Gordon's Dream

British capitalism is ill equipped to escape the huge downturn in world capitalist economic activity. The world is not going to recover quickly from the economic recession of 2001. Gordon Brown's proclamation of the end of "boom and bust" will be exposed for what it is.

By the time you read this, Chancellor Gordon Brown will have presented his annual "pre-budget" statement to parliament. Every year, the Chancellor gives an overview of how the British economy is doing and announces what the government plans to do with taxation and its spending for the next three years or so.

The world's most "prudent" finance minister has juggled the figures to explain how the government is going to fund a substantial increase in spending on health, education and transport, while not raising taxation for the average working household and while cutting taxation (yet again) for big business and the City of London.

Gordon's figures are dependent on two assumptions, both of which will prove to be false. The first is that, thanks to his "prudent" policies on taxation and spending, British capitalism no longer has booms and slumps. So, while the US, Europe and Japan may slide into economic recession, the UK will avoid it. The second is that, even if the rest of the world is contracting in its output and living standards, Britain can go on growing at 2% a year, so unemployment will hardly rise and pay packets will stay thick and prices low.

Gordon's argument about booms and slumps is based on his claim that he no longer allows the government to spend more than it can earn in taxation, unless it is for investment. This "golden rule" ensures that inflation (caused by government borrowing apparently) does not return.

But the "golden rule" has been kept to only because the UK has managed grow at a relatively fast rate (by British standards) of about 2.5% each year in the global boom period of 1997-2000. As a result, the government sucked in huge amounts of tax revenues and paid out much less in social security and unemployment benefits. And, as we have commented in this column before, Gordon Brown and New Labour kept religiously to the previous Tory government's public spending freeze on public services. The health service and schools got much worse as a result. And, by not reversing the rape of the railways through privatization, transport ground to halt. So public services rotted during an economic boom!

It has now been revealed, in a new analysis of the first four years of the New Labour government that investment in the public sector fell to its lowest level as a proportion of national income since the second world war! The Institute of Fiscal Studies (IFS) found that public investment was just 1.7% of GDP in 2000, down from 8.9% in 1975. There is the proof of what any parent or teacher at a school could tell you, what any patient in a hospital knows, and what any commuter to work by train or tube experiences every day.

But that's not the worst of it. Take investment in the health service. Total investment on new hospitals and equipment (so excluding spending on the wages of staff) was just 0.4% of Britain's national income in 1992. Under New Labour, it fell to even more, to just 0.2% in 2000.

"Education, education, education" is Tony Blair's election promise mantra. In the 1970s, investment spending on school buildings and equipment was just 0.7% of annual GDP. The Tories and Labour managed to drive that down to 0.2% by 1982. Now it is still just 0.3% of GDP.

Of course, Gordon is pledged to raising public investment in transport, health and education by considerable amounts. But here is the really startling fact that the Institute of Fiscal Studies has found. Even after the doubling of investment in public services up to 2004 as promised by Gordon in last year's pre-budget statement, and even after taking into account all the money that is supposed to come from big business for investment in public services through the ghastly "private finance initiative", public investment as a share of national income will still be lower than in 1992! As the IFS commented: "It is easy to promise to increase public investment sharply without going to very high level, if you are doing it from a very low base."

In practice, what all this means is that, by 2004 even if everything goes well and New Labour sticks to its promises, improvements in public services will be hardly visible to most of us.

At least it won't be any worse, you might grudgingly admit. Well, even that is in doubt. Gordon bases all his forecasts for government spending on the British economy continuing to grow at about 2.25% a year over the rest of this parliament. That's optimistic to say the least. In the 1970s and 1980s, Britain grew at about a 2% rate, well down from the growth rate of the 1960s, of about 3.3% a year. In the 1990s, the UK managed 2.2% a year and managed to reduce and stabilize unemployment as result.

But the prospects for the next few years don't look so good. The bad news is coming. British capitalism is ill equipped to escape the huge downturn in world capitalist economic activity. The squeeze on profits for UK big business is already under way. As companies reduce investment and employment as a result, unemployment will rise by at least 300,000 over the next year. Officially, unemployment is just one million, or 3.5%. But that's a fake. The real picture on any accepted international measure is at least 1.5m or 5.4%. Even so, this is low historically. But by the end of next year it's going to be over 6% and rising.

