RISE Report: the Crash to Come: Why Britain Can't Cope with Another Economic Crisis

RESPECT

THE CRASH TO COME: WHY BRITAIN CAN’T COPE WITH ANOTHER ECONOMIC CRISIS

INDEPENDENCE S0C

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ENVIR0NMENTALISM

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RISE: Scotland’s Left Alliance Who We Are We are a pro-independence left-wing alliance launched in 2015. Our name stands for our principles: respect, independence, socialism, and environmentalism. The alliance aims to provide a socialist alternative to neoliberalism in Scotland.

Contact Us You can visit our website - rise.scot - for full information. Press contacts are Jamie Maxwell, who can be reached on 07891 907989, and Craig Paterson, 07508 482085, or email media@rise.scot Scott Lavery, a research fellow at the Sheffield Political Economy Research Institute (SPERI), is the author of this paper. He is writing in a personal capacity.

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Executive Summary • Since 2008, the global economy has become increasingly unstable. The austerity policies pursued by policymakers in Western economies combined with the emergence of a series of protracted difficulties in Asia and in the Global South - have created a ‘great imbalance’ throughout the international economy. As such, the prospect of a second global economic crisis in the near-future looks increasingly likely.

• Since becoming Chancellor in 2010, George Osborne set himself two objectives: to eliminate the budget deficit in one parliament and to ‘rebalance’ the British economy, away from debt-led growth towards an economy based on savings and increased investment. On both measures, Osborne failed. The Conservatives’ pursuit of fiscal consolidation through spending cuts has exacerbated long-standing structural weaknesses in the British economy. This leaves Britain’s finance-led growth model peculiarly exposed to a global downturn.

• This paper examines the interconnections between these two developments and outlines how the British economy has become peculiarly exposed to a future global economic crisis. In the first section, three global imbalances are identified. Slowing growth in China, the threat of global deflation and protracted economic difficulties in the Eurozone all combine to render the post-crisis global economy particularly unstable. In the second section, it is argued that Britain is weighed-down by a series of internal imbalances. The record current account deficit, rising wealth and income inequality, stagnant wages, increasing levels of household debt and regional imbalances all threaten to undermine the sustainability of Britain’s economic recovery.

• Taken together, these trends suggest that Britain’s economy is more imbalanced than it was before the 2008 crash. Underlying each of these ‘economic’ imbalances, however, sits the greatest imbalance of all: unequal power relations between workers on the one hand and the economic and political elites on the other. Britain can’t cope with another crisis. During the 2014 independence campaign, calls for a ‘radical’ form of independence became increasingly pronounced across Scotland. As a further economic crisis beckons, it is hard to imagine that that same aspiration will not return in the future - and with greater intensity.

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Britain’s economy remains deeply imbalanced and unstable. Some of these imbalances are long-standing features of Britain’s model of capitalism. Other imbalances are more direct consequences of the Tories’ austerity programme.

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Introduction In 2010, George Osborne outlined how he planned to rejuvenate Britain’s ailing economy. He set himself two key objectives. First, in his June 2010 Budget he promised to eliminate the budget deficit within one parliament (HM Treasury, 2010). Second, he promised to ‘rebalance’ the British economy: to move Britain’s economic model away from its reliance on consumption and debt-fuelled growth and to establish a new growth model, based on exports, saving and private investment (Osborne, 2010). On both counts, Osborne failed. By 2015, half of the 2010 budget deficit remained.

Large public spending cuts in the midst of an economic downturn had lowered tax revenues which in turn had frustrated deficit reduction. On ‘rebalancing’, Osborne performed even worse. When growth returned in 2013, it was driven by consumption. Investment remained low. Britain’s trade balance deteriorated in spite of a sustained period of Sterling devaluation (Berry, 2013). Today, Osborne’s ‘new’ economic model looks a lot like the ‘old’ one in place before the 2008 crash.

In spite of these manifest economic failures, the Conservative Party’s political success has been undeniable. In May 2015, against expectations, David Cameron returned to 10 Downing Street with a parliamentary majority. With renewed confidence, Osborne presented himself as a hardheaded custodian of Britain’s public finances, taking the ‘tough decisions’ needed to put the economy back on track. The Conservatives’ claim that their ‘long-term economic plan’ - now codified in Osborne’s commitment to run a permanent budget surplus by 2018-19 - has laid the foundations for future economic stability and private sector-led expansion in Britain.

