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Article 2014 The Year in Review

UK 'recovery' in review

With 2014 coming towards an end, we are told that austerity is finally producing growth and employment. But why can most people not feel it? Looking behind the figures reveals a worrying household debt crisis

Tens of thousands of people marched against austerity in London in October. Photo: Fanny Malinen

The official recovery

On December 3rd, George Osborne will deliver his Autumn Statement. He will probably praise this year’s rise in GDP figures, attributing it to his economic policies. In October, when fears of a new Eurozone crisis emerged, he told BBC that “we have a stable economy and our economic plan is working.”

The UK economy has grown by 3% in the last 12 months, faster than any other developed country. Next year, the International Monetary Fund (IMF) is estimating it will continue to grow, although at a slightly slower rate of 2.7% due to a rise in interest rates. But they say the recession is finally over and “among advanced economies, the United States and the United Kingdom in particular are leaving the crisis behind and achieving decent growth.”

On the surface, it seems this is the case: unemployment has been falling steadily. But when one looks at the figures in more details, the picture that emerges is all but that of a healthy recovery.

…is not felt by many

According to a survey by the Financial Times, “only 1 in 7 British adults say they can feel benefit of economic recovery where they live.” There are also huge regional disparities: with 48% in Northeast England and 40% in Wales believing there is no recovery, compared to 18% in Oxford. When asked whether they could feel the recovery personally, only one in ten of the people in North East and Wales said yes.

This is no wonder: in the year to September, wage growth overtook inflation for the first time in five years. But the 0.1% increase was hardly worth celebrating considering that it followed a decrease of roughly 13% in real wages since the crash. The decline has been unprecedented, with records going back to mid-19th century.

This type of figures are, of course, always averages. They say nothing about distribution and thereby mask rising inequality of pay. In 2013, real earnings of the top 10% increased by 3.9%, whereas those of the bottom 90% fell by 2.4%.

If that is not enough, earnings from self-employment have declined by 22% since 2008. With the number of people in self-employment rising by 700,000 in that time, it is unlikely that that fall in earnings is a fair price paid by entrepreneurial risk-takers. It seems more plausible that in the absence of other jobs, many have been forced into precarious self-employment. Also part-time work can create a working poor whose plight is hidden by official employment figures. A survey by Unite the union released in autumn 2013 estimated there were 5.5 million zero-hour contracts in the UK, with under-thirties more likely to rely on precarious work. Of the respondents to the survey, only 13% said they would have liked to stay on zero-hour contracts were they given the choice.

The growth in employment has been all the more celebrated because it has not led to a rise in inflation: the Consumer Price Index has gone up by only 1.2% in the last year.

But again, the averages don’t show that the rises in prices have not been felt evenly. To reveal the reality of cost of living, the New Economics Foundation has produced a Real Britain Index. Since 2008, energy bills have increased by 67% whereas leisure activities only 27%. It is well known that poorer people spend more of their income on essentials than the rich, meaning the cost of living has increased disproportionately more for those on low incomes.

Regressive cuts and taxation

A study by Tim Horton and Howard Reed calculates the distributional impact of the 2010 Spending Review: The poorest 10% of households (in income terms) are losing services worth nearly 30% of their income - compared to 2% of the top decile. This is not only because the same changes would hit poorer people proportionally harder, but because the cuts really are regressive. Those on highest incomes use less of services such as social care and housing that have seen some of the hardest cuts.

Taxation, too, has become increasingly regressive since the crisis. Since 2008, tax receipts from corporation tax have fallen by 14%, whereas collected VAT has seen a 32% increase - no wonder as this flat-rate consumption tax that hits the poorest hardest has been increased. But despite increasing employment, income tax receipts have not gone up, another testimony to the failure of the ‘recovery’ to reflect any meaningful growth in incomes.

In light of these figures, it is no wonder that food bank queues have become the dominant image of poverty in Britain, and benefit sanctions are leading job seekers to despair and even death.

But unfortunately the well-documented failures of austerity do not mean that there is an end in sight: less than half of the cuts have been implemented by now.

In theory, austerity sometimes works

The theoretical basis for the record-harsh austerity programme rests on the idea that cutbacks in public spending will produce growth. This counterintuitive logic of expansionary fiscal austerity is based on expectations regarding the future: cuts need to be harsh and decisive to give a credible signal that taxes will stay down also in the future to give the private sector courage to invest. Fiscal adjusment, this economic thinking asserts, has to come from spending cuts: raising taxes would again hinder private sector stepping in to fill the gap.

The problems with this line of thinking are obvious: neoclassical economics rests on flawed assumptions such as rationality concerning future expectations, but also that of full employment. In reality, as the fact that business investment only started to increase last June after years of stagnation proves, there is no guarantee that private sector would step in. And as the Keynesian economist Robert Skidelski says, “Government spending to put the unemployed to work is not taking away employment from those already at work: it is adding to the amount of employment.”

The evidence for austerity having ever produced growth is equally dubious. In a famous 1998 paper, economists Alberto Alesina and Silvia Ardagna select ten case studies of fiscal adjustment from the 1980s and 90s. They find that only “two cases appear unambiguously expansionary: Ireland and Australia”. For Denmark, the case is “mixed”, Belgium’s “unclear”, whereas “Canada, Netherlands, Sweden, Ireland and Greece show no sign of an expansionary fiscal advantage”. Still, their conclusions have been widely taken as evidence that austerity works; Alesina has since advised Finance Ministers of the EU, which is pursuing at least as relentless cuts as the UK government is.

What is growing in the UK?

If wages are falling for most workers and benefits face heavy cuts, how can consumption be on the rise? The answer is credit. More and more people rely on consumer credit, credit cards or payday loans for their essential shopping, with unsecured lending increasing by around £1bn a month.

As the Guardian Economics correspondent Phillip Inman writes, the rise in consumer credit is changing the terms at which we buy things: In 2013, all the growth in car sales resulted from manufacturers’ attractive loan offers. Similarly to interest-only mortgages, this effectively means that people are leasing their cars and houses rather than actually buying them.

But by focusing on GDP, it does look like growth. So does the rise in house prices, driven by London where the increase in the year up to September reached a phenomenal 18%. Since then, there have been first signs of the market cooling down - in what manner the inflated prices will come back to earth remains to be seen. As the rise in the volume and complexity of financial products in the run-up to the previous financial crash showed, asset inflation can be far from a healthy sign of boom. For sure, it is also a measure for distributing wealth to the top.

There is also debt such as student debt, resulting directly from the austerity measures attempting to tackle public indebtedness. But shifting the bill to future graduates could backfire heavily: the estimated number of graduates who will not be able to pay their loans is threatening the viability of the entire higher education funding system. What the austerity regime does not factor in is that there is a limit to which you can increase indebtedness without increasing incomes.

On top of household debt shown in official statistics - 140% of disposable income according to the IMF - UK consumers are struggling with almost £5bn of ‘hidden debt’, consisting of rent arrears, unpaid council tax and household bills, a report by the thinktank Demos calculated in March.

The reliance on credit to make up for stagnant wages is no new tendency: Data from International Labour Organisation shows a steady decrease in workers’ share of national income since the 70s. During the same era, financial markets have expanded sensationally; and unsurprisingly, increasingly costly financial crises have become a feature of the world economy.

The last time the expansion of credit without incomes to sustain it proved disastrous in 2008 when the US housing bubble burst. With the lessons learned from that, it is only possible to wonder why the spectacular expansion in UK private debt is celebrated as recovery.

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