Britain: Fighting the Cuts

The current economic crisis, which started as a financial collapse in 2008, has since been transformed into a crisis of sovereign debt. This is due to governments across the world bailing out the banks. With historically high deficits, along with massive public debts, Greece and Ireland have been very much at the forefront of the cuts. Along with Portugal and Spain, these countries are now considered to be the weakest links in the global economy. However, with a budget deficit in Britain of 11.5% and a public debt of 68.1%, the Con-Dem coalition has announced the biggest austerity programme since the 1920s. The working class is in for the fight of their lives.

These savage cuts are not just the product of a hatred towards the public sector. They have arisen from the crisis of capitalism. The massive sovereign debts of the advanced capitalist countries are the result of governments converting private debt into public debt, having bailed out the banks and rescued the system. Worldwide, the cost of this unprecedented bail-out is estimated to be US$10.8 trillion (£7 trillion). Some estimates have been as high as US$14 trillion.

In Britain, an eye-watering £1.5 trillion was thrown at the banks, equating to 94.4% of the Gross Domestic Product (at the time). Much of this money was for guarantees against banking losses, which have since been recovered. Into the bargain, the government was forced to nationalise Northern Rock and the Royal Bank of Scotland. However, the total cost to the taxpayer is estimated to be £815bn, or £31,000 per household.

Although these banks were formally nationalised, in reality, the bail-out meant the nationalisation of the debts and the privatisation of the profits; in Britain, ordinary people are being attacked in order to reduce a budget deficit of £149bn, whilst bankers continue to receive millions in public subsidies and bonuses.

The Credit Crunch

What was the reason for this financial crisis? When the crisis broke out in 2008, it was dubbed “The Credit Crunch” and was blamed on greedy bankers who had taken extreme risks by trading bundled packages of assets, including the notorious “sub-prime mortgages,” i.e. mortgages sold to people who didn’t have a reliable source of income to pay them back. As sub-prime mortgage holders began to default on their loans, people started to realise that there was a mountain of toxic debt in the financial system. This spread panic throughout the system, drying up credit and causing a run on the banks.

Nevertheless, this explanation of the financial crisis still does not explain the real cause of the current situation. This popular version of events misses out the crucial question – why were banks taking such extortionate risks by lending to people who didn’t have an appropriate credit rating? To answer this question, we must take a look at the role of credit in the economy.

Under capitalism, credit fulfils two functions. Firstly, credit plays the role of increasing the money supply in the economy so that any bottlenecks in production and circulation are overcome. For example, a producer cannot wait until his goods have been sold before buying new raw materials, since this would completely disrupt production. To overcome this problem, a producer will need to borrow short-term credit to buy raw materials and pay wages, in order that the flow of production may continue without interruptions. The source of this credit comes from capital markets (for large companies) and banks, who lend money at interest. In turn, the money in banks comes from deposits and savings made by individuals and firms, who receive a lower rate of interest. The difference between these interest rates is the source of profit for banks. Capital markets, run by finance houses and insurance companies, also lend money but at more favourable rates of interest.

Surplus Value

In Capital, Marx describes the various forms of commodity circulation, and shows that the intention of the capitalist is to start with money, M, and transform this into a greater quantity of money, M'. This is done via the production of surplus value contained in commodities, C, which need to be sold. This M-C-M' circulation relies upon the capitalist being able to dispose of the commodities profitably on the market. To assist this process, credit allows the market to expand beyond its natural limits; that is, limits that are constrained by the purchasing power in the economy. If the market were restricted to the effective demand of consumers, i.e. the ability and willingness to buy goods and services, this alone would not be able to mop up the total output. This contradiction is overcome by the capitalists reinvesting the surplus value extracted from the labour of the working class. Profit is nothing more than the unpaid labour of the working class.

This investment nevertheless leads to greater and greater productive capacity. Sooner or later, the market becomes too narrow for the continuous outpouring of commodities. The capitalist system faces a crisis of over-production. This is what happened in 2008.