That means less tax revenue for the government and more social security spending. The budget surpluses that prudent Gordon has been achieving over the last few years are going to turn into deficit. Then the crunch comes. How can increased spending be achieved without raising taxes or increasing government borrowing and debt? No doubt, Gordon will have told parliament that he can square the circle. But nobody really believes him.

The Tories, as represented by that revolting weasel, Michael Howard, a man "with a touch of the darkness about him", will go on about the rising tax "burden" that New Labour will create for big business. Ironically, New Labour has steadily reduced that burden, as Tony Blair and Gordon Brown continually boast to the CBI and reactionary extremist organisations like the Institute of Directors. Indeed, Gordon Brown will have announced further cuts in capital gains taxes for the rich in this pre-budget statement.

As this column has shown before, corporate taxation revenues have fallen under New Labour, while national insurance contributions and taxes (VAT, fuel tax, etc) for the average working family have risen. So, to meet his targets for spending, taxes for you and me will have to rise. And yet services will hardly improve!

And then everything depends on global capitalism staying healthy. Will the US economy jump quickly out of its economic recession (officially declared as such by the august National Bureau of Economic Research only last month) and allow the US cavalry to save the rest of the world.

In the last few weeks, stock markets around the world have recovered sharply. Optimism prevails. The "War against Terrorism" seems to be going well in Afghanistan. And the US economy, key to world capitalism, seems to be making a small turn for the better. Or so US government leaders and Wall Street financial experts are arguing. But there is nothing to justify this optimism.

How can anyone take the experts seriously? Read the first sentence in the Organization for Economic Cooperation and Development's Economic Outlook, published less than a year ago in December 2000: "Global economic growth appears to have peaked during the first half of 2000, but world economic prospects remain relatively bright..." Attached to this rosy assessment was an equally rosy forecast for US economic growth of 3.5% in 2001 and 3.3% in 2002.

Then read what this same top economic organization in the world wrote in its June 2001 Economic Outlook, barely four to five months ago: "Economic growth in the OECD area has been weakening since autumn of 2000, but the forces damping growth are projected to dissipate during the current half-year." US real GDP growth was projected to accelerate from 1.2% in the first half of 2001 to 1.9% in the second half and further to 3.1% in 2002 and 3.5% in 2003.

The very latest estimate, drawn up at a recent committee meeting of OECD staff economists and government officials and to be published in December, is for 1.1% in 2001 and 1.3% in 2002. Although sharply down, it is already a joke before it is published, because to realize a growth rate of over 1% this year would require the economy to have already been accelerating. Just the opposite is true.

In the course of this year the US economy has developed far worse than had generally been expected, and ten interest rate cuts by the Fed have completely failed to show any desired effect. Yet the faith that the almighty Mr Greenspan and the Federal Reserve can and will successfully re-ignite economic growth is unshaken.

In September, America's industrial production experienced its 12th month of decline, the longest unbroken fall since 1945. Yet the consensus continues to reckon that America's recession will be brief and mild. Underlying these forecasts is a deeply embedded conviction that the US economy is still bursting with underlying economic strength and dynamism. The idea that America might follow Japan into a prolonged period of economic stagnation is emphatically discarded.

All this optimism ignores the crucial importance of profits in the capitalist economy. The US is in the worst profit crisis since the 1930s. According to Dresdner Kleinwort Wasserstein, the reported profits of companies in the S&P 500 index fell by 60% in the year to the second quarter. It's already the biggest decline since the Depression. As a result, profits in the non-financial corporate sector fell to 8.1% of GDP in the second quarter of this year, down from 12.5% in 1997. Profits have slumped further since then, as the third quarter figures (out by the time you read this) will show.

The world is not going to recover quickly from the economic recession of 2001. And as capitalism grinds further down into depression, all the prudent calculations of Gordon Brown and the belief of New Labour in globalisation and the end of boom and busts in the New Economy will be exposed as sham.