the damage they did.10

Now the current BoE deputy governor for financial stability, Sir John Cunliffe, has highlighted that banker pay has not fallen nearly as much as bank profits, especially in the UK. Top bankers are still raking it in. Shareholders (including the taxpayer in the two biggest banks) are getting just 2p in dividends for every pound paid to top staff!11

And, remember, the banking crash was so damaging because successive British governments relaxed controls and regulations over what banks could do in what was called ‘light touch’ regulation. This is what Gordon Brown said in June 2007, just before the great crash broke:

Over the 10 years that I have had the privilege of addressing you as chancellor, I have been able year by year to record how the City of London has risen by your efforts, ingenuity and creativity to become a new world leader … So I congratulate you, Lord Mayor and the City of London, on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London.12

Just a few months later, then leader of the opposition David Cameron spoke at the London School of Economics: “The world economy [is] more stable than for a generation … Our hugely sophisticated financial markets match funds with ideas better than ever before.”13

Current shadow chancellor Ed Balls wrote in the FT in the mid-1990s about ‘neoclassical endogenous growth theory’: namely that modern economies could now grow steadily without any shocks or crashes towards ecstasy.14 As City minister under Tony Blair, he advocated ‘light touch’ regulation of the finance sector.

Mainly because the UK economy grew between 1997 and 2007, Labour actually kept the government budget in balance over its first six years in office between 1997 and 2002, and ran only a small deficit between 2003 and 2007. Welfare spending rose only in line with GDP growth. The dramatic climb in the budget deficit from then to the average of 10.7% in 2009-10 was a consequence of the recession caused by the financial crisis.

The recession reduced government revenue by the equivalent of 2.4% points of GDP - from 42.1% to 39.7%. And it raised social spending (social benefit plus health spending) by the equivalent of 3.2% of GDP compared with its 2008 level (from 21.8% to 24%). So the recession triggered a fall in tax revenue and rise in social spending totalling 5.6% points of GDP.15

Weak recovery

But let us return to now.The irony is that cutting wages and slashing public spending - the ‘twin peaks’ of the coalition government’s economic policy - have not succeeded either in restoring sustained long-term growth or in ‘correcting’ public finances.

In March, the government predicted that the budget deficit would shrink by about £12 billion in the current fiscal year. Instead, it is widening. Government spending exceeded revenue by £10 billion in September. This leaves the shortfall in the first six months of the current fiscal year at £55 billion - 5% more than in the same period of 2013.

The reason is much weaker tax revenue than expected, because the extra employment is in low-paying jobs, part-time work replacing some full-time jobs and above all in self-employment. Self-employment accounts for one-third of the 1.75 million jobs created since early 2010, as people hit by the recession turned to working for themselves in jobs from taxi-driving to carpentry. And the proportion of self-employed workers reporting incomes below the tax-free threshold has jumped to 35%, from 21% before the financial crisis.

As nominal wages are barely growing, fewer people are moving into higher-rate tax bands. In March, the Office for Budget Responsibility forecast average incomes would grow 2.4% this year. Instead the latest quarterly figures show they rose by just 0.7%. Together, taxes on income and national-insurance contributions account for almost half of government revenue. Osborne had been predicting about 7% more income tax this year. Between April and August, it fell 0.8%!

The coalition government is way short of its target to ‘balance the books’ by the end of 2018, a target that has been slipping back anyway. Meanwhile the gross government debt ratio inexorably rises towards 100% of GDP - a level not seen since the war debt levels of 1945.

And yet the Conservatives have announced more tax cuts for the rich if they win the election next year. But they cannot square the circle of cutting taxes and maintaining public services, even if they reduce welfare spending to zero!