The capitalists attempted to delay this crisis by creating the greatest credit bubble in history. At bottom, the restricted consumption of the masses prepares the way for crisis under capitalism. The market is therefore restricted by the amount of money that people have in their pockets to spend on goods and services, as well as the excess capacity that has built up throughout the economy. Today, the world is awash with excess capacity. The market is saturated and the capitalists have had to cut back on production. Their attempt to overcome the crisis by credit has reached its limits. The productive forces have outgrown the limits of the capitalist system.

Recent figures illustrate how far credit was used to put off the crisis. A recent report on debt in The Economist stated that, “average total debt (private and public sector combined) in ten mature economies rose from 200% of GDP in 1995 to 300% in 2008. There were even more startling rises in Iceland and Ireland, where debt-to-GDP ratios reached 1,200% and 700% respectively” (26th July 2010).

In relation to consumer credit, The Economist reports that:

“At the end of the Second World War in 1945, consumer credit in America totalled just under $5.7 billion; ten years later it had already grown to nearly $43 billion and the party was just getting started. It reached $100 billion in 1966, $500 billion in 1984 and $1 trillion in 1994, or around $4,000 for every man, woman and child. The peak, so far, was almost $2.6 trillion in July 2008. Household debt approached 100% of GDP in 2007, a level seen only once before, rather ominously in 1929. America was not alone in embarking on a debt spree. In Britain, household debt rose from 105% of disposable income in 2000 to 160% in 2008” (ibid).

This huge expansion of credit was made possible by banks and governments encouraging people to take out cheap loans, mortgages, and credit cards; hence the growth of “sub-prime mortgages”. However, this debt-fuelled party could not last forever. In the United States in 2006, people started to default on their loans. Consumer demand dropped. Producers could no longer find any consumers to sell their commodities to, and capitalism was faced with a classic crisis of over-production.


Birmingham rally against the cuts last month. Photo: Geoff Dexter.Birmingham rally against the cuts last month. Photo: Geoff Dexter. Capitalism only produces in order to make profit. However, profit can only be realised in the act of selling. When commodities cannot be sold, the M-C-M' circulation is broken and the flow of money is stopped. It can be seen, therefore, that far from “The Credit Crunch” causing the crisis, it was the crisis that caused the lack of credit.

This understanding of the current economic crisis shows that it was not an accident but was due to the underlying contradictions that are inherent within the capitalist mode of production and exchange.

The idea of governments running a deficit and accumulating sovereign debt is not unique to the current period. Even at its lowest point in the last 30 years, the UK debt was 26% of GDP, and before the current crisis, in September 2007, the UK debt stood at 36% of GDP. The government regularly borrows money to make up the deficit between public spending and money received from various sources of tax. In fact, the British government has only recorded a budget surplus in six of the last 36 years, generally overspending by between 2% and 5% of GDP.

Governments raise money for their deficit by auctioning government bonds, or “gilts.” The government pays interest on these bonds every six months, up to the “maturity date,” at which time the full value must be paid back. The majority of British debt bonds have a maturity of 15 years, and currently the government pays £42bn per year in interest payments, making interest payments the fourth biggest source of public spending after benefits and pensions, health, and education.

At its peak, Greece was charged 40% interest on its gilts as the lenders (i.e. speculators) began to get worried about the possibility of sovereign default, as happened in Iceland in late 2008. Demands were made for public spending to be dramatically cut, and the EU and IMF came in, as representatives of the ruling class, to outline the austerity measures that were to be imposed. Similar demands are being made of Britain. The Con-Dem coalition, which represents finance capital, is now embarking on a merciless austerity package to slash public spending.

So who actually buys these gilts? Who owns the debts? Who do we owe money to? The UK Debt Management Office breaks the ownership of UK debt down as follows:

39.8% - Insurance companies and pension funds

35.1% - Overseas investors

17.8% - Other financial institutions

2.9% - Households

2.9% - Banks

1.5% - Others


We can see, therefore, that the overwhelming majority of the public debt in Britain is owned by financial speculators (insurance companies, overseas investors, and “other financial institutions”, e.g. hedge funds, etc.) who are looking to make a profit out of Britain’s debt crisis – a crisis that was created by bailing out the very same bankers and speculators in the first place! It does not matter that only 35.1% of this debt is owned by foreign investors – British-based speculators are still just as ruthless and will still demand their pound of flesh.

