FRFI 217 October/November 2010

The wholesale assault on state welfare outlined by the ConDem coalition government in the recent Budget is creating divisions among supporters of the Liberal Democrats, well in advance of the savage cuts in public services to be announced in the autumn spending review on 20 October. Few seriously believe Chancellor George Osborne’s claim that his Budget measures are ‘tough but fair’ and that ‘we are all in this together’, while banking corporations amass vast profits and bankers continue to receive obscene salaries and bonuses. Leading Liberal Democrat members of the government attempted to cover up this reality and placate their supporters with radical sounding speeches during their conference in the third week of September. So the Business Secretary Vince Cable, who is fully behind the savage cuts in state spending, prattled on at conference about controlling the ‘murky world of corporate behaviour’ and regulating capitalist markets that were often ‘irrational or rigged’. DAVID YAFFE reports.


In attacking ‘spivs and gamblers’ Cable asked: ‘Why should good companies be destroyed by short term investors looking for a speculative killing, while their accomplices in the City make fat fees? Why do directors sometimes forget their wider duties when a cheque is waved before them? …Capitalism takes no prisoners and kills competition where it can…’. Business leaders were apparently shocked by his remarks, with the Confederation of British Industry calling them ‘emotional’, and its leader Richard Lambert saying that: ‘Mr Cable has harsh things to say about the capitalist system: it will be interesting to hear his ideas for an alternative’ (The Guardian 22 September 2010). Cable, of course, has no alternative. He is a fervent advocate of capitalism, markets, competition and privatisation. He shares the petit bourgeois illusion of many liberals and leftists in this country that it is possible to tame capitalism and take measures to curtail the creation of monopolies and the speculative and parasitic activities of financial corporations.

In the last issue of FRFI we explained the link between the crisis of British capitalism, the parasitic and usurious activities of the banking corporations and the public sector deficit.[1] Recent developments within the banking industry reinforce our arguments.

Banks stand their ground

In August the five biggest British banks – HSBC, Lloyds Banking Group, RBS, Barclays and Standard Chartered – reported combined half-year pre-tax profits of more than £15bn. The top six British banks control 88% of deposits in this country.

There has been some attempt by regulators, especially in the US, to separate retail banking and the more speculative and risky investment banking associated with the financial crisis. This is also tied up with the argument of breaking up the large banking groups so that they are no longer regarded as ‘too big to fail’ and will not have to be bailed out by taxpayers in future financial crises.[2] Some ministers in the coalition government, including Vince Cable, are in favour of breaking up these large ‘universal’ banks. A commission, set up by the Chancellor George Osborne and chaired by former Bank of England economist Sir John Vickers, is looking into such ‘reforms’ but it is not expected to report until September 2011.

The large UK banks are totally opposed to separating their retail and investment banking operations and have threatened to move their headquarters overseas should such regulations come into force. City law firms have joined with major accountancy businesses, insurers and banks to lobby the government against proposals to separate investment banking divisions from retail banking. It is not difficult to understand why. Barclays investment arm, Barclays Capital, generated nearly 90% of Barclays higher than expected half-year profits of £3.9bn. It has amassed a £3bn pay and bonus fund for its 25,000 staff. In arguing the case for ‘universal’ banks such as Barclays, John Varley, its outgoing chief executive, said that Barclays had made £25bn over the three-year financial crisis and had not needed taxpayer’s money. The appointment of Bob Diamond, the Wall Street investment banker, as the new chief executive of Barclays Bank is a clear signal that nothing is about to change.[3]

Vince Cable was said to be infuriated by Diamond’s appointment. Nevertheless he soon began to shift ground when he told the BBC in early September that, although Britain’s ‘universal’ banks had to be made safe, this could be done by more subtle methods than a crude separation of investment and retail banking, such as placing ‘firewalls’ between the two arms. The former Labour Chancellor, Alistair Darling, said that he heard in these comments ‘the screeching of brakes shortly before the execution of a U-turn’. Mr Cable, he said, had finally realised the folly of breaking up world-class banks (Financial Times 9 September 2010). As we have consistently argued in FRFI, for any ruling class party in power in this country the interests of the international markets, the financial services sector and the City of London are the unquestionable priorities. The banks will soon have their own powerful backer in the coalition government. Stephen Green, present chairman of HSBC, will become a trade minister in January 2011 with a key role in considering the future of banking. He will be well aware of his bank’s catchphrase that the banking industry should be ‘big enough to cope’ rather than ‘too big to fail’. He will be on the cabinet committee that reviews the Vickers report on the banking industry next September (The Guardian 14 September 2010).

