FRFI 212 December 2009 / January 2010

Shadow-boxing through the crisis

British capitalism, with its bloated and usurious financial sector, has proved to be the most vulnerable of the main capitalist countries to the financial crisis. It will almost certainly be the last of those countries to pull out of recession. Contrary to all forecasts, the British economy failed to grow in the third quarter of 2009, with GDP falling a further 0.3% – the sixth consecutive quarter that the economy has been in recession. Over the last year GDP has fallen by 5.1% and since the recession began by almost 6%. The political class is impotent in the face of this crisis and so has now turned its focus on fighting the general election duein spring 2010. DAVID YAFFE reports.

The November conference of the Confederation of British Industry (CBI) saw the two main party leaders testing out their battle plans for the coming election. As we pointed out in the last issue of Fight Racism! Fight Imperialism!, the ruling class is united on the need to cut public spending – the ‘unsustainable public sector deficit’ – down to size.1 They differ only on tactics. Hence the shadow-boxing displayed at the CBI conference.

Labour Prime Minister Gordon Brown attacked the Tory opposition plans for an immediate cut in Britain’s deficit, arguing that it would derail recovery. ‘Turning off the life support of our economies prematurely would be fatal to British jobs, British growth and British prosperity for years… People need certainty. They need to know if there is a stable path of deficit reduction they can see will take place’.

The Conservative leader David Cameron rejected Brown’s arguments and was adamant that the budget deficit must be reduced much sooner. ‘Dealing with this deficit is not an alternative to economic growth – the two go hand in hand. If investors see that there is no will at the top of government to get a grip on our public finances, they are going to seriously doubt our country’s creditworthiness.’ Dealing with the deficit promptly was necessary said Cameron and he announced that if the Conservatives win the election, they will introduce an emergency budget 50 days after coming to power to deal with the deficit (The Guardian 24 November 2009).

In reality there is very little difference between the parties. In the Queen’s Speech, a few days before the CBI conference, it was announced that Labour would put forward a fiscal responsibility bill which would bind the government to cut the deficit year-on-year and halve it within four years. This would require a drastic cut in spending and significant tax increases. Yet much of the rest of the speech contained a series of ‘populist’, if limited, measures, some of which would involve increases in public spending, for example, free personal care at home for around 280,000 elderly and disabled people in severe need and various employment guarantees for unemployed young people. Again this is shadow-boxing with the opposition, with an eye to the coming general election.

In October there has usually been a budget surplus as a result of corporation tax payments., However, this year the public sector deficit increased by £11.4bn. The cumulative deficit reached £87bn in the first seven months of the financial year, with net public sector debt at £829.7bn or 59.2% of GDP, with more than £142bn of this, 10% of GDP, accounted for by public sector intervention to rescue the banking system. The cumulative deficit is expected to be around £175bn by the end of the tax year, with net public sector debt reaching about 65% of GDP. By 2013-14 the net public sector debt, on present projections, could amount to 76% of GDP.

Such figures are not unprecedented, given the severity of the economic crisis. In the early 1920s the level reached almost 200% and in 1956 the ratio was just under 150% of GDP (Financial Times 2 October 2009). Today even a right-wing German government has made it clear that it will not cut public spending until the country has safely emerged from the economic downturn. In Britain ruling class parties, whether Labour or Conservative, of necessity, have a quite different agenda. They have to sustain Britain’s financial sector and the City of London’s vast international interests and connections to ensure the British economy remains a ‘world centre of finance’. That is why the deficit will be cut as fast as political conditions allow, for that is what the City and international investors demand.

It is clear who will be at the receiving end of the inevitable cuts in public services. Recent research for the Public Services Trust 2020 has shown that the main net beneficiaries of public services are working households with children in the bottom half of the income scale, who receive more than half their income from the state annually (on average a net £9,109), and around 80% of retired households (The Guardian 14 November 2009). The cuts in the public sector deficit proposed by the main political parties will reduce the standard of living of the relatively poorer and more vulnerable sections of the working class.

Banking on the state

As we have pointed out in numerous articles over the last year and a half,2 this crisis of capitalism has seen the underwriting of the debt of the banks on a scale like never before. The process has entered a new phase. The City of London has always been at the heart of the British state, just as Wall Street is at the heart of the US state. The crisis has strengthened these ties to a new level of intensity. The result of the crisis has been a further consolidation of finance capital and the state – that is, the further development of state monopoly capitalism (imperialism).