However, despite the rhetoric, Britain’s economy remains deeply imbalanced and unstable. Some of these imbalances are long-standing features of Britain’s model of capitalism. Other imbalances are more direct consequences of Tory austerity. But in both cases the government’s drive to secure deficit reduction through large spending cuts has exacerbated deep structural weaknesses in the British economy. This paper identifies four areas of major ‘imbalance’ that have been re-enforced by the Conservative government’s economic policies and which render the British economy particularly vulnerable to a further economic crises in the near future.

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The four areas of imbalance are: • The current account deficit • Growing levels of income and wealth inequality • Sustained wage repression and rising levels of household indebtedness • Geographical imbalances expressed through a growing gap between the economic performance of London and the South East relative to other parts of the UK This paper examines these four ‘imbalances’ and argues that each leaves Britain’s growth model peculiarly exposed to an economic crisis in the near future. In the first section, an overview of contemporary global imbalances is outlines. It argues that the global economy is in a particularly precarious state, with slowing Chinese growth rates, the threat of global deflation, and protracted difficulties in the Eurozone all contributing to an increasingly unstable international economic environment. In the second section, the paper turns to analyse contemporary British imbalances. In four key areas, the paper argues that Britain’s growth model has either become or is becoming - more imbalanced than it was before the 2008 financial crash. In combination, these imbalances render Britain vulnerable to an economic crisis in the near future. The paper concludes by summarising the contemporary state of economic imbalance in Britain and in Scotland.

Global Imbalances The 2008 financial crash and the recession that followed resulted in the largest economic downturn since the 1930s. Eight years on from the crash, the tremors from that period still reverberate at the international, national and sub-national levels. The contemporary state of ‘global imbalance’ is in large part the result of a number of dynamics that were unleashed during the post-crisis period. It is worth briefly revisiting the series of events that led to the great ‘global imbalance’ which haunts the international economy today.

Since the financial crash of 2008, the crisis of the global economy has gone through a series of metamorphoses. It began as a banking crisis in September 2008, as the collapse of the sub-prime lending market in the US spilled-over into the inter-bank lending markets. Lending between financial institutions ceased-up and the international financial system went into a 6 | RISE.SCOT

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tail-spin. In response, governments led by Britain and the United States, initiated a massive re-capitalisation or ‘bail-out’ of the banking sector in order to maintain the liquidity of the global financial system. At this point, the crisis transformed from a banking crisis into a fiscal crisis of the state. The bank bail-outs added considerably to the debt levels of national governments. For example, within the UK, it has been estimated that government support for the banking sector amounted to £850bn (Hay, 2013, p. 7).

However, the cost of the bank bail-outs was only part of the story. As bank lending dried-up and economic activity slowed-down, tax revenues began to decline rapidly. At the same time, unemployment increased across the advanced capitalist states, causing government spending to rise substantially. This increase in public spending, coupled with the fall in GDP, meant that budget deficits - the difference between what governments spend and what they take-in in tax revenues - began to rise rapidly. In turn, these deficits had to be financed with more government debt. As a result, by 2010, government debt across the advanced Western economies had increased on average to over 90 per cent of GDP - a level substantially higher than at any stage since the 1970s (Streeck, 2014, p. 42).

It was at this point that the fiscal crisis was reframed as a sovereign debt crisis. Increased levels of public debt led to a spike in bond yields for those countries that were deemed to be at risk of defaulting on their loans.

In particular, governments on the southern European periphery began to pay hugely increased interest rates on their borrowing. In response, governments in advanced economies began to draw-up deficit reduction plans as they sought to appease international creditor institutions.

