FRFI 219 February / March 2011

The arrogance and self-confidence of the ConDem government took a knock on 25 January, when growth figures for the economy unexpectedly showed a fall in Gross Domestic Product (GDP) of 0.5% in the last quarter of 2010. With the annual inflation rate (CPI) shooting up to 3.7% in the year to December 2010 and youth unemployment hitting record levels, the government’s austerity programme is seriously being called into question. Far from the British economy being ‘well placed for a return to sustained, balanced growth’,[1] the talk is of stagflation – recession and inflation combined. The pound fell to a two-and-half month low against the dollar. The chancellor’s attempt to put the poor figures down to freezing weather in December was laughed out of court. This was, after all, in a period of relatively strong growth in the global economy and with a 25% depreciation of the pound since 2007 boosting manufacturing exports and growth. DAVID YAFFE reports.

A day before the growth figures came out, the departing head of the Confederation of British Industry, Richard Lambert, a friend of the Coalition, told the government that it had taken policy initiatives for political reasons that could damage the economy, and it still had no strategy for growth. Nouriel Roubini, one of the few economists who predicted the financial crisis, grouped the UK economy with the crisis-ridden parts of the eurozone, saying that there was a risk of a double-dip recession. And George Soros, the billionaire international speculator, said the government would push the economy into recession unless it modified its austerity programme.

Austerity for the working class

These statistics for the British economy are from a period before the January increase in VAT and well before the major spending cuts due in April 2011. So the situation for working class people can only deteriorate. Real incomes are continuing to fall, with inflation rising at 3.7% and earnings rising by 2.1%. Real wages are unlikely to be higher in 2011 than they were in 2005. The last time wages fell over a period of six years was in the 1920s (Mervyn King, cited in Financial Times, 26 January 2011).

In the three months to November 2010 unemployment rose 49,000 to almost 2.5 million, 7.9% of the workforce. Youth unemployment rose to record levels with the number of jobless 16-24-year-olds rising 32,000 to 951,000, 20.3% of the age group, the highest since records began in 1992. The unemployment rate for new graduates was 20% in the third quarter of 2010. Local councils have already announced more than 145,000 job cuts, with around 285 councils still to reveal their plans. Once the major spending cuts get underway in April unemployment will rapidly rise above 3 million.

Between 2008 and 2009 some 13 million people were living in poverty, including 3.7 million children. Most children living in poverty live in households with working parents. According to the Institute for Fiscal Studies, the number in poverty is projected to have risen by 800,000 in 2013-14 as a result of the government’s austerity programme.

The ConDem government is utilising the deepest crisis since the great depression in the 1930s to continue the class offensive that began in the 1980s. Their primary concern is to sustain the City of London, the financial arm of British imperialism, as a dominant world financial centre.[2]

Standing up for the City of London

In February 2009, as leader of the opposition, David Cameron told the BBC: ‘Where the taxpayer owns a large stake in a bank we are saying that no employee should be paid a bonus of over £2,000.’ In August 2009, then shadow chancellor, George Osborne told The Guardian that: ‘It is totally unacceptable for bank bonuses to be paid on the back of taxpayer guarantees…It must stop.’ Once in power the tune changed dramatically. Prime Minister Cameron, in a speech to the Lord Mayor’s Banquet in London on 15 November 2010, rejected the argument that Britain is on an ‘inevitable path of decline’ when he said: ‘Britain remains a great economic power. Show me a city in the world with stronger credentials than the City of London.’ He went on to assure his City audience: ‘We will stand up, at each and every turn, for our financial services industry and the City of London. London is Europe’s pre-eminent financial centre. With this government, I am determined it will remain so.’ On 10 January 2011 a spokesman for the Prime Minister admitted that the government will not set limits on the total amount of bonuses banks can pay their staff this year.

A recently-leaked document shows how the government covertly tried to stop much tougher European Union rules on what percentage of bankers’ bonuses could be paid upfront in cash. A European proposal set limits on upfront cash payment at 30% for small bonuses and 20% for large bonuses. The UK argued for 40% and claimed the 20% limit would have a significant impact on the financial services sector’s international competitiveness. It also contested the plan to impose a minimum period for deferring the rest of the bonus payment. The UK’s position was defeated and the much tougher European rules on paying bankers’ bonuses were accepted by the European Parliament in December 2010. Yet on 11 January the British government claimed credit for introducing ‘the most stringent code of practice of any financial centre in the world’, consisting of the very policies the government tried to obstruct (George Monbiot The Guardian 25 January 2011).

The need to sustain Britain’s financial services sector and the City of London’s vast international interests dictates the policies of any ruling class government in this country, whether Tory, Labour or LibDem. It is not difficult to see why. At the end of 2009, more than two years into the present crisis, Britain’s overseas assets were still a massive £8,679.7bn,[3] more than 6.2 times Britain’s GDP. 66% of these assets or £5731.4bn, more than 4.1 times Britain’s GDP, were listed under ‘other investments’ (mainly loans and deposits abroad by UK banks) and UK banks’ financial derivatives (speculative financial instruments) – a gigantic usury capital.

