British economy: covid, Brexit, crisis

 by David Yaffe

'Shop closed due to current crisis' store front

During the first half of 2020 the coronavirus pandemic drove the British economy into the deepest recession since records began. The second wave of the pandemic will ensure that the recession continues well into next year as the number of coronavirus cases rapidly rises and the government places new restrictions on businesses and social activities in an attempt to control its spread. DAVID YAFFE reports.

On 22 September Prime Minister Boris Johnson announced wide-ranging measures to contain the new wave of the coronavirus in England, which could be in place for at least six months. He reversed his recent call for workers to return to their offices, announced plans to shut pubs and restaurants at 10pm and scrapped plans to open up sporting events to spectators from 31 October. The objective, he said, was to avoid a second national lockdown.

A quarter of pubs and restaurants fear collapse before Christmas without further government support, with a loss of around 675,000 jobs predicted for early next year. The most recent unemployment rate – for May to July – is 4.1%, according to the Office for National Statistics (ONS). This is misleadingly low and, based on surveys over the previous months, is not up to date. The Office for Budget Responsibility (OBR) has given an official view of what might happen to unemployment. In its optimistic scenario, the unemployment rate peaks at 9.7% this year, and returns to pre-crisis levels in 2022. In its least optimistic scenario, it peaks at 13.2% in 2021, with four million people out of work. 

The economy in recession

The 20.4% fall in Britain’s GDP in the second quarter of 2020 was the largest drop in output in any major country over the period. GDP in the US and Germany fell by around 10% and in the eurozone by 12.1%, the severest drop in 25 years of records. Britain’s economy sank into recession, following the decline of 2.2% in GDP in the first quarter, as the Covid-19 outbreak spread in March and the government imposed a nationwide lockdown to contain it.

The ONS said that the pandemic had erased 17 years of economic growth in two quarters taking the level of GDP back to that of June 2003. While GDP has grown by 11.3% since the depth of the lockdown in April, it remains 17.2% below the level in February before the pandemic struck. Gross fixed capital formation fell by 25.5% in the second quarter of 2020 with business investment falling by 31.4%, three times greater than the worst point of the 2008-09 financial crisis. Dividends registered the largest quarterly fall since 2009, with more than £100bn wiped off the value in the three months to June. There was a 34% fall in education output and a 27% drop for health and social services. 

The pandemic is having devastating consequences for the NHS, which is in a precarious state after years of cuts, privatisation and outsourcing of services. The Institute for Public Policy Research has reported that more than four in five English hospitals had ‘dangerously low’ spare capacity. The NHS ‘had to withdraw services from huge cohorts of people’ cancelling two million non-urgent operations, while urgent cancer referrals from GPs fell by 75%. 

The pandemic is on the way to costing £210bn for the first six months of the crisis, equivalent to almost one-quarter of the annual cost for running the public sector. The increase in spending and lower tax revenues has seen the public sector net debt increase by £226bn to more than £2 trillion for the first time. The public sector net debt in July 2020 reached 100.5% of GDP, an increase of 20.4 percentage points compared with the same period last year. The deficit is set to hit £400bn for 2020-21, the highest level on record outside the Second World War. 

Desperate times call for desperate measures

The Chancellor Rishi Sunak cancelled plans for an autumn Budget. In an attempt to avert widespread business collapses and huge job losses, he has been forced to extend the life of four business loan schemes to the end of November, with the banks able to process loans to the end of the year. These have already backed £58bn lending to companies through state guarantees. Three of these loans have been given to businesses by commercial banks with the state guaranteeing 80% of the value of the loans. The coronavirus business interruption loan scheme, for example, has been taken up by 60,000 companies borrowing a total of £13.7bn with loans of up to £5m. 

The majority of lending comes from the fourth ‘bounce-back’ loan scheme, with more than a million businesses borrowing around £35bn in loans of up to £50,000, with only cursory checks on the borrower’s ability to pay the loans back. The banks have a 100% government guarantee for these loans. The OBR estimates that up to 40% of these bounce-back loans could default, costing public funds around £16bn. 

On 24 September Sunak confirmed plans to end the government’s employee furlough and self-employed support schemes on 31 October 2020. The furlough scheme has already cost more than £39bn since it was launched on 20 April. One-third of Britain’s workforce has benefitted from it. A much less costly ‘jobs support scheme’, based on a German-style wage subsidy plan, will replace the previous schemes. It will start in November and last for six months. 

Under this scheme businesses will be able to keep workers in a job on shorter hours. Workers must work at least a third of their usual hours and be paid by their employers as normal. For the time they are not working the state will pay a third of their pay and the employer will pay a third. Workers who are unable to work any of their normal hours are ineligible for the scheme. Businesses can also claim the £1,000 ‘jobs retention bonus’ announced by Sunak in July, if they bring people back to work from furlough and keep them employed until the end of January. As the Financial Times has pointed out Sunak is in effect forcing employers to decide within a short period of time which jobs are viable.