But governments can reduce budget deficits by pursuing a range of different policies, including cutting spending and increasing taxes. Alternatively, they have the option of pursuing expansionary fiscal policy. However, under the guidance of the IMF and under pressure from international creditors, Western governments reverted instead to the liberal orthodoxy: budgetary balance was achieved through deflationary fiscal policy. Spending cuts - as opposed to tax increases - became the default instrument of macroeconomic management. The results were disastrous. As national governments simultaneously cut their spending during the economic downturn, demand collapsed and unemployment worsened. As a result, business confidence fell further still. Corporations sat on huge cash surpluses, unwilling to invest in a context of extreme economic uncertainty.

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across the majority of advanced capitalist states. It was in this context of coordinated and self-defeating fiscal tightening that the current phase of global imbalance took root, producing a series of symptoms that continue to destabilise the global economy today.

Slowing Chinese Growth China was the main engine of global economic growth in the period prior to 2008. Throughout the 2000s, China had consistently registered annual GDP growth rates of between 10 and 15 per cent. This rapid expansion was crucial to growth in the advanced economies in the West, as well as to the developing economies in the Global South. For the emerging economies, the growing Chinese market was a crucial source of demand.

Exports of raw materials from Africa, Latin America and South East Asia grew rapidly in line with the expanding Chinese market. At the same time, huge Chinese surpluses - accumulated through the repression of Chinese workers’ wages and the maintenance of a low exchange rate - created a large savings glut. These funds were increasingly channelled into capital markets in the Western economies, driving down commercial interest rates further and augmenting demand for cheap Chinese imports (Saull, 2012, p. 324). However, in the aftermath of the 2008 crisis, this dynamic was fundamentally undermined. As global demand contracted, Chinese growth halved throughout the post-crisis period, falling from 14.2 per cent in 2007 to 7.4 per cent in 2014 (The World Bank, 2016). By January 2016, Chinese growth had reached a 25 year low. This downturn has impacted severely on developing economies in the global South, in particular hitting oil exporters and the mining sector within Africa and Latin America.

The West has not been immune to slowing Chinese growth either. Growing instability in China has impacted negatively on global stock markets. At the start of 2016, stock market turbulence emanating from China caused panic on Wall Street, with the NASDAQ losing 10.5 per cent and the Dow Jones 8.4 per cent of their value over the course of the month. With China’s total debt stock rising rapidly - it increased from 130 per cent of GDP in 2009 to 280 per cent of GDP in 2015 - and its manufacturing output contracting, the country stands-out as one of the key weakness in the global economy.

Falling Prices – Global Deflation The slowdown in Chinese growth has been one of the key factors behind the second global imbalance that characterises the contemporary period: falling commodity prices and the increasing threat of global deflation. As a result of collapsing Chinese demand, 42 of the 46 commodities monitored 8 | RISE.SCOT

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by the World Bank traded at their lowest level in 2015 since the early 1980s.

In addition, the austerity programmes implemented across the advanced capitalist economies have further undermined consumer spending power.

This has, in turn, further undermined aggregate demand and encouraged falling prices. Deflation - consistently falling prices - may sound like a positive development for consumers who might see the real value of their incomes increase as inflation drops. But if a deflationary spiral takes hold as happened in Japan throughout the 1990s - the effects can be ruinous.

First, consistently falling prices can lead households and firms to hold back on their spending and investment as they anticipate future price drops. This can lead to lower growth and further price cuts. Second, falling prices increase the value of debt in real terms. This can act as a further disincentive to investment and therefore as a further drag on growth. The threat of deflation has been one of the key underlying dangers throughout the post-crisis period (Gamble, 2014, p. 156). It took hold in 2014 in the Eurozone and re-emerged there in September 2015. The deflation threat also led the Federal Reserve and the Bank of England (and subsequently the European Central Bank) to pursue a distinctive regime of ‘loose monetary policy’. This is reflected in record low interest rates and sustained periods of ‘Quantitative Easing’, designed to expand the money supply, boost corporate portfolios, and stave-off the deflation threat. However, as we shall see, these policies have unleashed new imbalances that also threaten the stability of the global order. Deflation therefore remains another key area of weakness and imbalance globally.

