As we come out of the Covid pandemic we are being hurtled into another world pandemic – a pandemic of rising prices and falling standards of living. British households are being warned that they can on average expect a 2% fall in their living standards in 2022 as compared to 2021 as a result of (1) higher energy costs; (2) increased taxation and national insurance, (3) higher interest rates and (4) inflation. The long and the short of it is that although the billionaires of the world have been doubling their wealth throughout the Covid pandemic, the excess costs incurred during that period have to be borne by the mass of the working people.
This is a worldwide phenomenon, by no means confined to Britain alone.
1. Energy costs
There are multiple reasons for the increased cost of energy. First of these as that, owing to a reduced demand for energy as business shut down over the periods of lockdown, production levels were drastically reduced, and it is not apparently possible to restore them to previous levels at a drop of a hat (particularly, no doubt, since abundant supply would lower prices!). A second factor is that various countries are heavily reducing their production of fossil fuels, with the result that there is much less energy for sale in relation to demand. Many countries are also closing down nuclear reactors, with the same effect on overall energy supplies. A third factor is that ‘renewable’ energy sources that are supplying an increasing proportion of energy needs, being dependent on weather, can fluctuate significantly in years where the wind or the sun are deficient. A fourth factor has been the ongoing attempts by US imperialism to ‘wean Europe of its dependence on Russian energy supplies’, which delayed the completion and then the opening of the NordStream 2 gas pipeline (now suspended at US behest). As we go to press, and as Russia fights in Ukraine to defend itself against Nato’s aggressive advances, Europe is being urged to implement a boycott on Russian energy, which has caused a massive surge in the price of oil and gas on their respective markets. Even before the boycott it has been estimated that energy bills for the average household would increase by some £700 a year, with concurrent increases in petrol and transport costs of every type. And now The Sunday Times tells us: “Energy companies are quoting around £4,200 a year for a fixed one-year deal for an average household — up from a typical £900 two years ago — as the Ukraine conflict forces the price of natural gas to new highs” (Louise Eccles and David Byers, ‘ Your energy bill for the year may be £4,200 — and the supermarket shop is climbing too’, 6 March 2022. The cost to the masses of people all over the world, not just in Britain, will be horrendous.
Another major factor in the increased prices, of course, is unbridled profiteering by the energy companies which are making record profits and paying out millions to their shareholders and, more especially, to their top management who use their position to reward themselves astronomical sums in bonuses in addition to their already astronomical ‘salaries’.
2. Higher taxes
During the pandemic, government spending was vastly increased both by the expenditure involved in bringing the pandemic under control (e.g., the cost of vaccines, of PPE, and generally administrative costs), and by the grants and subventions given to businesses and workers to keep them more or less afloat during lockdowns. Therefore expenditure considerably exceeded government income from taxes and other sources. The result was that governments had to borrow heavily to fund the additional expenditure and now this money has to be repaid. Needless to say, any bourgeois government will turn first and foremost to the masses of workers to pay the bill. The British government has even opted to put much of the charge on National Insurance with the result that at least some of money raised will be coming from workers who earn too little to be subject to income tax.
This is so grossly unfair that even some of Britain’s wealthiest people have been shocked by it and were driven to write a letter reproduced at the end of this article.
This, however, is very much a minority view among the super-rich as can be seen from the way that banking and energy companies in particular insist that their higher payouts to parasites are necessary for the benefit of society.
The Times tells us that whereas “BP cashed in on surging oil and gas prices to deliver underlying annual profits of $12.8 billion” and “… reported a 35-fold increase in fourth-quarter profits to $4.1 billion, even better than analysts had expected, and said that it would boost returns to shareholders with a $1.5 billion share buyback this quarter”, at the same time, its CEO “Bernard Looney dismissed calls for a windfall tax on North Sea producers to fund help for struggling consumers, claiming that it would deter investment in gas production needed to ease the crisis” (Emily Gosden, ‘Investment will dry up if you punish us for making a profit, BP boss warns’, 9 February 2022).
