Can Darling's budget solve Britain's crisis?

Budget speeches are not as significant as they once were. But one of the main things to emerge from Alistair Darling’s pronouncements last week was the scale of the crisis now facing British capitalism. As many observers have noted, a key fact presented by Darling was the recognition that the government budget deficit is likely to rise to around 13 percent of GDP next year. Even more important, two thirds of this deficit is `structural’ according to government figures; in other words it is not simply a consequence of the recession but will persist over the course of the business cycle. Put another way, the deficit is set to grow to around £180 billion and the government plans to issue about £220 billion of bonds over the next year. But their own projections of the cost of bailing out the financial system only amount to £50-60 billion (though the IMF sets this considerably higher). The extra spending on top of this is not a direct consequence of financial collapse but is much more deeply embedded in the system.

The problem for New Labour is that even if the British economy comes out of recession over the next year the growth path that will emerge will not provide the tax revenues envisaged two years ago. This reflects the fact that the current crisis does not simply consist of the immediate problems of the financial sector but is a more generalised breaking down of the institutional arrangements that have governed global capitalism over the last 25 years. This breakdown is particularly severe for British capitalism because of the particular kind of accumulation strategy that it has adopted during this period. The high budget deficits are a symptom of the underlying weakness of British capital.

So, while a number of OECD countries face larger immediate falls in output this year than the UK, especially those heavily dependent on exports like Germany and Japan, longer-term indicators like the path of government revenue into the future are especially weak in Britain. We have now reached the point where it is possible to talk of a `fiscal crisis of the British state’.

Capital can attempt to solve such a crisis in four possible ways. Firstly, high rates of growth can provide the tax receipts to bring the budget into balance. The UK government is projecting such growth rates (3.5 percent from next year onwards) but virtually no-one outside Downing Street believes they have any credibility. A second approach is to raise taxes. The new 50p income tax rate for high earners and associated changes go a small way in this direction but their contribution to solving the deeper crisis is insignificant as they will only raise about £3 billion.

The main reliance is on the third possible way of achieving balance – savage cuts in government expenditure. The details of these remain to be announced but the overall approach is clear: a rise of 0.7 percent in money terms, meaning cuts in real terms coupled with deep reductions in capital expenditure. This is a sharper slowdown than at any point in the eighteen years of Tory rule following 1979. Frontline services, public-sector wages and, especially, pensions are in the firing line.

But it is not clear that even this can achieve the balance required and this raises the spectre of the fourth available approach to closing the funding gap – printing money to meet interest payments and letting inflation rise to erode the debt burden. This would in turn cut into real wages, not just for public-sector workers but for the population as a whole, especially when coupled with the falling pound. It would be a very high risk strategy for capital but the stakes are increasingly high. As Gillian Tett noted in the Financial Times this week, the spread on credit default swaps for British government bonds (a measure of the cost of insuring against default of such bonds) is now double that on bonds issued by companies like Cadbury Schweppes and British American Tobacco. Two years ago such a ranking would have been inconceivable. It is by no means clear that the government will be able to borrow the money it needs for the deficits currently projected.

The budget marks an important stage in moving the analysis of the costs of the crisis from the sphere of theoretical discussion to that of practical struggles. But the outcome of such struggles is still to be decided and will depend upon whether workers, pensioners, the unemployed and others facing austerity can organise effective resistance to the attempt to make them pay for capital’s crisis.

Andy Kilmister