At the end of October on the old scheme the level of government subsidy for workers on furlough and not at work will be 60% of their wages (up until the 1 August it was 80%). The new scheme will dramatically cut government support to a maximum 22%. Support for the UK’s five million self-employed workers has also been massively cut from 80% of trading profits to 20%. The total cost of Sunak’s six month package depends on take-up and the hours worked. It has been estimated at £5bn (The Guardian) and as unlikely to exceed £10bn (Financial Times) over the next six months. These are relatively small amounts in comparison with the £210bn the pandemic has already cost.

Sunak disingenuously justified his proposals to Parliament by saying that ‘I cannot save every job’ and that it was ‘impossible’ to predict how many jobs would be protected. In reality, his new work support scheme will fail to stop a further one million workers losing their jobs by the end of the year. Saving workers’ jobs is not the Chancellor’s primary concern. Rather it is his intention to cover up and justify the government’s incompetent and corrupt record from the start of the coronavirus pandemic.

Once again on Brexit 

In the midst of this pandemic Johnson, perhaps to distract attention from criticism of the government’s overall incompetence, brought before Parliament new legislation, the UK Internal Market Bill that would override key parts of the Brexit Withdrawal Agreement, risk the collapse of trade talks with the European Union (EU) and break international law. When the Brexit Withdrawal Agreement was signed by Johnson on 17 October 2019 he said it was a ‘fantastic moment’. 

The aim of the UK Internal Market Bill published on 9 September 2020 is to remove the legal force of parts of the Withdrawal Agreement in areas including state aid and Northern Ireland customs. Brexiters object to two key aspects of the Withdrawal Agreement. The first says that EU law on state aid will apply to the UK in relation to the goods trade in Northern Ireland. The second is a requirement that Northern Irish businesses complete export summary declarations when they are sending goods to Great Britain. Brexiters say that this is incompatible with a pledge that Northern Ireland will have ‘unfettered access’ to the UK internal market. 

Johnson’s behaviour in Parliament was astonishing. He claimed the bill was vital to head off ‘extraordinary’ threats by the EU in recent months, and further that the EU had raised the possibility of ‘blockading’ food movements from mainland Britain to Northern Ireland by refusing to certify the UK’s food as being safe to export. Johnson’s plans have been attacked by all five surviving former prime ministers, the former Chancellor Sajid Javid and two ex-Attorneys General. More than 20 Tory MPs refused to support the Internal Market Bill at its second reading. Nevertheless the government’s comfortable majority in the House of Commons allowed the Internal Market Bill to pass its second reading by 340 votes to 263, a majority of 77. An amendment which would have required MPs to give approval before any ministerial override of the Withdrawal Agreement took effect, contrary to international law, was tabled by Conservative MP Bob O’Neill. In order not to risk defeat the government tabled its own amendment which had the same effect and which was passed without division. The bill has further readings in both Houses of Parliament before it becomes law.

State mobilised to save monopoly capitalism

Right-wing neo-liberal British Tory governments over the last decade have consistently attempted to limit the economic role of the state in the British economy with little success. The coronavirus crisis has now made this impossible and has forced the government to suspend market mechanisms and use state financial powers to bail out the economy and sustain critical public services. The Johnson government has consistently chosen to outsource those services to more costly and often blunder-prone private companies. 

385 government contracts, worth £1.7bn, were awarded to private companies without offering other companies the chance to bid for such work. Under fast-track rules private companies have been handed direct contracts to administer Covid-19 tests, provide food parcels, personal protective equipment (PPE) and other services, and to run an operations room with civil servants to organise these contracts. 

The failed attempt to create an adequate and effective coronavirus test and trace system is a case in point. 35 organisations are listed as ‘data processors’ involved in the NHS Test and Trace system. Only four are NHS bodies. 22 organisations are private companies. Serco is one of the main companies contracted to deliver the system. Another is Deloitte. 

A leaked email from Serco’s Chief Executive, Rupert Soames, grandson of Winston Churchill, confirms the real intent behind this government’s use of public funds to sustain private monopolies. Soames said that he doubted the scheme would evolve smoothly but he wanted it ‘to cement the position of the private sector’ in the NHS supply chain. Serco has been given the bulk of the work recruiting 10,000 of the 25,000 contract tracers for an initial fee of £45.8m which could rise to £90m. He continued ‘If it succeeds…it will go a long way in cementing the position of the private sector companies in the public sector supply chain.’ Serco has had other contracts with the Home Office to provide accommodation for asylum seekers, an £800m 10-year contract for prisoner escort and custody and a £200m contract to manage two immigration removal centres. In October 2019 Serco was fined more than £1m for failures in relation to the asylum contract. In the past Serco has received larger fines, notably more than £19m as part of a settlement with the Serious Fraud Office over failures in electronic tagging dating back to 2010. 

Deloitte manages the registration and appointment booking of NHS Test and Trace and is responsible for holding data and making it available to the NHS. It has recently been ordered to pay a record fine of £15m plus costs of £5.6m for committing serious misconduct between 2009 and 2011 when it audited Autonomy, a former FTSE 100 technology group at the centre of one of the UK’s biggest accountancy scandals. Yet more contracts come the way of private companies such as Serco and Deloitte. This is the cronyism and corruption that has become the hallmark of a decaying, rotten state monopoly capitalist system.

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