Nothing could better illustrate the fact that in capitalist countries the governments, even if elected by the people, actually serve only the ruling billionaire class, and protect only their interests.
3. Higher interest rates
Interest is of course tribute paid by borrowers to the owners of capital for the privilege of being allowed for a time to use that capital. In bourgeois economic theory, however, this essential aspect tends to be overlooked as it is presented primarily as a means of controlling inflation. The reason increasing interest rates is expected to reduce inflation is that it is believed that if interest rates are high people will borrow less and therefore buy less, i.e., there will be less demand in the economy in relation to supply and therefore prices will fall. Straight away it is obvious that as a cure for the ‘illness’ of inflation, this is akin to the medieval practice of bleeding a patient in order to cure his disorder. It can only possibly make things worse because if there is indeed less demand in the economy, it can only aggravate the ongoing crisis of overproduction.
Moreover, in the present circumstances, it turns out that over the last couple of years there has been very little private borrowing notwithstanding low interest rates: as Rex Nutting points out in Marketwatch: “Real household debt has increased just 2.2% annualised since the pandemic began while business borrowing is growing at the slowest pace in eight years, even after businesses loaded up on cheap pandemic loans early in 2020.
“Raising rates would have little impact on the economy because credit growth is already weak” (‘Why interest rates aren’t really the right tool to control inflation’, 15 January 2022). So although higher interest rates will mean households may have less money to spend, since many will be paying much more interest on outstanding loans (their mortgages, overdrafts and credit cards), they will not have much effect on the amount of new borrowing.
Interest rates have been low since the financial crisis of 2007-8 because of lack of demand for borrowed capital. As there is a crisis of overproduction, i.e., far more is being produced or is capable of being produced than consumers can afford to buy, there is a very much reduced incentive to borrow money to set up or continue a business. Low demand means low prices. Low demand for capital means low interest payments. In fact, for much of the past 10 years in many countries of the world rates of interest have fallen below the rate of inflation, i.e., interest rates have effectively been negative. It is therefore impossible to see how on earth increasing interest rates could possibly have any kind of beneficial effect on the economy. It will probably reduce share prices for the benefit of the asset-stripping vulture capitalists (sorry, venture capitalists), but that’s about it. It will also increase the liabilities of governments all over the world who have borrowed for whatever purpose and who will look to taxpayers to make good the repayments and higher interest.
It is common to conflate higher prices with inflation, but they are not necessarily the same thing. If a particular commodity happens to be in very short supply, e.g., if the onion crop fails because of some pestilence, then the price is liable to soar even though the overall purchasing power of money generally has not significantly changed.
The purchasing power of money falls when more money is made available for purchases than the money that was deposited from sales that has not yet been spent. Clearly the money deposited from sales that has not yet been spent is a finite amount, even if that amount is very difficult to measure as it is constantly shifting. Each deposit of money is measured in units (pounds, shillings and pence, for example) that represent a definite proportion of the total deposits, the idea being that the units deposited are exchangeable at some later date for things of equivalent price, the expectation being that this price be more or less unchanged from what it would be if the purchase was effected immediately rather than being deferred to the future. If therefore the total amount of prices deposited and unspent amounts to X, each unit equals 1/x. But if the number of units has been increased by excess money printing, let us say for the sake of simplicity, by 2%, without X having increased, the purchasing power of each unit will now be 1/(x+(2x/100)). By way of illustration, if we arbitrarily assign the number 1,000 to X, then increasing money supply by 2% over and above net deposits, and apply this figure to the above equation, we will be able to say that each unit now equals 1/1000+20, or 1/1,020. Obviously 1 is going to be worth less if divided among 1020 than if it is divided among only 1000. In this way the depositors, be they rich or poor, have surreptitiously been robbed.
One might note in passing that if in between depositing the money and spending it, productivity has generally improved by 2%, it may well be that this will appear as if it counteracted the inflationary effect.