A recent publication from the Bank of England has updated statistics showing the scale of intervention to support the banks in the US, UK and the eurozone during the current crisis. This now totals over $14 trillion or nearly a quarter of global GDP; this includes liquidity and capital injections, debt guarantees, deposit insurance and asset purchase. Such an intervention is without historical precedent. It indicates the central importance of financial capital in these economies. The UK is a special historical case. The ratio of UK bank assets to GDP since 1880 remained at around 50% of GDP for almost a century. From the early 1970s this changed dramatically and by the start of the 21st century were more than five times annual UK GDP, a tenfold increase in this ratio over around 30 years. Support packages in the UK have reached $1.71 trillion (£1.04 trillion), around 74% of GDP.3

These remarkable statistics make it clear who is calling the shots. It matters little who wins the next election. The interests of financial capital are overriding. That is why the Bank of England had little option but to extend £61.6bn in emergency funds to the Royal Bank of Scotland and HBOS at the height of the financial crisis in October and November 2008. The loans were paid back by January 2009. Yet this operation was kept secret and only revealed on 24 November 2009, more than a year after the funds were loaned to the banks. The shareholders of Lloyds and HBOS were unaware of this operation when the merger of the two banks took place in January 2009. The Labour Chancellor Alistair Darling justified the secrecy, saying that he shared the Bank of England’s assessment that disclosing details of the lending ‘would seriously jeopardise the financial stability of the system as a whole’. More than a year later, it now appears that there is no longer need for secrecy. Clearly they feel they have stepped back from the precipice.

Financial services contributed £12.4bn in corporation tax, 27% of the total, and £18.7bn in employees’ PAYE, 15% of the total in the year before the financial crisis (The Observer 1 November 2009). Britain had a large surplus on its services trade, £54.5bn in 2008, with financial services responsible for 70% of this. Most significantly, Britain’s overseas assets were £7,135bn in 2008, an unprecedented 4.9 times Britain’s GDP. Nearly 60% of those assets, £4,261bn or 2.95 times Britain’s GDP, are loans and deposits abroad by UK banks – a gigantic usury capital. Net earnings on Britain’s international investment account in 2008 came to £27.6bn. Without those earnings and the large surplus on services trade the standard of living of the British people would have fallen significantly.4

No ruling class government, whether Labour, Tory or Liberal Democrats, is going to take steps to rein in and control the financial services industry, particularly the banks. That is why the Labour government appointed a banker, Sir David Walker, to carry out a review of the banking industry. His recommendations, published on 26 November 2009, are risible. Large banks will have to disclose how many of their UK employees are paid more than £1m and half of the bonuses paid to employees should be deferred for three to four years. There are recommendations concerning the election of the board, and the creation of ‘board-level risk committees’ (Financial Times 26 November 2009). The government said it would quickly implement the recommendations. The bankers must be quaking in their boots!

Despite owning 43.5% of Lloyds Banking Group, the government is releasing the banking conglomerate from the government’s toxic asset insurance scheme by allowing it to raise funds on the capital markets. In November Lloyds launched the UK’s largest rights issue to raise £13.5bn of new capital at a massive discount of 40% on its present share price. This amount is well over half the bank’s market capitalisation of £24bn. In addition it has agreed with bondholders to swap £9bn of bonds for equity, in all raising a huge £22.5bn to add to its balance sheet. The rights issue will involve the taxpayer sinking an extra £5.8bn into the bank in order to maintain its present shareholding. The investment banks will make millions managing this exercise. Lloyds will abandon its original project to put £260bn of toxic assets into the government’s scheme, which would have cost Lloyds £15.6bn over five years, payable in shares, increasing the government’s stake to over 60%. Lloyds is determined to release itself from state control as quickly as possible and is being helped towards this end by the government. Lloyds has recently announced that it will cut 5,000 jobs.

The banks are clearly having a field day. On 25 November Britain’s new Supreme Court ruled in favour of the banks on overdraft charges and thwarted the action by the Office of Fair Trading to assess such charges on the ground of fairness. Millions of people who have paid usurious charges will get no redress.

Finally let us return to the outstanding issue of the public sector deficit. The governor of the Bank of England, Mervyn King, told the House of Commons Treasury Committee, on 24 November 2009, that Britain’s credit rating could be at risk unless the government came up with a ‘credible’ plan to tackle the deficit. That is what the bankers need to hear and the state will comply, whichever party wins the election.

  1. See David Yaffe ‘Britain’s crisis: public services under attack’ in FRFI 211 October/November 2009.

2 See

3 From P Alessandri & A G Haldane Banking on the state Bank of England November 2009. The actual amounts are dependent on exchange rates and exactly what is included as state support.

4 See David Yaffe ‘Parasitism remains at the heart of British capitalism’ in FRFI 210, August/ September 2009