The Tories have no real plan to get out of the current
economic crisis, but they are determined that the working class will foot the
bill. In that way, their hope is that
the end result of this economic slump will be much lower wages across the board
and that profits for the remaining companies will significantly increase as a
The UK has one of the worst per capita death tolls in the
world. With an OBR forecast of a
contraction in GDP of 11.3% it also has an economic slump of the same
magnitude. The OBR reckons it is the worst for over 300 years.
Chart 1. OBR: The Worst Slump since the Great Frost of 1709
This slump is treated by ministers and commentators alike as
if it is an act of God, rather than a consequence of government failure. However, its alleged effects fall into a
different ‘something must be done’ category.
In particular, the propaganda campaign on the deficit in government
finances has begun, in a farcical re-run of the drive to austerity from 2009
onwards that led to austerity, the BBC’s chief political correspondent Laura
Kuenssberg plays an especially prominent, pernicious role with bulletins filled
with talk of “we
can’t afford” to support jobs and families during and after the pandemic,
that there is “no money left”, that we’ve “maxed out the
nation’s credit card”, that we’re “loading debt onto our
children”. Even mainstream economists such as Jonathan Portes describe
this all as ‘economically illiterate nonsense’.
Chart 2 shows, public debt is rising but it is far from unprecedentedly
high. Crucially debt interest as a
proportion of GDP is close to its all-time lows because global interest rates
remain so low. The debt is currently
easily affordable, because interest payments are so low.
2: OBR: Debt and debt interest payments as a proportion of GDP
The scaremongering about the debt and deficit levels serve
another purpose altogether. This is the attempt to justify the freeze in public
sector wages, which is a cut in real terms (after inflation). This is the one big ‘saving’ announced in the
Spending Review, along with further big cuts in spending on public services in
Yet it is not a big saving at all. Unusually, the Chancellor did not provide a
specific estimate of the ‘saving’ in his review of Policy Costings. But an approximate estimate (current author’s
calculation) is an annual saving of £3billion to £4billion.
This is a pitifully small amount relative to government
finances in aggregate. The total forecast deficit for this year is £394
billion, so the entire cut to public sector wages falls with the scope of
accounting errors. The Chancellor
boasted that £280 billion had already been spent, largely on supporting
businesses. And it should not be
forgotten that the public sector workers’ wages have already been earmarked as
a contribution towards a £26.4 billion increase in military spending.
As SEB has argued previously the purpose of the
public sector pay freeze (a real terms cut) is not to reduce the deficit. With these magnitudes it would take over 100
years, even assuming there were no indirect negative economic consequences
arising from it. The real purpose of the
public sector pay freeze to attempt to set a ceiling on all pay after the
crisis is over, and thereby lower all wages in real terms.
This was its purpose in the austerity offensive from 2010
onwards. This had the desired effect of
lowering real wages for a period, but the electoral timetable combined with
very low unemployment meant that holding down wages could not be
maintained. The current plan is to solve
that problem of wages creeping higher while there is low or zero productivity
growth, and which prevents the growth of profits. This is the return to mass unemployment.
The OBR’s central forecast is that 2.6 million people will
be made unemployed and that the unemployment rate will rise to 7.5%. Its worst-case scenario is that the
unemployment rate rises to 11%, or almost 4 million people. This is getting into Thatcher territory.
Chart 3. OBR: Forecasts for fall in GDP, rise in
In this way, this government will hope to combine the
Thatcherite effort to lift profits by deindustrialisation, with the cuts to
real pay under the Tory-led Coalition. Of
course, neither of these strategies worked even in their own terms, as profits
did not rise sufficiently to restore UK competitiveness or spark an investment
Yet the current Tory strategists will be hoping that by combining
this worst of both worlds, cutting real pay and mass unemployment, they can
achieve something their predecessors could not. They aim to get wages down and keep them
there. We shall see if this toxic mixture has the desired effect. But millions of people will face misery,
increased poverty and unemployment if their plan is put into action.
