FRFI 204 August / September 2008

On the road to recession

The economic turmoil in the international credit markets is taking its toll on the British economy. Six months ago government ministers confidently told us that the British economy could withstand global turbulence, and in March the Chancellor Alistair Darling claimed that Britain is the ‘most stable’ economy in the G7 major capitalist countries. The payback for their wishful thinking was not long in coming. By mid-July the tune had to change and Darling was forced to admit that the economic downturn looked set to be more profound and longer lasting than initially expected. DAVID YAFFE reports on the problems facing the British economy.

We have argued in past issues of FRFI that the parasitic character of British capitalism, its reliance on the earnings from its vast overseas assets – particularly those of its parasitic banking sector – and the growing weight of financial and business services in the domestic economy make it the imperialist country most vulnerable to external financial shocks.1 Inexorably, therefore, the ‘credit crunch’ is leading to a rapid deterioration in the British economy with important social and political consequences.

A parasitic and decaying capitalism
Britain’s overseas assets in 2007 were £6,486.5bn, an increase of 22.3% on 2006 and 33.7% on 2005. These assets were an unprecedented 4.7 times Britain’s GDP. 58.4% of these assets, £3,784.6bn or 2.74 times Britain’s GDP, were ‘other investments’ mainly loans and deposits abroad by UK banks – a gigantic usury capital. (See table)

Britain’s foreign assets are more than matched by even greater foreign liabilities of £6,836.9bn, nearly five times Britain’s GDP, leaving a net external debt of £350.4bn, 25.4% of GDP. Despite this net external debt Britain still generates investment income surpluses from its international investment account. However these earnings of £6bn in 2007 have fallen significantly from 2005 when they reached £25.8bn. This will soon have serious repercussions for Britain’s balance of payments.2

In 2007 Britain had a balance of payments deficit of £59.7bn. Britain spent around 4.3% of GDP more than it earned, a significant increase on the 2005 deficit at 2.5% of GDP. The deficit on the trade in goods has rapidly deteriorated since 2005 and reached a massive £89.5bn in 2007, 6.5% of GDP. Without the large surplus on the services trade of £38.3bn and the still positive, but decreasing income flow on the international investment account, the standard of living of the British people would have fallen. If the deficit continues to grow the pound will fall rapidly against other currencies.

This deteriorating situation is clearly unsustainable and will have political and social consequences in the near future.

Debts all round
The British economy has experienced a record period of nearly 17 years of economic growth. This could soon come to an end. With the global financial crisis threatening to halt the rapid expansion of credit that has been the driving force behind economic growth in the major capitalist countries over the last 60 years, the growing indebtedness in the public, personal and corporate sectors of the British economy has become unsupportable and ominous.

Public sector
Between April and June 2008, the public sector current deficit reached £20.4bn, an increase in the deficit on the same period last year of £7.9bn. Public sector net borrowing at £24.4bn is already 66% higher than that between April and June the previous year. It is the highest quarterly figure since records began in 1946. Overall public sector net debt reached £555.5bn at the end of June, 38.3% of GDP. The government is very close to breaching its self-imposed neo-liberal ‘golden rule’ that public sector net debt should not exceed 40% of GDP. In reality it has already broken the rule. Once the loan and guarantees given to Northern Rock by the Bank of England are included in public accounts, the net debt at the end of June rises to £640.5bn or 44.2% of GDP. The situation can only deteriorate as corporate profitability and consumer spending fall further, reducing tax revenues, and the stagnation in the housing market slashes receipts from stamp duty. It is of little surprise that in mid-July the Treasury announced it is considering a change to its ‘golden rule’, as the government will not risk raising taxes with the economy facing a severe downturn.

Personal sector
Total UK personal debt reached £1,443bn at the end of May, a record 173% of household disposable income and 109% of GDP. Secured lending on homes stood at £1,210bn and unsecured consumer credit lending to individuals at £233bn. This debt is higher than that in any other G7 major capitalist economy. The average ratio of debt service to disposable income for mortgage borrowers in the first quarter of 2008 was 24.1% – the highest on record (Financial Times 11 July 2008).

Corporate sector
The corporate sector is more indebted than the personal sector. Non-financial companies’ debt has reached 123% of GDP with a ratio of interest payments to profits of 28%. The most indebted companies are non-bank financial companies (hedge funds, private equity and wholesale mortgage lenders etc). The aggregate debt for these companies at £2,427bn has reached 171% of GDP at the end of the first quarter 2008. ( 6 July 2008)

It will be the unwinding of this unprecedented debt in the public, personal and corporate sectors of the British economy which will force it into recession.

Paying for the crisis
The deepening crisis will inevitably lead to a further polarisation of British society along class lines. The poorer sections of the working class are being hit hardest, but the crisis will not stop there as millions of workers, including many now relatively well-paid, face losing their homes, unemployment, cuts in living standards and growing poverty. Recent developments indicate what is in store.