To eliminate this debt at a single stroke, a socialist government would simply nationalise the financial institutions, insurance companies, and banks that own the public debt, with compensation only being paid on the basis of proven need (e.g. to compensate ordinary people and households for their savings and pension funds, but not the fat cats). The government could default on the remaining debt owned by foreign speculators.

Nationalisation of the banks and other financial institutions under democratic workers’ control would allow for the wealth of society to be invested efficiently and effectively. If combined with nationalised, democratically run industry, it would enable production to be rationally planned for the needs of people. Money flows could be controlled and the country would no longer be held to ransom by big business sharks and speculators – at home and abroad. An appeal would then be made to workers in other countries to follow suit, laying the basis for a Socialist Federation of European States, as a stepping stone to a Socialist World Federation.

Of course, the ruling class in Britain and internationally has a very different solution to public debt: draconian cuts. The programme of austerity in Britain (following on from Greece and Ireland) is seen as an example for the ruling class internationally. If the coalition can carry out such brutal attacks on the British working class, then governments elsewhere will have no qualms about carrying out equally severe cuts.

The Economist – usually a reliable mouthpiece of the ruling class – described the Con-Dem coalition as a “radical force” and described Cameron as “the unlikely revolutionary” (12th August 2010).


Concerns have, however, even been voiced from some sections about the extent of the Con-Dem’s austerity measures. A senior police chief warned that if the government carried out their plans to reduce front-line police numbers by 40,000, the remaining police would not be able to “deal with likely social unrest and industrial action stemming from the cuts” (Evening Standard, 14th September 2010). Meanwhile, military chiefs are warning that cuts to defence spending will make it impossible for the army to fight in Afghanistan, indicating potential fault-lines of future splits within the ruling class.

Keynesian economists, such as Paul Krugman (a former Nobel Prize winner for Economics), warn that the effect of such deep cuts will be to reduce demand and usher in a “double-dip” recession. They are correct; the cuts will exacerbate excess capacity and over-production. However, the Keynesian solution of increasing government expenditure is also not viable. Continuing government stimulus to maintain the economy would just inflate public debt, driving up interest rates on the debt and would end up pushing national economies further towards default.

The Keynesians often respond by pointing out that governments have had much larger debts in the past. This is true; the UK’s public debt was above 100% of GDP for most of the inter-war period, and peaked at over 250% after WWII. However, the reduction of the national debt after the Second World War was achieved on the basis of huge economic growth, which in turn was only possible due to the destruction of capital during the war and a massive expansion of world trade, Marshall aid, and investment in the profitable new technologies that had developed as a result of wartime research and development.


None of the above conditions exist at the present time. The prospect for most of the advanced capitalist countries is for a long period of slow growth, stagnation, or even a “double-dip” recession. The supposed “green shoots of recovery” are hard to see, as unemployment continues to rise and public services are slashed.

There are also worries about the American economy, which accounts for approximately 25% of world GDP, with The Economist stating that:

“Americans are not optimistic. Official statistics say that the economy has been growing for nearly 15 months, but so sluggishly that most people seem to think it is still in recession. For a few months it looked as if the economy might even shrink again, as growth slowed to a mere 1.6% (at an annualised rate) in the second quarter, job creation almost stopped and home sales plunged” (16th September 2010).

Whilst there are enormous contradictions facing capitalism, it should be pointed out that, as Lenin often said, there is no such thing as a “final crisis of capitalism”. The ruling class can always find a way out of a crisis, but only at the expense of the working class.

In reality, there is no fundamental difference between the right wing of the Labour Party and the Con-Dem coalition, insisting that the cuts are necessary but spread over a longer period.