The experience of this country (both positive and negative)
and many others shows that there should be a compete lockdown to combat the
pandemic. This means all non-essential work stopped, all leisure and other
services halted, schools closed and all possible higher education moved
online. There should also be proper
compensation for workers, who should receive 100% of their pay, not the 80%
currently (or none at all for some freelance and other workers). That
compensation should be for the duration of the furlough itself, at first approximately
8 weeks and until new cases reach levels where they can be suppressed, and then
extended for the necessary period while the gradual back to work process is
A combined crisis
The public health crisis caused by the Covid-19 pandemic has
led in turn to an economic crisis. There
is no possibility of ‘saving the economy’ while a pandemic is raging. Services account for approximately 70% of the
economy and the demand for many of these is discretionary. You cannot force people to go to pubs,
cinemas or restaurants in a pandemic. On
the experience of this country and many others, the majority of people will
simply refuse to take up their normal leisure and cultural activities. It is not the restrictions that are killing
these businesses and workers’ jobs. It
is the pandemic itself.
Similarly, there is no ‘trade-off’ between combatting the
virus and protecting the economy, as ministers and others frequently
claim. The UK’s own disastrous record on
both demonstrates that. The UK has one
of the worst death tolls per capita of any large country in the world, and the
worst total in Europe despite both waves of the virus hitting this country
later than continental Europe. It has also the worst economic performance any
major Western economy (see Chart 1 below).
Chart 1. UK GDP, Largest Contraction Among the Major Western
By contrast, it is clear that all the countries that have
effectively eliminated the virus are also the economies that will grow the
strongest this year, as shown in Table 1 below.
Table 1. IMF Real GDP
Growth Forecasts for 2020
Real GDP Forecast, %
Source: IMF World Economic Outlook
At the same time there is a public health imperative to
combining full lockdown with full pay for all furloughed workers. Many workers are already in poverty even at
100% of their usual pay. Excluding
benefit claimants are people in work and 56% of those in poverty before the
pandemic were in work. Put simply,
millions of a were already poor when being paid at 100% of their wages. Reducing it to 80% increases the probability
of outright destitution for millions.
The pay cut also compels many to ignore lockdown
restrictions, even when they know they are putting themselves and their loved
ones at risk. 80% of breadline wages is
insupportable. People are then forced to seek additional work, in breach of the
requirement to close all non-essential workplaces. It is morally unjustifiable to cut those wages,
including those on the National Minimum Wage, as this government is doing. It is in the interests of the whole of
society that people are able and do adhere to strict lockdown measures.
‘There is no money
The main objection to 100% pay for all furloughed workers is
cost. But the additional outlay for full
pay is tiny in comparison to other levels of expenditure, including a £300
billion bank loan guarantee scheme and the
initial £110 billion support for businesses (via the Job Retention Scheme,
the bounce back loan scheme, the business rates holiday and other measures).
The estimated cost of the initial furlough scheme which ran
to the beginning of October was £40 billion. Using simple maths, the total cost of a scheme
offering 100% of wages is only marginally more at £50 billion. Of course, the government cap can continue to
apply at £2,500 pay per month.
The National Institute for Economic and Social Research
that the scheme is self-funding.
This is because over the long-term it helps to preserve jobs and all the
tax revenues that they generate. Furlough payments are like an insurance
policy, helping to ensure the continuation of that future tax revenue stream
dependent on jobs.
But the furlough scheme, and increasing it to 100% of pay,
is also largely self-financing even in the short-term. Over the period of the first half of the
Financial Year (FY), which approximately coincides with the bulk of the initial
furlough scheme from April to the end of September, government revenues
declined by £42.6 billion. As the
biggest contributors to tax revenues are from personal income taxes and
indirect taxes on personal consumption, it is clear that government revenues
are lowered by reduced employment and reduced pay. So, in the first 6 months of this FY, taking
just VAT, income tax and social security together, government revenues fell by
£23 billion compared to the first half of the last FY. The shortfall would be even greater adjusted
The increase to 100% furlough pay is easily affordable.
It would also be an important part of a genuine lockdown,
which could break the back of the virus as has been done elsewhere (and which
was almost done here until lockdown was ended too early in June).
There may be a more valid objection about fairness,
especially for essential workers who would continue at work even during a
properly effective lockdown. But that should
be dealt with in other ways, such as large bonuses and substantial
above-inflation pay rises when the pandemic is finally ended.