Yet the government continues to crow that its policies of austerity have worked. Even some Keynesians seem convinced that the economy is turning around for good. Arch-Keynesian Simon Wren-Lewis from Oxford University attacked those who continued to doubt the economic recovery:

What about the counter-argument that the recovery is not real, or not sustainable? In some ways this rhetoric is worse than the ‘austerity works’ line: it is also wrong, but it is much less likely to succeed as rhetoric. The rhetoric will not work because, despite the unequal and uneven nature of the recovery, many people do feel more optimistic now than two years ago.16

Wren-Lewis goes on:

It is much better for critics of the government to focus on the ‘wasted years’ of 2010-12, and on the fall in median incomes over the last five years. If they want economic issues for today and tomorrow, focus on inequality.

Yes, as this article has done so far. But that does not mean we have to accept the view that all is now fine and dandy with the British economy.

Although manufacturing output is growing at its fastest for five years, it is still shy of its peak in 2008 before the great recession hit the UK economy. Despite a large devaluation of sterling as a response to the financial crash, exports have not made much progress and the UK’s deficit on trade with the rest of the world remains very high. The UK’s government budget deficit is still the highest among the G7 economies. As for the message that the UK economy is heading for 3%-plus real growth this year and next, the real joker in the pack is that, just as in the US, the capitalist sector is not investing.

The UK economy has delivered one of the weakest recoveries since the end of the great recession in this ‘recovery’ phase.17 The UK’s real GDP has only just got back to its pre-slump peak in 2007. Yet all the other G7 economies (except Italy) have passed that benchmark.

And if you look at GDP per head of population, the UK record is even worse, with the UK lagging behind the euro zone average and still nowhere near restoring the pre-recession position. What that tells you is that the UK economy has only expanded because of a big influx of immigrants into the country. It is population, not productivity, that is growing.

Two studies have shown that increased net immigration into the UK since the great recession has added to real GDP growth and if the government carries out its plans to cut net immigration by 50%, it would reduce GDP per head.18 Immigration is boosting the British economy, although a rising population leaves problems of overcrowding of public facilities (including schools, hospitals, roads), the limited supply of housing and strain on natural resources (for example, water). But that is an issue for higher government investment and services and a public-sector housing programme.

Productivity puzzle

As for productivity, output per hour in the UK was 17% below the average for the rest of the major G7 industrialised economies in 2013 - the widest productivity gap since 1992. On an output-per-worker basis, UK productivity was 19% below the average for the rest of the G7 in 2013.19

And it is getting worse. UK output per hour fell slightly in 2013 compared with 2012, contrasting with an increase of 1% across the rest of the G7. UK productivity levels are about the same as in 2007, but 15% below where they ought to be if pre-crisis productivity growth had continued.

And productivity growth matters if overall economic growth is to be sustained. Real GDP growth is a combination of employment growth and productivity growth (output per worker). Employment growth in the UK, even with wholesale immigration maintained, is unlikely to be higher than 1% a year. So to achieve sustained 3% real GDP growth (the minimum necessary to get unemployment down further), reduce the budget deficit and government debt, and start to raise real incomes, productivity growth must be at least 2% a year. But instead it is falling.

Why has British productivity been so bad? It has been a combination of the growth of low value-added self-employment (taxi-drivers, cleaners, odd-jobbers, etc), low-skilled part-time, temporary and full-time jobs (Asda, McDonalds, Starbucks, etc). The ranks of workers in ‘time-related underemployment’ - doing fewer hours than they wish due to a lack of availability of work - have swollen dramatically. Between 1999 and 2006, only about 1.9% of workers were in such a position; by 2012-13 the figure was 8%.

One of the features of the employment market in the UK in this ‘boom’ has been the huge rise in self-employed workers. The number of firms with fewer than 10 employees has swelled by 550,000 since 2008. Meanwhile, in mid-2013 there were 5.7 million people working in the public sector, only 18.8% of total employment, the lowest since records began in 1999. Indeed, the self-employed will outnumber those working in the public sector in four years, once the government has completed its slashing of public-sector jobs and services.

Self-employment’s share of total work, whose historical norm (1984-2007) was 12.6%, now stands at an unprecedented 15%. With no evidence of a sudden burst of entrepreneurial energy among Britons, we may conclude that many are in self-employment out of necessity or even desperation. Even though surveys show that most newly self-employed people say it is their preference, the fact that these workers have experienced a far greater collapse in earnings than employees - 20% against 6% between 2006-07 and 2011-12, according to the Resolution Foundation20 - suggests that they have few alternatives.