The Eurozone Crisis The third area of global imbalance is the protracted economic problems within the European Union, the world’s single largest trading bloc. Since 2010, the so-called ‘Troika’ - the European Central Bank, European Commission and the International Monetary Fund - have insisted that key Eurozone member states implement largescale austerity packages in exchange for ‘bail-out’ funds. The effects have been devastating. The unemployment rate in Spain remains above 20 per cent while youth unemployment registers at a staggering 46 per cent. In February 2016, Greece slipped back into recession, weighed down with an un-repayable debt burden. Even Portugal - often held-up as the ‘good pupil’ of Eurozone austerity - has a government debt level of over 129 per cent (after over six years of heavy spending cutbacks). A recent IMF report emphasised that a small change in market sentiment could “render Portugal’s capacity to repay [its debts] more vulnerable”. The overall impact of these shifts has 9 | RISE.SCOT

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been to constrain growth throughout the Eurozone. Austerity pushed up unemployment and debt levels across the so-called ‘programme’ countries.

However, it has also constrained demand for exports from the Eurozone core, in particular from Germany. As a result, since 2011, GDP growth in the Eurozone as a whole has barely registered above zero per cent. In this context of severely constrained economic growth - and with government debt continuing to increase across the Eurozone despite of years of austerity - the Eurozone is badly exposed to any downturn in the global financial markets. It represents the third sphere of global imbalance in the post-crisis period.

British Imbalances The growing turbulence within the international economy has not been ignored by the Conservative Party leadership. At the start of 2016, George Osborne warned that a global ‘cocktail of threats’ could undermine the UK’s economic recovery. However, he presented these as external difficulties over which the British government has little control. Britain’s house is in order, Osborne argues, but remains vulnerable to ‘external’ shocks. In reality, by the start of 2016, Britain’s economy had become precariously imbalanced. These imbalances were not driven by external market forces but by bad economic policy and by an unnecessary programme of cuts to Britain’s current and capital spending. Although many of today’s imbalances are long-standing features of British capitalism, Conservative economic policy since 2010 has deepened and exacerbated these structural weaknesses.

Current Account Deficit Since 2008, economic policy discourse has been dominated by questions relating to the budget deficit. But there is another deficit that has received less attention but which arguably is more crucial to the long-term sustainability of the UK’s economic recovery: the current account deficit.

The current account measures the extent to which a country relies upon borrowing from abroad to sustain consumption and economic growth.

It is composed of two major elements: the trade balance (exports minus imports) and the net investment balance (earnings on foreign assets by UK investors minus earnings on UK assets by foreign lenders). If this balance is negative then the country is running a deficit and relies upon foreign loans for its consumption and growth. If it is positive then the country runs a current account surplus and is a net lender abroad.

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While the UK economy has persistently run current account deficits, in 2015 it ran a current account deficit of 6 per cent of GDP: the highest since records began in 1955 (Perraton, 2015).

Why did this come about? First, Osborne failed to deliver the manufacturing resurgence that he had promised in 2010 and 2011. Britain’s export performance has been woeful: the trade deficit on goods and services remains at historically high levels. By the end of 2014 the manufacturing sector represented a smaller proportion of overall output (at 9.7 per cent) than when the Coalition government assumed office (Berry & Hay, 2015).

Second, there has been a marked deterioration in the net investment balance. Traditionally, the UK has earned more on its investments abroad than it pays-out to foreign investments in the UK. However, in 2011 that changed. Foreign capital poured into Britain - in particular into London’s property market - as UK income earned on foreign investments declined. So long as this trend persists there is only one way to improve the rebalance: exports would have to increase. This looks incredibly unlikely in the near future. Protracted difficulties in the Eurozone - Britain’s major trading partner - mean that the Pound is likely to remain uncompetitive relative to the Euro.

Moreover, investment in Britain’s industrial base remains woefully low.

So Britain is now more exposed to a currency crisis than it was before the 2008 crash. There is a cliché that no one worries about the current account until it’s too late. So long as foreign investors are happy to finance a current account deficit it can be sustained. However, as was made abundantly clear during the 2008 crash, investor sentiment can rapidly shift at any moment.

Any future event that is perceived to threaten the stability of Sterling - such as a British exit from the European Union - could lead to rapid capital flight, exposing the country to a deep balance of payments crisis and years of further austerity (Green, 2016). In an uncertain global climate, Britain’s yawning current account deficit represents a major imbalance, leaving Britain vulnerable to an economic crisis in the near future.