The money printing in imperialist countries since the 2007-8 crisis has been extremely high. In the UK alone it is estimated at £895 billion! Nearly £14,000 per head of population. Wow! The ensuing reduction in the purchasing power of all money units must necessarily be very high.
Rate of ‘inflation’
“The Bank of England warned last week that Britons face the deepest cost-of-living squeeze in more than 70 years, with real post-tax incomes forecast to fall by 2 per cent this year. Households face the triple whammy of the highest tax burden since the 1970s, inflation that is forecast to hit 7.5 per cent this year driven by soaring energy prices, and the higher interest rates needed to tame it” (Editorial, ‘The Times view on the UK economy: Growing Problems’, The Times, 11 February 2021). (Interestingly, the same article says that the British economy grew by 7.5% last year). It can be seen that this article is conflating inflation with price rises of a commodity that are, at least in part, elevated because of a supply shortfall rather than solely through monetary inflation. In fact many bourgeois economists have persistently closed their eyes to the fact that empty money printing results in inflation, so it’s nice for them to have a different phenomenon to blame. What can’t be denied, however, is that the bulk of the burden of the crisis is now being offloaded on to working people.
It is estimated that “People will face the worst hit to real incomes since comparable records began in 1990 as take-home pay falls by five times the amount it did during the 2008 financial crisis” (Arthi Nachiappan, ‘Bank of England takes sobering view of UK recovery as it raises interest rate’, The Times, 4 February 2022). Note that this is the case despite the fact that last year wages rose on average by 8.8% over the previous year!
Yet despite this, some bourgeois pundits are asking workers not to ask for pay rises because that would worsen inflation! At least they don’t yet appear to be claiming that it is increased wages alone that drive inflation which used to be how the bourgeoisie would blame the workers for its crisis, but it should be no surprise if it reprises this argument before long! At any rate, here is what is being said now:
“Second, the labour market is very tight, with the unemployment rate down to 4.2 per cent, not far above the pre-pandemic level. Meanwhile, the number of vacancies is above 1.2 million, compared with 700,000 to 800,000 before the pandemic. The tight situation in the labour market is starting to be reflected in upward pressure on wages. Average earnings in the past three months were 4.9 per cent up on a year ago, according to the latest official data. The inflation surge could add further to the upward pressure on wages, potentially fuelling a more persistent wage-price spiral” (Andrew Sentance, op.cit.). As a consequence, Andrew Bailey, the governor of the Bank of England, called for wage restraint:
“In a BBC interview the day after the central bank increased interest rates, Bailey said workers should avoid asking for large pay rises — even as households face the biggest squeeze on their income in decades — in order to help keep inflation under control” (Daniel Thomas, Jasmine Cameron-Chileshe and Chris Giles, ‘ Bank of England chief under fire for wage restraint call’, Financial Times, 4 February 2022). Andrew Bailey’s pay packet last year was worth £575,538. He was taken to task even by Boris Johnson who is bent on painting a bright future high-wage British economy. It would appear that there are at least some sections of the bourgeoisie who realise that reduced demand as a result of households’ reduced purchasing power would be very bad for business.
It is not just that take home pay is reduced, however, or that energy prices are rising exponentially, but that ALL prices are rising, and most are doing so mostly as a result of inflation.
“Factory gate prices were 9.1 per cent up on a year ago in November and prices of materials, components and energy bought by British manufacturers were up 14.3 per cent” (Andrew Sentance, ‘Inflation looks here to stay and that means more interest rate rises’, The Times, 21 December 2021).
“Unilever, one of Britain’s largest companies, said that it was facing £2.95 billion of higher costs this year, almost three times as much as the increase in costs it had struggled to absorb last year” (Ashley Armstrong, ‘Shoppers warned they will pay more for household favourites’, The Times, 11 February 2022). Readers will no doubt be relieved to hear that Unilever’s higher costs are not expected to reduce their profits in any way but, on the contrary, “Unilever’s warning came as the company reported a 9.9 per cent rise in profits to £5.5 billion”!
