Downgrading Osborne; degrading Britain

The UK’s finance minister (we Brits call him, in medieval terms, the Chancellor of Exchequer), George Osborne presented his 2013 budget for public finances today.  Last year, Osborne made a complete hash of it and had to reverse and back down on many measures for taxes and public spending measures that he announced.  More worryingly, he had to admit that his main targets, of eliminating the annual budget deficit and reducing the government debt ratio by 2015, could not be met.  He revised the date to 2017.  Today he has put it back yet another year.  The Chancellor’s ‘austerity’ plan is failing.

Indeed, that is what one of the credit agencies, Moody’s, concluded at the beginning of this year when it downgraded the UK’s government triple-A bond rating.  Moody’s reckoned the government could not meet its targets because the UK capitalist economy was still failing to recover from the Great Recession:  “the country’s current economic recovery has already proven to be significantly slower — and believes that it will likely remain so — compared with the recovery observed after previous recessions, such as those of the 1970s, early 1980s and early 1990s.” 

UK GDP-real-quarterly-actual

Instead of a declining government debt to GDP ratio, it would continue to rise until 2018.   But what did Osborne say back at the end of 2011?: “The UK is the only western country that has seen an improvement in its credit rating in the past 18 months. When this Government came to office, the country’s triple A credit rating was on negative watch, which is where it was put by the Labour party. I am delighted that it came off negative watch, but we must stay vigilant. The credit rating agencies have said that an abandonment of our deficit plan would definitely lead to a downgrade of the credit rating.”  Well, the deficit plan was not abandoned, but it still happened.

The right-wing London financial daily, City AM, described the UK economy in harsh capitalist terms: “The stark reality is that the UK is a busted flush: the deficit is increasing again, despite accounting shenanigans, and is being financed through quantitative easing in a dangerous game of financial pass the parcel; an army of zombie firms remain addicted to near-zero interest rates, forcing down productivity and preventing a Schumpeterian process of creative destruction and reallocation of capital and labour; the banking system remains squeezed; and the economy remains tied down by regulations, outdated planning laws and high tax.”   Such is the analysis of the UK capitalist economy from a source that wants to revive capitalism. The stark reality of the British economy is revealed in the figure for national income: stagnation.


As with other capitalist economies, recovery has been weaker in the UK after the Great Recession than in any other recovery from previous slumps.


So Osborne has had to admit that annual government borrowing will rise this year, not fall, as the government reduces its forecast for economic growth.  The Office for Budget Responsibility (OBR) now forecasts real GDP growth of just 0.6 per cent for 2013, down from the 1.2 per cent forecast in December.  It also revised down 2014 growth from 2 per cent to 1.8 per cent.  There were big upward revisions to the borrowing forecasts. This year, the government will borrow £114bn, falling to £108bn next year.  The OBR said Mr Osborne’s promise to have debt falling as a proportion of national income would not now happen until 2017/18, two years later than planned.  Indeed, in 2015, the UK government will have the worst budget deficit as % of GDP in the OECD!

uk debt

UK deficit worst in West by 2015 200313

What is the answer of the Chancellor?  Not to reduce the cuts in public spending, not to lower the overall burden of taxes and charges on average householders, but on the contrary to increase austerity measures.  Sure, there have been reductions in tax rates for corporations (Osborne boasted in his speech to parliament that the UK had cut corporation tax on profits more than any other major country); and sure, income tax thresholds will be raised in 2014 to take poorer households out of income tax. But the gains from these tax cuts go disproportionately to the richest income earners, as the graph below shows.

10000 allowance

And although employer contributions to social security have been reduced by a special allowance, social security charges for employees will rise sharply, pension contributions will rocket and benefits will be decimated.  Indeed, the last VAT increase will cost the lowest-paid workers four times more than any gain from the £10,000 personal allowance, according to the TUC.  And by the time of the next election, low-paid workers with an average weekly income of £196 will be losing up to four times more per year from the government’s increase in VAT in January 2011 than they will gain from the raising of the personal tax allowance to £10,000. The gain from the tax allowance would be £1.09 a week, but the loss from the VAT increase is £4.26 a week.

At the same time, changes to the state pension will bring the exchequer a stealth windfall of almost £6bn a year from 2016-17, mostly paid by public sector employers and employees in the form of increased national insurance contributions.    Getting rid of the contracted-out rebate on state pension contributions will cost public sector employers £3.5bn a year.   And government departments will end pay progression in the next spending round.  So the government cuts corporate tax, but cuts wages in the public sector by removing contractual progression and replaces it with pay scales aligned with “performance”.   As Mark Serwotka, general secretary of the PCS public sector union, said: “Not content with cutting pay, pensions and working conditions, Osborne’s Treasury now wants to rip up civil service contracts to keep wages low for many years to come.”

Osborne made a gesture to those who are demanding more government spending on infrastructure projects to boost growth and employment (and this includes his own Business Minister, the Liberal Democrat Vince Cable).  The TUC estimated that the planned extra £3bn a year for infrastructure (and not starting until 2015) would “boost growth by a measly 0.06%”“Worse still, funding it through departmental spending cuts will mean further reductions in public services,” said general secretary Frances O’Grady.

And nothing has changed in the inexorable reduction of basic welfare support for the poorest and most vulnerable in Britain.  The callous so-called bedroom tax on ‘social housing’ tenants who have an ‘extra bedroom’ is just one example.