The rightwing editor of The Daily Telegraph, Allister Heath, tells us that this is really good news for the economy:

This is clearly a golden age for entrepreneurship, especially in London, but there is more to it than that. Self-employment surged 17% over the past five years and is still rising; while at first the increase was made up of people who preferred to work as consultants rather than being forced to sign on to the dole, many of the more recent entrants appear happy with the choice. In the past, recoveries in the labour market were driven by increased demand for workers; today, it is just as much a case of a better, more flexible and more entrepreneurial supply creating its own demand.21

Heath goes on to tell us that ‘zero-hours contracts’ and a choice between self-employment, working on call and part-time work shows how ‘flexible’ the UK labour market has become, thanks to deregulation and the weakening of the unions under Thatcher and Blair: “We need to build on this flexibility.”

Really? Actually, the Global Entrepreneurship Monitor statistics show that the proportion of new entrepreneurs in the UK driven by valuable opportunities has fallen - from a high of 61% in 2006 to 43% in 2012. And Office for National Statistics figures show that a falling number of self-employed people hire other workers, suggesting that the rise in self-employment is not translating into new, thriving businesses. Researchers at the University of Warwick found that, in less prosperous areas of the UK, policies to increase firm formation had a negative impact on long-term employment, as those who started new companies had low skills, few other options and poor market prospects.

What is really behind the increase in self-employed is not ‘entrepreneurial spirit’, but the loss of benefits and the ability of self-employed to claim tax credits under the government ‘welfare reforms’. As Richard Murphy at Tax Research has pointed out, the self-employed now account for 15% of the workforce, but 19% of working tax credit claimants. In other words, those working for themselves are more likely to be claiming tax credits than those in employment. The self-employed are earning less than they did before the slump. In 2007-08, 4.9 million self-employed earned £88.4 billion, but in 2011-12, 5.5 million self-employed earned £80.6 billion. Indeed, the Resolution Foundation found that self-employed weekly earnings are 20% lower than they were in 2006-07, while employee earnings have fallen by just 6%. As a result, the typical self-employed person now earns 40% less than the typical employed person.22

Low investment

What Haldane did not say in his ‘twin peaks’ speech was why there had been such a fall in real wages and a rise in his “agony index”. It is because, rather than increase investment to raise productivity, British capital has opted to squeeze wages and cut costs to try and restore profitability. You see, contrary to the view of neoclassical and Keynesian economics alike, productivity and profitability are not the same thing - indeed they are often contradictory.

Including all investment (in property, business and government), the UK’s investment ratio remains the lowest of all major capitalist economies.

Before the global financial crash broke in 2007-08, I wrote in my book, The great recession, that, because the UK was essentially a ‘rentier’ economy - ie, relying increasingly on earnings from rent (property), interest (often from abroad) and foreign capital flows - it would suffer the most from any global crash and take the longest to recover. So it has proved. The BoE shows that the financial services sector, which contributed up to nearly 10% of UK GDP in 2009 - much more than even the US financial sector - has dropped 30% to under 7% of GDP.

With the finance sector in the doldrums, the UK economy needed a boost from somewhere else. The answer from the government has been to fuel a new property boom with cheap and subsidised mortgages. Property prices exploded in central London and this spread to the rest of the country - they are now rising in double-digit rates. But there has been no corresponding increase in business investment, which remained a drag on growth in the UK economy in 2013.

Investment by the capitalist sector is not recovering and British businesses are failing to raise their share in world export markets.

Instead, companies have opted to squeeze wages. This has boosted the rate of exploitation (and raised levels of inequality). But it has failed to raise UK profitability much.23 The underlying ‘health’ of British capitalism, at least in its productive sectors, remains frail.

Indeed, the peak in the 2000s for profitability was in 2007, at 14.2%. But even after the huge credit boom, profitability was below the 1997 peak of 14.5%. The decline from 1997 to a low in the depth of the great recession (2009) was 10.9%, down 21%. It is now 11.9%, or up 10% from that level. But it is still 18% below 1997.