The labour movement should argue for 100% of pay in a
complete lockdown. Full lockdown and
full pay now!
Recently the Chancellor Rishi Sunak won widespread plaudits for
altering the terms of his financial support for workers whose jobs are under
threat because of the restrictions introduced in response to the pandemic. The furlough scheme is back, leaving the
workers affected with just 80% of their wages, rather than 67%.
This was simply a tactical retreat. The government has clearly signalled it is
conducting a ferocious attack on living standards but has had to recalibrate
what it can impose right now.
It should be clear that the scale of this attack on the living
standards of the working class and poor, is much more ruthless than the
austerity of 2010 or in some respects even than Thatcher in the 1980s. As a result, it should be equally clear that
success for the government would be a decisive shift in favour of big business
and the rich, at the expense of workers and the poor.
Since class warfare is being waged, anyone who preaches social
peace now is simply making it harder for the working class and its allies to defend
themselves against a major defeat.
down, not levelling up
The claims that the Boris Johnson government is engaged in ‘levelling
up’ poorer areas of the country belong with the falsehoods that he is
‘implementing Corbyn’s policies’, is ‘spending like a socialist’, has
‘abandoned austerity’. They are all pure
hokum. They are proposed by those wishing to blunt any opposition to the
government, and repeated by those who clearly do not understand what is going
on around them.
All these claims fall apart as soon as the government meets any
resistance, as the excellent campaign for free school meals by Marcus Rashford
and others shows. Donating £12 billion
to SERCO, Deloitte’s and other private sector companies, most of whom are
intimately connected to the Tory Party, while they for long refused £120
million for free school meals is not levelling up, implementing Corbyn’s
policies or socialist spending or any other of the spurious claims.
Austerity is properly understood as a transfer of incomes and
wealth from poor to rich, from labour to capital. So, in the very first
austerity Budget by Osborne and Cameron there were £12 billion in cuts to
social security while business taxes were cut by almost exactly the same
amount. Clearly, even in simple
accounting terms (leaving aside any economic effects) this had nothing to do
with reducing the deficit, as was claimed.
But it did transfer government spending from the poor to the rich.
Austerity has continued in the same vein, with varying intensity ever since. Previously,
Thatcherism used the cloak of monetarism in order to effect exactly the same
type of transfer, largely through an assault on the unions and tax breaks for
In the same fashion, the overwhelming bulk of every package
announced in the current crisis is to benefit big business. So, of the initial £330 billion emergency
package that was finally announced after the March Budget, £300 billion was in
the form of loan guarantees to the banks to avoid losses on their business
lending. In contrast, just £1.6 billion is for local
authorities who are under enormous pressure both from reduced revenues and much
higher outlays to meet the mounting effects of the crisis caused by the
on the working class
The centrepiece of the class warfare being waged by big business
and their government is on wages, hours and employment. Here, the ratchet down effect is the most
wide-ranging in its effects.
This is easy to demonstrate.
Before the crisis began, however low wages were for workers across many sectors,
they did at least receive 100% of those wages.
Under furlough conditions, where work was supposed to be suspended, this
has been reduced to 80%. At the same
time, and completely against the rules, many companies committed fraud by
forcing staff into work for no additional pay. Up to a third of all employees
were asked or forced to come in, according
to one estimate.
In addition, a large number of firms are in the process of making
that reduction permanent. Three high
profile employers, British Gas, British Airways and the BBC have all launched
fire and rehire schemes to reduce wages and conditions. Many others are following suit but are less
well known. As the end of the previous furlough
scheme approached, the government tried to enforce a reduction to 67% of wages
for some topped up by 5% from employers, and no support at all for those caught
in the spurious ‘Tier 2’ restrictions.
The fear over the probable immediate collapse in jobs forced a tactical
Now that furlough is back, there has been a return to 80%, at
least for the time being. But even if this is the full extent of the reduction,
it still represents an enormous and dramatic shift from labour to capital. Nothing on this scale was achieved under
The intention of the ruling class and the Tory government is as
far as possible to make this reduction permanent.
Mainstream economists have long studied the issue of the
determinants of wages for obvious reasons.