As Michael Burke explained in a recent excellent article in the Guardian (, “in reality, the government has a host of investment opportunities. A huge housebuilding programme would deal with a housing shortage which has been chronic and become acute, and put the construction sector back to work. The rents on affordable council homes could provide a yield way above the government’s long-term cost of borrowing (currently 3.3% for 30 years) and it would ease the spiral of house prices and rents generally. The government could invest in large-scale infrastructure, energy and transport projects, nationalising those firms which stood in the way. It could invest in education by scrapping fees and bringing back the education maintenance allowance. According to the OECD, the additional public return from each graduate is £55,000, far outweighing their cost of education.   It is rejecting these options because the purpose of “austerity” is not growth or deficit-reduction, but boosting the profits of the private sector. Government policy is to reduce its own investment in these areas, and others like health, so that the private sector can reap the benefits.”

As Michael says, another scandal is the failure of the private sector build enough homes for people to live in at reasonable rents.  Annual housing construction is at its lowest since the 1920s.

uk housing

Yet all that the government offers is a subsidy scheme for ‘first-time’ buyers of homes on their deposits to reverse falling ‘home ownership’, while applying severe reductions in housing benefit for the poorest working families.


The government is sticking with austerity and it is not working.  But let’s be clear.  Austerity is not the only or even the main cause of the stagnating economy.  As I have noted in several previous posts, one recent study found that the relatively tougher fiscal adjustment in the UK compared to the US has contributed slightly less than half the 5% pt difference in real GDP growth between the two countries over the last three years (see G Davies, J Antolin-Diaz, Why is the US economic recovery stronger?, Fulcrum Research, November 2012).  The real cause is the failure of the ‘rentier’ economy that is British capitalism.  Productivity in productive sectors of the economy is stagnant and investment has collapsed.  Holders of capital are accumulating cash, sending it abroad or buying financial assets.  But they are not investing.  So the real economy stagnates and the authorities can do nothing about it because the capitalist sector dominates.  Government debt is being downgraded as Britain’s public sector is being degraded.

So what are the alternatives to this degradation that Osborne is presiding over?  For the Keynesians, it is more investment through “any structural reforms that might encourage higher investment by the private sector” (Martin Wolf at the FT) plus a “once in a lifetime opportunity for higher public investment.”  Instead, the government plans to cut government investment by 50% until 2018 and net investment (after maintenance) will cease to rise in real terms at all, reaching just 1% of GDP!

UK public investment

The reason that UK companies are not investing at home is that corporate profitability is still well below its peak in 2007 and, even more significant, the ROP in the productive sector of the economy, manufacturing, continues its steady decline from 1997, and now hitting lows not seen since the the recession of the early 1990s.

UK net return on capital

If we compare the UK’s official data for the rate of profit with the Eurostat’s AMECO data, we get a similar story. The UK rate of profit is down 15-20% from a peak in 2007.


Part of the reason for this is that not sufficient capital has been devalued to raise the ROP despite the Great Recession.  But also, even the mass of profit generated is marking time.

UK gross profits

Not surprisingly, UK companies are on an investment strike and business investment as a share of total  profit is near its all-time low.

UK share of investment in profits

Instead of investing in the British economy, British companies are investing abroad or paying higher dividends to shareholders or buying back their shares to boost share prices.   This is the reason why the easy monetary policy of the Bank of England, whether it is near zero interest rates or massive buying of government and corporate debt from the banks (QE),  is not working to boost growth.  QE has already been larger, relative to GDP, in the UK (22 per cent) than in either the US (13 per cent) or the Eurozone (4 per cent). It has helped mop up 46 per cent of the massive issuance of UK sovereign bonds over the past five years.  But QE has crippled savers, who are losing an estimated £65bn a year in interest forgone, while sterling has lost 17.2 per cent of its purchasing power thanks to inflation.

UK govt cost of borrowing

There is desperate talk among mainstream economists to introduce negative interest rates or get the Bank of England to target ‘nominal GDP growth’ rather than inflation.  But neither of these measures will work if capitalists don’t want to invest. Britain is a distorted rentier capitalist economy that is oriented towards unproductive investment and away from investment to increase resources and social need.  London’s share of the UK’s economic output has just reached an all-time high of 21.9 per cent, dominated as it is by financial services, professional services and other non-productive sectors.  Vast parts of modern Britain now host only relatively small amounts of private sector producers and depend on the state.

George Osborne and this coalition government continue to feed that distorted economy to attract financial investment with corporate tax cuts paid for by reducing welfare spending, decimating public services, eating away at the health service and state schooling and starving productive sectors of funds, while British companies send their profits abroad for better returns.  This is a lost decade.

7 thoughts on “Downgrading Osborne; degrading Britain

  1. Many thanks Michael for yet another superb, succinct analysis of the economic omni-shambles that is the UK economy. And written in an accessible style too.

  2. How did you work out the UK rate of profit? You show the mass of profit hasn’t really changed, yet national income – total value added – has fallen, as has investment, in which case it seems counter intuitive for the rate of profit to fall.

    1. Bill – the UK rate of profit is the net return on the stock of capital as provided by the ONS

      This measure is pretty good but I do prefer what I call a ‘whole economy’ measure. That is less up to date but tells the same story. As does the AMECO data.

      The data from the ONS includes gross and net operating surplus for UK companies. My gross profit figure in the post is slightly different from non-financial profit figure in the ONS release as it includes all corporates. But the flatlining trend is repeated in the ONS data for NFCs.

      1. That’s not a rate of profit then in the strict sense, even though its similar. As its not measured against total capital, but only the FCS. From memory isn’t the gross surplus before depreciation in the British measures? That’s also a distorting factor.

      2. Yes, it’s not a Marxist rate of profit as it excludes variable capital. I have worked out one elsewhere that shows a similar result. And yes GOS is before depreciation but the NOS series shows the same flatlining from 2007.

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