By Tom O’Leary
The depth of the economic crisis that has already begun to grip the British economy will inevitably lead to a full-scale assault on the working class. This is because capital requires the restoration of profits, which will have fallen sharply in the crisis.
The struggle to increase the rate of exploitation in order to restore the profitability of UK firms will necessarily be a ferocious one. It is completely mistaken to suggest that austerity is over as it is imperative that profits are restored. If there is to be any successful resistance it is necessary to face facts and not engage in wishful thinking.
The next crisis, before the last one is over
By widespread consensus, the current crisis will be sharper than the recession of 2008 to 2009. The UK recession in 2008/09 lasted 5 quarters from the 2nd quarter of 2008 to the 2nd quarter of 2009 inclusive. From the pre-recession peak in the economy the total decline in output was 6%, the largest fall in the UK in the post-World War II era. Because of very weak growth, the economy did not recover to its pre-recession peak until the 2nd quarter of 2013, four years after the crisis began.
In one important sense, there never has been a full recovery from that recession in terms of returning to previous trends. There were also clear signs that the economy was slowing from a very weak pace, even before the impact of the coronavirus was felt. This can be seen in Chart 1 below, although naturally the most striking feature is the unprecedented pace of the contraction in March and April this year.
Chart 1. UK Real GDP, Quarterly Q1 2005 to Q1 2020
The Office for National Statistics (ONS) has highlighted all periods of economic contraction in red. Helpfully it has also provided an estimate of GDP in the 3 months to April. In that period the economy shrank by 10.4% (and fell by 20.4% in April alone). As the chart shows the pace of the contraction is already much more rapid than in 2008-09.
It is also likely to be a more severe recession than a decade earlier. This is based on the evidence to date. In addition, the most recent noted forecasts for UK GDP in 2020 range from a 7.2% contraction from the National Institute for Economic and Social Research, to the ITEM Club’s 8% fall, to the European Commission’s decline of 8.3%.
But the forecasts are deteriorating as the extent of the coronavirus becomes clear, along with the UK government’s catastrophically bad response to it. The OECD is the only major institution to have published a UK GDP forecast in June and it now expects a decline of 11.5% in 2020, the worst outcome of any advanced industrialised economy. This would be almost double the total contraction in output of 2008-09.
Profits first, last and always
The motor of the capitalist economy is profits. Firms do not exist under capitalism to make specific goods, or to employ a given number of people or to provide a basis for philanthropy. Firms can and frequently close entire sectors of their business and switch to others, or fire large parts of their workforce, or spend large resources in avoiding paying taxes. The purpose of the capitalist is to realise profits.
In a recession, profits get crushed. Very frequently, profits fall first, firms stop investing and that itself causes recession. This is precisely what happened in the US from 2006 onwards, concentrated in the housing sector. In this country there was a very sharp fall in the rate of return on capital employed by UK firms directly linked the recession, as shown in Chart 2 below.
Chart 2. Rate of Return on Capital of UK Firms, 2003 to 2019
British firms suffered a fall in the rate of return of from 11.6% in 2006 to 9.4% in 2009. The response was ‘austerity’ in 2010, which Alistair Darling’s 2010 Budget threatened (widely said to have been written by Peter Mandelson) and which Cameron and Osborne implemented.
Austerity is aimed at restoring profits. The rhetoric about government debt being out of control is merely a device to cloak the real content of economic policy, as was monetarism before it. And one of the reasons SEB has repeatedly warned that austerity would not be ended now is because British capital had not resolved its crisis of profitability. In fact, Chart 2 also shows that profitability was declining once more even before the coronavirus hit.
There are a number of different ways that profitability can be restored. But, in the unlikely event that British firms will conquer new markets (at the same time as erecting barriers to their biggest market in the EU), then the various forms of increasing the rate of exploitation of workers are required.
These are to demand that workers produce more for the same pay (either fewer workers and/or shorter hours) or pay is cut outright while the work is unchanged. In this regard, the growth of large numbers of unemployed or marginalised workers with few rights is extremely important. This had already begun with the growing casualisation of the workforce, the ‘gig economy’, zero hours and fake ‘self-employment’.
This will be increased through the Covid-19 crisis. In addition, the government’s new immigration policies will not make good on their reactionary promise to reduce migration (non-EU migration had already risen under the Tories to replace the decline in EU migration because of Brexit). Instead, the real purpose of the policy is to create a large cohort of workers without either citizens’ or workers’ rights, who can be used to lower pay and conditions more generally. A general assault on workers’ rights, and the environmental protections and product standards that are an impediment to profitability will be facilitated by Brexit.
This process has already begun. The disgraceful case of BA is widely known. A large section of the existing workforce is being fired, some to be rehired on much worse terms including severe pay cuts. But this is only the most well-known case. The Mirror newspaper group is cutting pay, while many other large companies are simply slashing jobs. In addition, the Treasury is already mulling tax increases on workers and yet another public sector pay freeze (a cut in real terms).
As the furlough scheme comes to an end, the government has consciously created a pressure for firms either to cut pay, or to cut jobs. This gives firms the opportunity to co-ordinate their efforts, so that the widest possible number can benefit from increasing the rate of exploitation this way.
Therefore, it is completely muddle-headed to suggest that Boris Johnson will not return to austerity. As SEB explained about the March Budget, he already has. Denying free school meals in the summer to poorer children while guaranteeing banks’ lending for £300 billion also shows that transferring resources for poor to rich and from workers to banks ad big business is back with a vengeance.
It is extremely unlikely too that the current leadership of the Labour Party will oppose Johnson on this and promote Corbyn-style solutions to the offensive. On the contrary, it has already begun to undermine one of the key pillars of the welfare state, universalism.
A child’s lullaby that everything will be fine, that there will be an outbreak of fairness from Johnson and Keir Starmer was really a Cobynista all along is not merely foolish but downright dangerous in the current circumstances. The British ruling class is gearing up for an enormous offensive, compelled by the logic of capitalism itself. The working class and its allies need to be prepared for the coming onslaught.
The above article was initially published by Socialist Economic Bulletin.