Besides affecting consumers, inflation will also drive thousands of small businesses to insolvency as their customers are hit with lower purchasing power, while businesses’ costs are inexorably rising. There has been an 83% increase in county court judgments relating to unpaid debt in the last quarter of 2021, indicating a huge rise in businesses that are in financial trouble. Currently it is said that nearly 600,000 UK businesses in the UK are showing signs of distress, with support services, construction and property the worst affected sectors. As they are driven out of business, their staff lose their jobs and their suppliers lose customers and are in turn put under greater financial stress themselves.
All this is bound to lead to greater unemployment and thus greater losses of overall household income. At the moment it is being claimed that unemployment stands at less than 4%, though the percentage of the working-age population that is in employment is only 75.5% and youth unemployment is 11%. Yet supposedly there are 1.2 million vacancies up for the taking: the problem is, however, the vacancies require either: workers with skills who aren’t available because Britain, rather than bearing the cost of training people, has been relying on importing skilled labour from abroad and a large proportion of that skilled labour went home during the pandemic; or low skilled workers who are infinitely flexible, who either have no families or no families in this country and who can therefore put up with the meanest living conditions in order to work in areas where family housing costs more than unskilled worker families could possibly afford. The policy of phasing out council housing has created this problem. So despite the apparent availability of jobs, unemployment will increase, and is indeed “forecast to go back up to 5 per cent late this year as rising energy prices hit household budgets and suppress demand, reducing the need for as many workers” (Arthi Nachiappan, op.cit.).
Such an economic shambles is unavoidable in a capitalist economy. There is no point saying it’s the Tory government since a like shambles is affecting all the imperialist countries, however wealthy. In a socialist economy, all surpluses produced over and above what the population uses for its everyday needs, belong to the state which uses them either to create the infrastructure needed to expand production or, if an emergency arises to take whatever measures are necessary to deal with it. The money is not borrowed and there is no interest to pay. There is no need to ‘print money’ to cover emergencies, no need to raid people’s savings, and no inflation. In actual fact there are fewer emergencies, since capitalism’s recurring crises of overproduction cannot occur if it is central planning for the satisfaction of needs rather than the profit of the few that is the motivator of production. As it is, workers living under capitalism are all too often faced with the choice of heating or eating, even in rich imperialist countries. In other countries there is often not even that choice with both heating and eating being out of reach for millions.
Getting rid of capitalism in the face of the fierce resistance of the well off will be far from easy and will involve huge sacrifices on the part of the working class, but this is the price that has to be paid if humanity is to progress out of the era of mass poverty, war and planetary degradation.
THE MILLIONAIRES’ LETTER TO THE TIMES
In their article justifying the rise in national insurance (News, last week) Boris Johnson and Rishi Sunak said: “We have always supported people through the pandemic.” As a group of very wealthy people we agree: they have certainly supported us. In fact for decades now our wealth has enjoyed incredibly low tax rates — and has been defended at the cost of everyone else.
So we ask the prime minister and chancellor to review their decision to raise NI, which is a tax on working people. They should consider taxing us, the wealthy, instead.
They could start by aligning capital gains tax with income tax, generating £14 billion a year, more than is expected from the NI rise. And research we supported shows that a small progressive wealth tax starting at 2 per cent for those with more than $5 million (£3.6 million) would generate nearly £44 billion a year in the UK, enough to pay for the social care levy three times over.
The cost-of-living crisis will not hurt us but it will cripple hard-pressed families. We cannot continue on this divisive path, where the rich get endlessly richer at the expense of everyone else. The government should not shirk its responsibility for fear of losing influence or favour with wealthy donors and friends.
James Perry, Julia Davies, Gary Stevenson, Nick Marple, Akshay Singal, Jonathan Bloch, Gemma McGough, Kristina Johannson, Graham Hobson, Phil White, Patriotic Millionaires UK, London NW5
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