In the second quarter of 2002 household savings were just 4.5% of income, only half the level of a decade before. Since then, the rise in borrowing has quickened. Credit card borrowing this September, for example, rose twice as fast as in the same month the previous year:
This high level of borrowing has been possible because of low interest rates. As the level of debt has risen, interest rates have fallen in proportion so that interest payments have stayed roughly constant as a proportion of income. However, there are two main reasons why this poses important dangers for economic stability. rates can be kept low for vet irstly, it is unlikely that interest
much longer. One reason for this is that the boom has meant that consumption has been growing faster than output. • From 1995 to 2002 while consumption grew by 4.2% each year UK output grew by just 2.6%.
This means that the extra consumption has to come from imports and the result of this has been a mushrooming trade deficit. Unless international capital can be persuaded to fund this deficit indefinitely by lending to Britain, or investing in the UK, eventually this deficit will tend to push the value of the pound down. This in turn is likely to increase inflation and lead to the Bank of England raising interest rates.
Interest rates may also rise because of an increase in government borrowing.
Current estimates are that the gap between public spending and taxation is If taxes do not rise quickly the government will have to borrow money, and this could push up interest rates.
•.. argument has been put forward strongly by Cambridge economists Wynne Godley and Alex Izureita, and has become
n November 2002 Financial Times an unbalanced expansion. Behind it lies explosive household consumption and a
"Until a year or so ago a smooth readjustment to normality seemed not implausible. Alas, that looks increasingly unlikely."
Since then, the imbalances highlighted by Wolf have become even sharper. What he and other analysts cannot explain is just why this kind of problem continues to afflict British capitalism. It is here that Marxism can offer some of the answers.
The UK economy is continually faced with two crucial problems - of establishing the conditions for profitability in the sphere of production and of actually realising these potential profits by creating the conditions for stable growth. The difficulty for capital is that these two objectives conflict.
The historic weakness of at least that section of British capital located in Britain, as opposed to overseas, has meant that it has relied heavily on driving down wages and other costs in order to generate profits through proThis strategy, however, has made it very difficult for these profits to be realised effectively by the sale of the goods produced, since low wages have led to a continual shortage of demand. are allowed to rise in order to generate
tant parallels between Gordon Brown
and Nigel Lawson, the former Tory Chancellor whose policies led to that recession. Both were initially seen as miracle workers, before the combination of a housing and consumer boom with a rocketing trade deficit took its toll.
Brown still has important advantages that Lawson did not have, notably the continuing low rate of inflation, which gives him some room for manoeuvre. But the similarities that do exist highlight the failure of New Labour over the last seven years to solve any of the underlying problems of British capitalism.
This failure will increase the opportunities for socialists to argue that these problems can only be solved by changing the system entirely. New Labour has failed to solve any of the underlying problems of British capitalism.
page 18 of the scan
International resistance