The reasoning given by advocates of the “lower and slower” plan is essentially another Keynesian viewpoint, to prevent plunging the economy back into recession. But, as we have already pointed out, the size and speed of the cuts is dictated by the ruling class (both from Britain and internationally) and not by the whims of politicians. They are dictated by the interests of capitalism in the shape of the EU and the IMF. Had Gordon Brown won the general election in May, we would likely be seeing little difference now in terms of the planned cuts.

On the other hand, many honest left-wingers, both within the trade unions and the Labour Party, support Keynesian “alternatives” to the programme of Coalition austerity. They argue that the working class did not cause the crisis, therefore they should not pay for it. This is absolutely correct. They argue however that the £149bn deficit can be plugged by taxing the rich and cutting spending elsewhere. They explain:

  • £25bn is lost through tax avoidance, in which the rich find legal loopholes in order to avoid taxes.

  • £70bn is lost through tax evasion, where the rich just don’t declare certain income.

  • Replacing Trident (nuclear missile submarines) will cost between £15bn-20bn.

  • The UK budget for defence spending is currently £37bn per year.


Their proposals, therefore, are to eliminate tax evasion and avoidance, scrap Trident, and reduce “defence” spending. Adding up the money from these measures results in a potential £152bn that could be raised   £3bn more than the deficit! Along with a higher rate of income tax for those on high incomes, a tax on financial transactions (also known as the “Tobin tax” or “Robin Hood tax”) and greater corporation tax, it seems that we should have no problem in finding ways to plug the deficit. What could be easier?

Of course all socialists would support these measures. However, such measures, to chase up every penny of the £95bn that is lost through tax evasion and avoidance for instance, would face the wrath of the ruling class, who would attempt to sabotage them at every turn.

The only way they could be carried out would be by a government that was prepared to take ruthless action against big business and mobilise the working class to help carry it through. If that was the case, then why stop there? Why not go the whole hog and take over the commanding heights of the economy? This is not a secondary question. The measures to tax the rich will result in a strike of capital. They will cause a panic in the stock market and bond markets in order to bring the government to its knees.

If a determined government was going to stand up for the working class then it would need to take the economic power out of the hands of the ruling class. This can only be done by introducing bold socialist measures to take over the banks, finance houses and giant monopolies that have a stranglehold over the economy.

We are in favour of building a mass movement against the cuts. This must include mass demonstrations and national industrial action. However, even this will not be enough as can be seen from Greece and the series of mass mobilisations, public sector strikes and general strikes in the last year. The Labour movement must be armed with a real programme to answer the crisis by taking over the banks and industry. In short, the working class must put an end to capitalism and the misery it creates.


The left reformists who put forward a Keynesian “alternative” are trying to seek a “solution” within the limits of capitalism. But there is no solution on a capitalist basis. The crisis of capitalism is due to the contradictions of capitalism. The productive forces have outgrown the nation state and private property. The whole system is in an impasse.

A mass movement must not only challenge the Con-Dem government but must challenge the system itself. Open the books! Let ordinary people see how much of their money is wasted on outsourcing services to private companies and on fees for management consultants! Let workers see how much profit the giant monopolies make! Let us see how many millions are spent on bankers’ bonuses! If the books are opened, then we can really see the rottenness of capitalism. Drastic times call for drastic solutions.

Under the current conditions, the demand should be for the trade unions to call for a public sector strike, followed by a 24-hour general strike. After the long period of low activity in the class struggle in Britain, a day-long general strike would act as a demonstration of strength and could help to give the working class a sense of their power, thus raising consciousness.

The fight for socialism will require a mass movement of the working class. On the basis of historic events, workers will become conscious of the need to change society. The stormy period we have entered will shake society from top to bottom. The mass organisations will be transformed and re-transformed.

The ideas of genuine Marxism will find an increasing echo within the workers’ organisations. Workers will learn on the basis of their own experiences that the attempts to reform capitalism are no longer possible. The consciousness of the masses will be shaped by the hammer blow of events.

On this basis a mass revolutionary tendency will be formed that is prepared to undertake the task posed by history: a fundamental transformation of society, the overthrow of capitalism, and the establishment of socialism. There is no alternative.