Wage Repression and Household Debt One of the distinctive features of the Great Recession was that unemployment didn’t increase in Britain to the same extent that it had in previous downturns. The unemployment rate increased from 5 per cent in 2009 to 8.5 per cent in 2012. It then peaked and started to fall.

Britain’s ‘jobs rich’ recovery has been touted as one of the great successes of the Conservative government’s economic programme. However, rather

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than unemployment spiking, the burden of adjustment has been placed elsewhere: workers’ wages were hammered and the labour market generated large numbers of insecure, low pay jobs. In the five years after the crisis, British workers experienced the deepest and most sustained decline in their living standards since the 19th Century. Real wages fell by between 8 and 10 per cent between 2008 and 2014. This compared unfavourably with the recessions of the early 1980s and 1990s, when three years after each recession wages had increased by 5 and 10 per cent respectively (IFS, 2013, p. 5).

Real wage stagnation was driven by a number of factors. By 2012, 41 per cent of workplaces had implemented wage freeze or wage cut programmes (WERS, 2013). The Conservatives also drove through a huge and sustained cut to the public sector pay bill. At the same time, self-employment increased rapidly, reaching its highest point for over 40 years in 2014 (ONS, 2014). Since the median wage for a self-employed individual is £12,000 - well below the national average - this acted as a further drag on income growth.

In addition, 77 per cent of net job creation was concentrated in low pay sectors between 2010 and 2013 (TUC, 2013).

There are two main problems with Britain’s low pay recovery: first, low pay jobs generate less tax revenue which makes it harder to eliminate the deficit. This is one of the key factors which explains the Coalition’s woeful record on deficit reduction. Second, stagnant real wages can create a shortfall of aggregate demand. In this situation, there is a danger that consumption can only be sustained by rising levels of household indebtedness and asset-price inflation. By 2013, GDP growth had started to rise once again. However, while household consumption rose by around £10.6bn in this period, household incomes rose by less than £2.0bn over the same period (Weldon, 2013). One of the key factors driving this consumption boom was a decline in the ‘savings rate’ - the proportion of income which households save, through paying down mortgage debt and other similar mechanisms. However, by 2014 the savings rate had declined to its 2008 level. The collapse of savings as a source of funds for consumption was therefore all but exhausted by the end of the previous parliament. As such, rising levels of household debt are likely to return as a key driver of consumption growth in the years ahead, particularly insofar as productivity rates and real wages remain deflated. Therefore, the Office for Budget Responsibility (OBR) - the government’s own fiscal watchdog - has calculated that household debt to income ratios are set to surpass their pre-crisis peak by the end of the parliament (OBR, 2015, p. 73). This renders households in

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Britain particularly vulnerable to any future downturn in credit conditions or to interest rate hikes. Wage repression combined with growing exposure to household debt therefore account for the second area of imbalance in the UK economy.

Income and Wealth Inequality Between 2007 and 2013, income inequality actually fell on some measures in Britain (IFS, 2014, p. 34). As we saw in the previous section, real wages declined rapidly throughout this period. The result of this was that inequality measured in terms of the ‘market income’ - the distribution of income between those who derive their income from employment, self-employment and capital - increased in the first three years of the downturn. Private firms effectively passed the burden of economic adjustment on to employees in the form of wage cuts and pay freeze, while the public sector simultaneously cut back on pay and on the size of its workforce. However, during this period the income of non-working households remained relatively protected.

This was because welfare payments are generally indexed to inflation and therefore act as ‘automatic stabilisers’ in periods of recession. As the income of non-working households fell less rapidly than the incomes of in-work households, this led to a decline in the overall level of income inequality over the post-crisis period.

But this is best viewed as a temporary blip in an otherwise clear trajectory.

The Coalition government’s Welfare Reform Act (2012) contained a series of measures aimed tackling Britain’s supposedly ‘lavish’ benefits system. As part of its reforms, the government implemented a ‘welfare cap’. This holds increases in working age benefits below the rate of inflation - a process that impacts negatively on the incomes of those lower down the income scale.