There is a whole literature devoted to what they describe as the problem
of rigidities that lead to ‘sticky’ wages, that is the difficulty in driving
down nominal wages (here is just one example pdf, there
are innumerable others).
This ‘stickiness’ of wage growth is shown in Chart 1 below. The annual growth in wages in nominal terms
is shown in orange, the growth in wage in real terms (after adjusting for
inflation) is shown in blue. Nominal
wage growth hardly fell at all in the last recession. The brief dip in wages occurred in the first
few months of 2009 and began to recover very slowly in later months. It was only the simultaneous fall in the
value of the pound, which drove up prices in an economic slump, which caused
real wages to fall over a more prolonged period, from mid-2008 to the end of
2009. But even wages in these terms
began to recover in early 2010.
Real wages for public and private sector workers fell after the
June 2010 ‘emergency Budget’ all the way through to October 2014. This was a result of government policy. Only as the Coalition government geared up
for an election the following year by loosening government spending did real
wages start to crawl higher. The
austerity policy was highly successful in cutting real wages, as it was
designed to do.
Chart 1. UK Nominal and Real Wage Growth, % change
If everything else is unaltered, the combination of economic
weakness, rising import prices and rising real wages from 2010 onwards was
bound to damage profits severely. The centrepiece of the austerity policy was
to combat this profits-damaging combination of factors.
The chosen method was a public sector pay freeze. Not only did this have the direct impact of
cutting real wages (as well as cuts to pensions) for approximately 1 in 6 UK
workers (over 5 million of them) in the public sector where union densities are
highest, but it also had a ‘demonstration effect’ (pdf), of
setting a nominal wage freeze or similar in the private sector as well. With
prices still rising because of the effects of the weakness of the currency,
real wages for workers started to fall once more.
However, as appealing as it may be to employers to cut wages if
they can, this does not by itself resolve the issue of profitability especially
if the overall business conditions are characterised by sluggish growth and
rising import prices. The austerity policy of driving down wages was only
successful in raising the level of misery. It was not successful in its overall
aim of raising profits.
Worse, from the perspective of the architects and supporters of
austerity, nominal wage growth continued to rise at a very modest pace after
2014 and continued to rise until the current pandemic began. Real wage growth was more erratic, undercut
by rising inflation once more in 2017.
But even so, no blow had been struck which cut wages sufficiently to
raise profits on an enduring basis.
This trend in profits is shown in chart 2 below. Initially, profits fell as they tend to
during a recession. Sales were falling
and as noted above wages remain ‘sticky’.
(The ONS data shown is actually a measure of the rate of return on
capital, not strictly profits, but it is a useful guide to profitability). Subsequently profitability did recover but
Yet profitability continues to remain below 2008 levels. And, as
regular readers of SEB will know, profitability never rose sufficiently
to spark an upturn in private sector investment. From the perspective of the
capitalist class as a whole, there is no incentive to raise investment, which
means adding to the productive capacity of the economy, if the rate of return
on existing investments is depressed below usual levels.
reserve army of labour
In the last recession and under the austerity policy real wages
fell initially by 6% and only recovered over a very prolonged period. Under
Thatcher, real earnings for those in work did not fall at all. Instead, her policy addressed the problem of
low profitability by massive deindustrialisation that created 3 million
The current policy is a combination of these two. Through government policy wages are being
slashed by 20% for very large parts of the workforce, even including those on
the National Minimum Wage. At the same
time there is a sharp rise in the level of unemployment, and some businesses
will fold. The combination of these two factors,
the sharp reduction of wages and the surge in unemployment is government
policy. It is a new development and its
architects will be hoping that one reinforces the other, that much higher
unemployment will be a decisive factor in keeping wages low long after the
public health crisis is over.
This mechanism was first analysed by Marx as the creation of the
‘industrial reserve army’ of labour. Marx says the reserve army of the
unemployed exists in no previous form of society except in capitalism, and is
integral to it.