In June house prices were down by nearly 9% and mortgage approvals down 67% on a year ago. There were 38,688 mortgage possession claims and 247,187 consumer debt-related county court judgments during the first quarter of 2008. It can only get worse as the economy moves towards recession. ( 6 July 2008)

The number claiming unemployment benefit saw the biggest rise for 16 years and is expected to rise further over the next 12 months as the downturn in finance and property extends to other sectors. Total unemployment, which includes those not receiving unemployment benefit, reached 1.62m at the end of May. Job vacancies fell by 32,000 to 655,100 in the second quarter of 2008 – the largest fall for nearly seven years. The biggest drops were in construction, finance and business services and distribution, hotels and restaurants – the latter reflecting a general cutback in the leisure industry as the disposable incomes of the better-off working class and middle class are squeezed. Tens of thousands of jobs have already been lost in the construction industry given the crisis facing the housing sector. At least 10,000 could be lost in the City as the banks retrench. Finally the CBI is predicting a manufacturing recession and a loss of 36,000 jobs. This is only the beginning.

In June annual inflation measured by the consumer price index rose by 3.8%, up from 3.3% in May. Food inflation alone rose by 10.6%, up from 8.7% in May. Electricity, gas and other fuels rose to 13.8%, up from 11.2% in May. The poorer sections of the working class are hardest hit by inflation given the dramatically rising costs of food, fuel and energy. They also face slower rates of income growth than middle class families. The annual rise in average wages for the three months to May was only 3.8%, so that a majority of workers are facing real wage cuts. In mid-June 500,000 local government workers, predominantly low-paid, came out on strike for 48 hours rejecting the 2.45% wage increase on offer because it would be a substantial wage cut in real terms.

A government for the rich
The rich have done well under a Labour government whose leaders, in their policies and personal behaviour, personify parasitic capitalism (see FRFI 194). Labour will not make the rich and powerful pay more tax even as public debt spirals upwards. Chancellor Darling had already backed down in the face of banking and corporate lobbying on budget proposals for a flat rate capital gains tax and for taxing wealthy non-domiciled residents in Britain.3 He has now retreated on a package of anti-tax avoidance measures designed to prevent up to £1bn tax revenues from multinational companies going offshore, after exempting multinational companies’ foreign profits from UK tax. The business lobby vigorously protested and he will discuss a way of doing this that corporate business can tolerate.

A new chief executive for Northern Rock has just been recruited by the Treasury at a salary of £700,000 a year plus three bonus payments of £400,000 to compensate for loss of bonuses due to him at his previous job at Barclays. This is how the rich friends of this Labour government are rewarded. Labour should celebrate ‘huge salaries in Britain’ said the Business and Enterprise Secretary John Hutton.

Contrast this with the treatment of the poorer sections of the working class. As we reported after the March budget (FRFI 202), James Purnell, the Work and Pensions Secretary, was planning to implement a brutal ‘welfare to work’ regime administered by private companies and voluntary organisations on a payment by results basis. In a Green Paper published on 21 July, Purnell announced that the 2.6m people claiming incapacity benefit – in all but the worst cases – will be expected to make themselves available for some kind of work or lose their benefits. Those on the dole for more than two years will ‘be forced to take part in full-time activity such as community work’ or lose their benefits. Drug users will be required to seek treatment or risk losing benefits. Lone parents will be eligible for a ‘skill for work’ payment to make themselves more employable. Private contractors will administer the scheme and be allowed to keep part of the benefits savings as profit. These are the punitive measures being proposed by a reactionary anti-working class government in a period of growing crisis and rising unemployment. Little surprise that the Tory Party said it would help Labour get the measure through Parliament.

Despite around 17 years of economic growth, 11 under Labour, the Labour government has barely begun to reverse the massive increase in poverty of the Tory years and inequality is continuing to grow. The number of people in poverty (people in households with income below 60% of the median after housing costs) is rising again and between 2005/06 and 2006/07 increased by 400,000 to 13.2m, 22% of the population. The number of children in poverty grew by 100,000 to 3.9m, 30% of all children, and the number of pensioners in poverty rose by 200,000 to 2.1m, 19% of all pensioners.

Under these conditions of a deepening economic, political, and social crisis it is imperative that a new working class movement is forged in the resistance to such measures. Its first task will be to break irrevocably with the racist, imperialist and anti-working class Labour Party.

Table: Britain’s External Assets £bn



% of total

% of GDP


% of total

% of GDP

% increase 2005-07

Direct investment








Portfolio investment








Other investment








Reserve assets













1. See 'Britain: parasitic and decaying capitalism' in FRFI 194 and 'Trouble ahead for British capitalism' FRFI 201
2. See FRFI 194 for a detailed discussion of these issues. All statistics are taken from the relevant UK Official National Statistics and are provisional for the latest years and tend to be revised over time. This explains the differences between the 2005 statistics in this article and those in FRFI 194. Nevertheless the trend is clear and that is what is importnat for our analysis
3. See 'A hole in my budget' in FRFI 202