As such, the very mechanisms that prevented the increase in inequality in the immediate post-crisis period are now being rapidly eroded. Income inequality is now predicted to increase throughout the course of the current parliament.

Wealth inequality has also spiralled in post-crisis Britain. From 2009, interest rates fell to a historic low and the Bank of England embarked on a sustained programme of ‘Quantitative Easing’ (Green & Lavery, 2015).

However, both of these policies tended to benefit households at the upper end of the income scale. In particular, sustained low interest rates lowered mortgage servicing costs: housing costs for owner occupiers fell by 37 per cent between 2007-8 and 2012-3 (IFS, 2014, p. 51). This primarily benefited households in the upper half of the income scale where the vast majority

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The financial crash of 2008 demonstrated that the neoliberal orthodoxies of the 1990s and 2000s - that unfettered markets would produce stable economic growth and that deregulated financial markets could accurately price risk were little more than dangerous mirages.

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of homeowners are concentrated (ibid., p. 56). At the same time, rent costs spiralled, eroding the disposable incomes of low income households while boosting the wealth of buy-to-let landlords. Simultaneously, the Bank of England conceded that QE had a regressive distributional impact, primarily benefiting the top five per cent of households (Bank of England, 2012, p.

254). A recent report from Standard and Poors revealed that in 2008 the wealthiest 10 per cent of households owned 56 per cent of net financial assets in Britain. By 2014, this had increased to 65 per cent.

Growing income and wealth inequality make Britain more susceptible to crisis for a number of reasons. In particular, households at the lower end of the income distribution are likely to spend a larger proportion of their incomes on consumption. Conversely, households at the upper end of the income distribution are likely to spend a lower proportion of their incomes on consumption. This means that high rates of inequality tend to be associated with constrained levels of aggregate demand which can act as a drag on economic growth. In addition, high levels of wealth concentration at the top-end of the income distribution tends to encourage destabilising bouts of speculative behaviour and can act as a brake on productive investment (Kotz, 2009, p. 307). Taken together, a continuing trend towards greater inequality suggests that Britain’s economy is more imbalanced today than it was previously - and more vulnerable to another economic crisis as a result.

Uneven Development The final imbalance that underpins Britain’s economy is geographical and expressed through the uneven development of British capitalism throughout the post-crisis period. In 2010, Osborne promised to ‘rebalance’ the economy so that economic growth was spread more evenly across the UK’s nations and regions. However, by 2016, both London and the South East represented greater shares of the UK economic output than they did in 2008. At the same time many of the ‘ex-industrial’ regions have seen their share of UK output shrink further still over the same timeframe (Berry & Hay, 2015). Private sector jobs growth has been far larger in London and the South East than elsewhere in the country, while public sector job cuts have been disproportionately focused on Northern English regions and on the socalled ‘Celtic periphery’ of Scotland, Wales and Northern Ireland.

In addition, job creation has been disproportionately skewed towards ‘low pay’ sectors in the North while net job losses have tended concentrate in higher paying sectors. For example, in Scotland, of the ten sectors that lost

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most jobs between 2010 and 2014, nine paid above the median national wage. Civil engineering (with gross hourly median earnings of £13.19), publishing activities (£15.05), telecommunications (£15.85) and insurance, reinsurance and pension funding (£16.86) all experienced among the largest workforce contractions in Scotland in this period. By contrast, in the South East of England, of the top ten job creation sectors, only 16.2 per cent of the total was in ‘low pay’ industries. Jobs growth was far more concentrated in higher pay, higher skill sectors.

Growing levels of regional inequality are not the result of market forces.

The Conservative government’s mismanagement of the British economy has re-enforced these trends throughout the post-crisis period. For example, public infrastructure investment allocated specifically to London represented £5305 per head of population since 2010. In contrast, the figure came in at £1946 per head in the North West, £851 per head in Yorkshire and Humberside, and just £414 per head in the North East of England (SPERI, 2015). Taken together, these trends consolidate old geographical asymmetries long embedded within the fabric of Britain’s economy and society. Britain’s uneven economic geography therefore represents another deep and widening imbalance that Conservative Party policy has exacerbated.