“The industrial reserve
army, during the periods of stagnation and average prosperity, weighs down the
active labour-army; during the periods of over-production and paroxysm, it
holds its pretensions in check. Relative surplus population is therefore the
pivot upon which the law of demand and supply of labour works. It confines the
field of action of this law within the limits absolutely convenient to the
activity of exploitation and to the domination of capital.” – Karl Marx, Capital, Volume One, Chapter 25
In general, high or sharply rising
unemployment holds the risk that it may produce social unrest and political
discontent. The government of an
advanced industrialised country may choose to engineer a sharp rise in
unemployment in an attempt to restore profitability, or it may choose to try to
cut wages. But both stratagems entail
high risk. Combining the two is
exceptionally high risk. Only in a
period of desperation and generalised crisis would they be attempted or could
they be potentially successful.
Under the cloak of the public health
crisis which their own policies have helped to create, the current government
is attempting such a strategy. Naturally it is in the interests of all workers,
all the oppressed and vast majority of society that they are not successful.
In the West the population is at present sheltering to
protect itself from Covid, entering the greatest economic downturn since the
Great Depression, and facing the threat of unemployment and reduced living
standards. On the other side of the world in China, something going in exactly
the opposite direction is occurring. China unveiled its new Five-Year Plan.
This will take a country which in 1949 was almost the poorest in the world, and
its almost 1.4 billion population, into the ranks of high-income economies by
international classification – with all the steps forward in life expectancy, living
standards, health, education and social conditions this brings with it.
There has never been such a large scale economic and social ‘miracle’
in the entire history of humanity – the population of China is larger than the combined
population of all other high-income economies in the world.
This transformation therefore poses the most profound possible
questions for socialists, socialist theory, and the international left. If, as
some on the left claim, China is a capitalist country then the only conclusion
that can be drawn from these facts is that capitalism remains a progressive
system. If capitalism can raise almost one fifth of humanity from nearly the world’s
most grinding poverty to high income status in 70 years, that is within a
single lifetime, it is nonsense to claim that capitalism has exhausted its
possibilities. If capitalism had delivered 850 million people from
internationally defined poverty, as China has, then capitalism would have
delivered gigantic progress for humanity. Capitalism would have delivered an
immense improvement, a qualitative step forward in life, for a higher
proportion of humanity than the European Union and the US combined.
Furthermore this capitalist system would also have been demonstrated
to be able to deliver similar results not only to China but to be a path that
could be followed by other major countries – for example Vietnam, a country of
almost 100 million people, is delivering economic growth and reduction of
poverty at a rate, if at an earlier stage of development, essentially the same
as China’s. If capitalism can deliver such benefits it is utopian not to
But in that case, there is an impossible mystery. Why has
such unparalleled economic development and improvement in living conditions not
been delivered by the other countries following the capitalist system?
In summary, the ‘leftist’ claim China is a capitalist
country paradoxically, and doubtless against the subjective intentions of those
on the left who put it forward, leads to the conclusion that capitalism can
deliver historically unparalleled improvements in living standards!
There is in fact no such mystery because China, and Vietnam,
are not capitalist but socialist countries. That is why such progress has been
made. And this is why the left has a real model for economic development across
the world – something it is vital for the left to understand, most immediately
in developing countries. Socialism is not a utopia, it is not a dream, it is
not something which was achieved in 1917 in Russia and has never been achieved
since. It is something real, totally practical, and which delivers immediate
benefits to truly gigantic numbers of people.
The following article by John Ross, which appeared in
China.org.cn, on China’s new Five Year Plan analyses the historical facts which
have to explained by any analysis of China, the nature of its new plan, and the
step forward that this represents as the country enters the stage of
development of a high income economy.
* * *
The press conference which followed the Plenary Session of
the CPC’s Central Committee put forward guidelines not only for China’s next
Five-Year Plan, for 2021-2025, but also for more medium-term development of
China up to 2035. The two are interrelated because the next Five-Year Plan will
inaugurate a qualitatively new period in China’s economic development which is of
global significance. This goes beyond the fact that China’s short-term economic
prospects are better than for any other major country – the IMF estimates in
2020-2021 it will account for 60% of global growth. The new Five-Year Plan inaugurates
a fundamental transition.
China in 2020 became a ‘moderately prosperous’ economy by
its own national classification – also achieving its goal of the elimination of
absolute poverty. But most countries use World Bank classification in making international
comparisons – dividing economies into low, medium and high-income groups. By
this criterion in approximately 2022-23, the middle of the next Five-Year Plan,
China will enter the ranks of global ‘high income economies.’
