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Tories drive ahead with austerity plan despite faltering economy

David Cameron announced it was full steam ahead with the government spending cuts after it was announced that the economy had worsened. Why? Because the government aims to slash wages and services irrespective of the economics damage, writes Keith Spencer
The UK economy contracted by 0.5 per cent in the last quarter of 2010, it was announced on Tuesday. The contraction is the third quarter in a row in which the economy has slowed from its surprising growth of 1.1 per cent earlier in the year.

The only sector that showed robust growth was manufacturing, benefiting from sterling’s depreciation and upturn in other economies, yet it makes up only 12 per cent of the UK’s economy. The big sectors such as retail and finance are still weak.

A prolonged period of sluggish growth or even a double-dip recession looks likely as the Tories carry out their policy of deficit reduction, which will lead to more unemployment, pension and benefit cuts, and closing of council services.

The weakening economy is taking its toll on people’s confidence. The latest survey of consumer confidence had the biggest fall since 1994 as the 20 per cent hike came into force; other surveys carried out this month also found that most people expect the economy and their living standards to worsen in the coming months.

Davos hears austerity plan
David Cameron and George Osborne responded to the bad news by announcing that it was full steam ahead with their plan to eradicate the budget deficit in four years, with savage cuts to public services, jobs, benefits and pensions.

They told the World Economic Forum in Davos that their policy was the right one despite the pain it would inflict upon the population or economy. They were explicit in saying that if they were to change course now then the money markets would move on the UK economy – similar to the attack on Greece and Ireland.

Cameron and Osborne were even warned about the dangers of cutting to quickly by Timothy Geithner, head of the Federal Reserve Bank in the US, who advocates cutting at a slower pace and pumping money into the economy.

Osborne admitted that there was no “Plan B” if the economy did nosedive into a recession. Savage cuts are here to stay irrespective of that happens.

Back to the 1920s
The misery awaiting the UK’s workers was outlined last week by a speech by Mervyn King, chief of the Bank of England.

King told an audience in Newcastle that the standard of living had already fallen by 13 per cent to 2005 levels during the recession. Not content with this fall, he predicted further declines at a “level not seen since the 1920s” – a decade of open class war that saw real cuts to workers’ wages, unemployed organization and struggles, mass union action leading to the 1926 general strike, which ultimately failed because of the misleadership of the trade union leaders.

Justice minister Kenneth Clarke went on TV the day after to ram the point home – most people will suffer serious pain and declining living standards in the next four years, a message echoed by Cameron and Osborne at Davos.

The current Tory government has the same strategy as the one headed by Prime Minister Margaret Thatcher in the 1980s, when she and her advisers carried out policies that engineered a slump in British capitalism, destroyed mass industry, created record unemployment levels of five million and more and defeated the unions. The result was a fall in living standards for the many, growth for certain “chosen” industries and a financial explosion in the city of London that made a few very rich.

Reducing living standards
King spoke of the erosion of savings and the coming years of pain. This he blamed mainly on the inflation rate, which is now just under 5 per cent (or 3.7 per cent if you exclude housing costs) and slated to increase further when the VAT rise comes. Meanwhile wage increases are running at about 2 per cent.

Part of this inflation rise is caused by global phenomena such as poor harvests and increased demand from growing economies along with causes rooted in the UK such as banks holding too much money and speculating and exports becoming more expensive as the pound falls in value.

Normally, however, governments or the Bank of England would have policies in place to control inflation.

The Monetary Policy Committee (MPC) was set up in 1997 with the sole task of keeping inflation in check by using interest rates. King heads the MPC but he announced he was unwilling to intervene.

"The Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal.”

But now with full backing of the government, it has abandoned the fight to control inflation. In his speech, King said the MPC didn’t want to choke off growth by raising interest rates. But growth is already being choked off and the low interest rates are really only benefiting the banks who can borrow cheaply from the government.

Wages are lagging well behind inflation at 2 per cent and interest paid to savers is pitiful (while that charged to borrowers is closer or exceeding the inflation rate). The result is that living standards are now down to 2005 levels and slated to fall even further.

Cameron has said he wants the 20 per cent VAT rate to stay while removing the 50 per cent tax rate of the super rich at the first opportunity and cutting corporation tax.

In addition, the government’s cuts to health, benefits, pensions, welfare and social services will mean workers will have to pick up the tab for services instead of being paid for out of general taxation.
The result will be increased poverty and indebtedness.

Low interest rates and cheap money
But while King and the government are intent on letting inflation erode wages, they are keen on keeping interest rates as low as possible to provide banks and the City with cheap money.

In his speech, the Governor of the Bank of England said that he was unable to offer any imminent hope of a rise in interest rates in coming months because of the poor economic outlook. But for the vast majority of people the interest rate is far higher than 0.5 per cent; it is only the banks and large financial institutions that benefit from such low rates.

The interest rate has to be kept low in order to provide cheap money for the banks in order to safeguard them against debt threats (UK banks are exposed in Ireland, Greece, Portugal to bad debts) and to help them on the road to recovery.

Return of bubbles?
Nearly 70 per cent of the working population currently earns less than the average wage of £26,510 with half earning less than 21,210.
But most people need homes, cars, consumer goods, even holidays for a decent standard of living and, if living standards are cutback, they are only going to afford these items through credit lent by banks. So the whole credit bubble cycle that was a feature of the boom and bust will begin again.

If the trade union and Labour Party leaders needed a wake up call then this week has been it. Disappointingly, the few statements Ed Miliband uttered about the economy was to say that Labour will cut the deficit over eight years rather than rejecting the cuts altogether.

The assault on wages and living standards mean that the trade unions should be central to any fight against cuts and the Tory proposals. So far the major trade unions such as Unison, GMB and Unite have restricted their opposition to words only as councils have announced job losses and cuts.

The TUC demonstration in 26 March should be used as a rallying point to start a mass campaign of resistance led by the trade unions. There should be support for all action against the cuts and for strike action. The unions should co-ordinate their action into mass strikes in the public sector against job, pension and services cuts and draw in private sector workers.

We should build anti-cuts committees and rank and file groups to co-ordinate resistance, fight for united strikes and build a general strike against the government and its cuts.

If Mervyn King and David Cameron want to go back to the 1920s then we should give them a general strike like 1926, except this time we aim to win.

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