Conclusion: Britain, Scotland and the Great Imbalance The financial crash of 2008 demonstrated that the neoliberal orthodoxies of the 1990s and 2000s - that unfettered markets would produce stable economic growth and that deregulated financial markets could accurately price risk - were little more than dangerous mirages. However, over the past eight years, the crisis of neoliberalism has been repackaged as a ‘sovereign debt’ crisis. Political elites and international creditor institutions framed rising public debt-to-GDP ratios as a cause of the economic crisis rather than as a symptom of a failed, finance-led growth model. Austerity - reducing budget deficits through cutting public services - has been the proposed solution. But rapid spending cuts across the advanced capitalist economies - combined with the unravelling of China’s export-led growth regime - have 16 | RISE.SCOT

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contributed to a series of deep global imbalances that are destabilising the global economic. Chinese growth continues to slow, exports from the Global South have nose-dived, global deflation remains an underlying threat, and the Eurozone remains highly vulnerable to further economic and social and political instability. Together, these global imbalances lay the foundations for a second serious economic crisis in the near future.

From the moment he entered 11 Downing Street in May 2010, George Osborne enthusiastically embraced the logic of austerity. He claimed that his economic programme would rebalance the British economy towards savings and investment and eliminate the budget deficit in one parliament. It did neither. Instead, the British economy remains precariously imbalanced and badly exposed to a future downturn in the international financial markets. Britain’s growth model relies on huge in-flows of foreign capital to compensate for its weak industrial base. Its labour market is held-up as a shining example of ‘flexibility’, but low-pay, low-skill, low-productivity jobs predominate. Indeed, precarious employment - involuntary part time and temporary work as well as self-employment - has increased over the postcrisis period. Government revenues remain hopelessly reliant on the City of London and on taxes associated with an appreciating property market.

Inequality continues to widen and regional imbalances have worsened.

Manufacturing has slumped further while the services sector - buoyed increasingly by domestic consumption and by rising levels of private indebtedness - has been the chief motor of Britain’s GDP growth. In sum, Britain has returned to the model of unstable, finance-led growth that predominated in the pre-crisis period (Crouch, 2009). The major difference is that today, this dynamic is flanked by an emergent regime of permanent austerity, embodied in the Conservatives’ commitment to run a permanent budget surplus by the end of the parliament.

Scotland Scotland finds itself embedded within this context of deep economic imbalance. Real wage decline has intensified, with Scottish workers paid on average £1,882 per annum less in 2014 than in 2010 (TUC, 2015). Over the same period, jobs in sectors that pay above the median wage have declined rapidly while job creation has been skewed towards ‘low pay’ sectors such as retail, food and beverage service activities, and residential care. This consolidates persistently low productivity rates in Scotland, as these sectors are labour-intensive and are therefore less susceptible to productivity boosts through technological innovation. In addition, investment remains low and is falling further in the context of oil price decline. In Scotland as 17 | RISE.SCOT

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in Britain, the economy is precariously imbalanced and vulnerable to an economic downturn in the near future. However, it is important to note that the various sectoral and distributional imbalances which have been discussed in this paper are only expressions of deeper, more fundamental imbalances that underpin advanced developed Western economies in the contemporary period.

The key imbalance today is not narrowly ‘economic’ but rather political.

Across Europe, the ‘wage share’ - the proportion of economic output that accrues to workers - has declined rapidly over the past three decades, falling from 72.5 per cent in the early 1980s to 63.3 per cent before the crisis broke (Stockhammer, 2009). Similar trends have been in place for a long time now in both Britain and in Scotland (Lansley, 2011). What these trends represent is the growing empowerment of capital and the on-going disempowerment of labour.

The austerity programmes adopted in the aftermath of the crisis have only entrenched this imbalance in the organisation of social power further still.

The social costs associated with this ‘great imbalance’ are there for all to see. Wages have been slashed, working conditions have worsened, welfare has been retrenched, and spending on public services has been cut rapidly.

At the same time, profit rates have been sustained through loose monetary policy combined with iron fiscal discipline. During the 2014 independence campaign, calls for a ‘radical’ form of independence became increasingly pronounced across Scotland. As a further crisis of British capitalism beckons, it is hard to imagine that that same aspiration will not return in the future - and with greater intensity.

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