On Sunday 12 September, after months of disagreements, the Basel Committee on Banking, representing 27 member countries, finally came to a deal. This effectively more than tripled the size of the capital reserves that the world’s banks must hold against possible losses from 2% to 7%. The new rules, known as Basel III, will be phased in between January 2013 and January 2019. US and UK regulators wanted tougher standards, but resistance from Germany amongst others forced a lower total ratio. The large UK banks will have little difficulty meeting the standards. Barclays already has a core capital ratio of 13.7%, RBS 11.2%, HSBC 10.2% and Lloyds Banking Group 9.2%. So international regulation poses few problems for the UK banking corporations. The FTSE 100 index rose after the regulations were announced, supported by rises in bank shares.

Vince Cable warned that the government would not tolerate the new rules being used as an excuse not to lend to small businesses. This carries little weight with the banks. Not only are banks restricting lending but their interest rates are much higher than before the financial crisis despite the dramatic fall in official borrowing costs. Those borrowing without security can expect to pay around 11%, with the bank rate currently at 0.5%. Interest rates on mortgage lending have fallen around two percentage points to 4%, less than half the five point drop in the bank rate. The banks, not the government, are dictating the terms.

Attacking the working class

While the poorer sections of the working class will be hit disproportionately by the cuts, the income of the better paid working class and the lower middle class will very soon start to be squeezed as well. The recession saw a fall in total employment and a shift to part-time work. Nearly one million full-time jobs have been lost since the start of the recession after a dramatic shift to part-time working. Total employment fell by 580,000 over two years to spring 2010, while part-time employment increased by 330,000. The draconian cuts in public spending planned in the autumn spending review will almost certainly accelerate these trends. The aim of the government is to cut public spending from 48% of GDP to below 40% in five years. This will not only hit the jobs of the six million workers in the public sector but also the 1.2 million private sector workers directly dependent on government contracts.

The Institute for Fiscal Studies (IFS) has shown that the tax and benefit changes in the coalition’s first Budget will hit the poorer sections of the working class much harder than the better off and the rich (See article in FRFI 216). A recent report Where the money goes[4] put out by the TUC at its Congress in September takes this further and shows the impact on different groups of the population of implementing the £34bn public spending cuts planned by the coalition government by 2013.

The research shows that on average households benefit from £21,000 worth of public services a year. Those on lower incomes gain more than the better off. So the effects of the spending cuts will clearly be regressive. The UK’s poorest 10% will be hit 13 times harder than the richest 10%. Across the income distribution, the poorer the household the more they will lose. The poorest 10% lose services equivalent to more than 20% of their household income. The second poorest 10% lose 13% and the third poorest lose 10%, while the richest 10% of the population lose 1.5%. Lone parents and single pensioners are the social groups that lose most.

The poorest parts of the country, where the population is more dependent on public spending, will suffer most from the spending cuts. Public spending accounts for 57.4% of the GDP in Wales, 57.1% in the North East, 50.3% in Scotland, 50.2% in the North West, 42.1% in the South West and 34% in the South East (The Guardian 9 August 2010). If we ignore the extreme inequality between rich and poor in inner London, the coalition’s spending cuts undoubtedly will widen the so-called North/South divide. Where the money goes (p53) endorses this analysis.

The TUC study also combines the effect of the cuts in services with the IFS study of the impact of tax and benefits changes in the Budget. It shows that the impact of public spending cuts will be much bigger than the tax and benefit changes for all groups of the population other than the richest 10%. Despite the richest 10% facing increases in their tax payments, mainly as a result of the coalition continuing with the tax changes on high incomes in Labour’s final Budget, they still lose only one quarter of the losses faced by the poorest 10% (See chart).

This is class war, brutally demonstrated by the recent statement of the coalition Chancellor, multi-millionaire George Osborne, that he would reduce the number of people who claim benefits as a ‘lifestyle choice’. He was not referring to the bankers.

1 See ‘Coalition declares class war’ FRFI 216 August/September 2010. For an extensive article on the character of British capitalism see ‘Britain: parasitic and decaying capitalism’ in FRFI 194 December 2006/January 2007. Both at

2 See ‘Banks on a roll as Britain staggers out of recession’, FRFI 213 February/March 2010 on our website.

3 It has just been announced that Stuart Gulliver, head of investment banking at HSBC, has been appointed HSBC’s new chief executive.