Achieving this new level of development determines the
Five-Year Plan’s nature. Previously China planned for escaping underdevelopment,
whereas this plan centres on the different tasks of building a high-income
economy. Furthermore, due to US actions, it will do so in a different
international context and where serious challenges face humanity – particularly
the threat of climate change and of economic recovery from a pandemic which Western
failure to control has created the deepest global economic downturn since the
To understand this Five-Year Plan’s place in China’s national
development, the almost incredible character of what has been achieved must be understood.
In 1949 China was almost the world’s poorest country – only 10 counties had
lower per capita GDPs. Only 73 years later, the span of a single lifetime,
China will count among the world’s high-income economies.
When the Communist Party of China took power in 1949 in
essence it put forward a promise to China’s people: ‘if China adopts our
methods the Chinese people will be taken from a century of humiliation, regain
control of their own destiny and rejuvenate their country.’ The achievement by
China of high-income international status during the next Five-Year plan is a key
symbol on the economic field that this promise was delivered – following
similar achievements in national unification, elimination of foreign military forces,
gigantic improvements in health, life expectancy, education, culture and
numerous other fields.
Internationally the scale of what is represented by the new
Five-Year Plan is clearly understood by historical comparison. Today, by World
Bank classification, only 16% of the world’s population lives in high income
economies. But China is 18% of the world’s population. China becoming a high-income
economy will therefore more than double the proportion of the world’s
population living in such states. It is a fact that no such comparable single improvement
in the position of such a large proportion of humanity has ever taken place in the
whole of history.
This staggering achievement brings new challenges. Some are
internal – a high income economy is far more complex than a low or medium one.
But some are external. The US has embarked on an attempt to block China’s development. This
path was launched by Trump with tariffs and technology bans. But there is no
indication that US policy will fundamentally change no matter who wins the US
This is what makes the much-discussed concept of a ‘dual
circulation’ economy so crucial in the new plan. Many US analysts consider
Trump made tactical errors in his attack on China. That the tariffs were a
mistake as they were paid by the US population and attacked China on terrain
where it was strong, and the US could not compete – good quality medium
technology manufacturing. Instead, it was argued, the US attack should be concentrated
on its strong point – high technology. The US should concentrate on weakening China’s
most high technology companies as with Huawei and Tiktok. Trump and Biden are therefore
urged to create a ‘technology blockade’ of China.
There are certainly doubts whether the US can achieve this goal
– it is against the interests of other countries and its own high technology
companies which previously had strong markets in China. But it would be a naïve,
unrealistic, strategy for China to base its policy on an assumption that US
policy will collapse due to its own contradictions. Therefore, to progress as a
high-income economy, China will have to increasingly rely on its own
technology. Every part of the production chain must be potential achievable in
China – best described as ‘domestic circulation’. This is different to the 1978-2016
period in which China could rely to a great extent on importing technology.
China remains committed to globalisation, which would be the
best path of development for the world, and uses every opportunity for
internationalisation, but in the new situation its domestic economy will
Obviously, this requires great national effort – money has
to be poured into R&D and scientific research. Large investments are required
to embody and produce new technology. Fortunately, China has the financial
resources for this.
This issue overlaps with international problems which are
not just due to US policy but also to common problems of humanity and particularly
climate change. Regarding this it is China’s prowess in the field of renewable
energy manufacturing technology that makes possible the meeting, and potential
exceeding, of the goals of the Paris Climate Change accords.
China had outlined its goal of ‘ecological civilization’ conceptually
previously but global attention was paid to Xi Jinping’s statement at the UN on
22 September that: ‘We aim to have [carbon dioxide] emissions peak before 2030
and achieve carbon neutrality before 2060.’ For example, Adam Tooze, one of the
West’s most eminent economic analysts and historians, noted in the US Foreign
Policy magazine: ‘with those two short sentences China’s leader may have
redefined the future prospects for humanity.’
To achieve these goals, they will have to begin to be
embodied in the new Five-Year Plan and globally these will be among the most
eagerly noted of its targets.