Britain’s foreign assets are matched by even greater foreign liabilities of £8,974.1bn, leaving a net external debt of £294.4bn, a relatively high 21% of GDP. However, despite its net external debt, Britain generated an investment income surplus of £20.8bn on its international investment account.[4]

In 2009 Britain had a balance of payments deficit of £23.8bn, spending 1.7% of GDP more than it earned. The deficit on trade in goods reached a very high £82.4bn, 5.9% of GDP. Without the large surplus on services trade of £52.7bn, with financial services responsible for around 70% of this, and the income flow of £20.8bn from the international investment account, the standard of living of British people would have fallen significantly.

In addition, as the British Bankers’ Association never tires of pointing out, the banks paid some £26bn in taxes to the Treasury in 2009, while the Corporation of London informs us that the City, in its broadest sense, provided £66bn of tax revenues in the same year, employed a million people and accounted for 10% of GDP (The Guardian 22 October 2010). It is no surprise that this government, like the Labour government before it, ‘will stand up, at each and every turn, for our financial services industry and the City of London’.

Bankers dictating terms

The major world banks have started announcing their earnings and profits for 2010 and salary and bonus payouts for the year. JP Morgan Chase is setting aside nearly $10bn for basic pay and bonuses for its investment banking division, with bankers receiving on average $369,651 for 2010, despite a 4% fall in profits and a 7% fall in turnover. It increased the percentage of its turnover set aside for salary and bonuses to 37%, from 33% in 2009.

Goldman Sachs is lifting the £1m cap imposed last year on bonuses paid out to its London-based partners. It is ignoring any appeals for restraint by setting aside $15.3bn for bonuses and salaries, with its 35,700 employees worldwide receiving on average around $430,000, and top bankers getting a great deal more. This was despite revenues being down 13% and profits down 38% in 2010.

Morgan Stanley, which has 7,000 employees in the City, had a good year with worldwide profits tripling to $4.5bn. Its revenues increased by 35% to $31.6bn. It set aside $16bn for salaries, bonuses and other benefits, up from $14.4bn the previous year. Its employees will receive on average $255,000, a rise of 8%.[5]

The bankers are confident that their position cannot be seriously challenged. This was made admirably clear by the performance of Barclays’ new chief executive Bob Diamond, when he appeared before the Treasury Select Committee on 11 January 2011. He was repeatedly asked whether he would waive his bonus for 2010, expected to be around £8m, as he had done for the previous two years. He replied that he had not yet been awarded a bonus for 2010 and would decide ‘with his family’ whether to accept it or not. He told the committee during somewhat rancorous exchanges that: ‘There was a period of remorse and apology for banks and I think that period needs to be over’. He insisted that it was not possible to stop paying competitive bonuses without severe consequences for business and the broader banking sector. Diamond was previously head of Barclays investment bank. His pay and bonuses have amounted to around £70m over the last four years.

The arrogance and contempt that the banking fraternity is showing the rest of the population facing the brunt of the economic crisis is creating problems, even unease, among the ruling class vying for the populist vote. George Osborne was forced at the last minute to veto a ‘peace deal’ on bank bonuses, lending and pay transparency he had drawn up with Britain’s largest banks after Nick Clegg and Vince Cable made it clear that the Liberal Democrats could not accept the package. The tensions between the ConDem government and the City are certain to continue, when the part-nationalised banks RBS and Lloyds Banking Group announce their earnings, pay and bonuses.

The rich and the powerful are sure of their ground. They will always find ways of sustaining their privileged lifestyles and obscene earnings, even while feigning ‘restraint’ as far as their pay and bonuses are concerned. Barclays is talking about a radical pay overhaul and using innovative bonds – so-called contingent convertibles or ‘cocos’ – to pay a large proportion of bonuses to their top bankers (Financial Times 24 January 2011).

We are not deceived by clowns. The government’s claim that we are all in this together is insulting, desperate and groundless. This is class war and the rich and powerful will only be stopped by a massive mobilisation of working class people against the government’s programme.

1 The words of Mervyn King, Governor of the Bank of England, after the growth figures were known.

2 See ‘Parasitism remains at the heart of British capitalism’ in FRFI 210 August/ September 2009. Available on our website at

3 This is a fall of 21% from the foreign assets in 2008 at £10,980.5bn. The statistics for 2010 will not be available until the end of March 2011. Statistics so far for 2010 show a 14% growth of foreign assets on 2009. Office of National Statistics at

4 For a discussion and explanation of this development see ‘Britain: parasitic and decaying capitalism’ in FRFI 194 December 2006/January 2007 on our website.

5 See The Guardian 15, 20 and 21 January.