The current ‘fast’ growth of the UK economy is not sustainable without much increased investment. But the government has cut public investment to the bone and the capitalist sector is not investing because profitability is poor.

The way to raise profits is by new labour-shedding technology that increases productivity and lowers costs. But British capital is reluctant to invest when it is still burdened with spare capacity in old technology and corporate debt. That needs to be liquidated first - in another slump.

There is more agony to come.

Michael Roberts blogs at thenextrecession.wordpress.com


1. www.bankofengland.co.uk/publications/Documents/speeches/2014/speech764.pdf.

2. See https://thenextrecession.wordpress.com/2013/08/13/a-blind-guide-dog.

3. J Ganesh, ‘Miserablism risks causing Britain serious harm’ Financial Times October 20 2014.

4. O Jones The establishment London 2014.

5. See www.tuc.org.uk/economic-issues/labour-market-and-economic-reports/economic-analysis/britain-needs-pay-rise/uk.

6. www.gov.uk/government/uploads/system/uploads/attachment_data/file/365765/State_of_Nation_2014_Main_Report.pdf.

7. Oxfam, ‘A tale of two Britains‘: http://policy-practice.oxfam.org.uk/publications/a-tale-of-two-britains-inequality-in-the-uk-314152.

8. http://policy-practice.oxfam.org.uk/publications/a-tale-of-two-britains-inequality-in-the-uk-314152.

9. IMF Fiscal monitor (October 2014), chapter 1: www.imf.org/external/pubs/ft/fm/2014/02/fmindex.htm.

10. Haldane.

11. www.ft.com/cms/s/0/32f776d2-5853-11e4-a31b-00144feab7de.html#axzz3Grc2z028.

12. Gordon Brown: http://webarchive.nationalarchives.gov.uk/+/http:/www.hm-treasury.gov.uk/2014.htm.

13. David Cameron: www.lse.ac.uk/newsAndMedia/news/archives/2007/DavidCameron.aspx.

14. www.independent.co.uk/arts-entertainment/the-saturday-profile-ed-balls-treasury-adviser--chancellors-golden-boy-1078592.html.

15. From Ha-Joon Chang, www.theguardian.com/commentisfree/2014/oct/19/britain-political-class-tories-economic-fairytale.

16. Simon Wren-Lewis: http://mainlymacro.blogspot.co.uk/2014/04/recovery-rhetoric-and-reality.html.

17. See http://flipchartfairytales.wordpress.com/2014/04/29/britain-is-coming-back-well-yes-but); and www.ons.gov.uk/ons/dcp171766_360847.pdf.

18. http://niesr.ac.uk/blog/long-term-economic-impacts-reducing-migration#.VEd77rRvE8U. Lisenkova and others look at two scenarios: net migration of 200,000 and a lower migration scenario, which assumes that net migration is reduced by around 50% - close to David Cameron’s migration target of less than 100,000. They find that by 2060 GDP per capita would be 2.7% lower under the lower migration scenario (www.civitas.org.uk/immigration/LSI). Rowthorn suggests that, given a set of assumptions about employment rates and labour productivity, GDP per capita is 3% higher in 2087 with high migration than with very low migration.

19. www.ons.gov.uk/ons/rel/icp/international-comparisons-of-productivity/2013---first-estimates/stb-icp1014.html.

20. www.resolutionfoundation.org/publications/just-the-job-or-a-working-compromise-the-changing-nature-of-self-employment.

21. City AM: www.cityam.com/article/1397452896/recovery-being-driven-revolution-jobs-market.

22. www.taxresearch.org.uk/Blog/2014/05/06/its-not-just-inequality-that-is-rising-rapidly-insecurity-is-too/#sthash.xf5ecfiB.dpuf.

23. www.ons.gov.uk/ons/rel/pnfc2/profitability-of-uk-companies/q1-2014/stb-profitability-of-uk-companies-q1-2014.html.