The Major Policy of the Current Coalition Government is NOT Fiscal Balance But an Increased Rate of Income Shifting From Wage Earners to the Pockets of the Already Rich

1 Background

The policy of the Coalition Government is not the much-trumpeted and unachievable aim of a balanced budget but the deliberate lowering of median British living standards and the production of more poverty. The purpose of that policy is to provide a continuing and massive shift in national income in favour of the already rich.

This is not a theory. It is a description of what has already happened since 1980 and what is continuing to happen now. The major tendency in most economic systems is inertia – that is, they continue to behave as they have been set up to behave, within the existing constraints and capabilities of the major economic players. The data shows that this income-shifting has happened in most Western economies, but is greatest in the UK and among the English-speaking low growth group,

The shift in income from wages to profits and the reduction in the share of wages in national income has been set out in an academically excellent report produced by Landman Economics. The summary of that report states:

“Over the last 35 years there has been a substantial shift from wages to profits in the UK economy. Data from the Office for National Statistics show that between 1977 and 2008 the wage share fell from 59 per cent of national income to 53 per cent, while the share of profits in national income rose from 25 per cent to 29 per cent. At the same time, average (median) earnings failed to keep pace with growth in national income (as measured by gross domestic product (GDP)). If wages had kept pace with growth in overall UK output between 1980 and 2010, median annual earnings for full-time workers would now be around £7,000 higher than they actually are. The fall in the share of wages in national income accounts for just over a third of this gap, with the other two-thirds due to earnings becoming more unequal.”

From “Touchstone Extras – Where Have All the Wages Gone? Lost pay and profits outside financial services” by Howard Reed and Jacob Mohun Himmelweit. See

http://www.tuc.org.uk/economic-issues/touchstone-pamphlets/labour-market/touchstone-extras-where-have-all-wages-gone-lost

If an extra £7,000 was added to the median wage, British workers would be much more prosperous.

2 The Coalition Contribution to British Poverty

But the Cameron-led Coalition Government has raised the stakes in the process described above by increasing the amount of income shifting substantially above its trend rate. The fall in that wages share in national income is a general trend in all developed economies but it is sharpest in the UK and the British trend is accelerating – a reduction in UK wages of £7,000 in over over 30 years (1980-2010, at an average rate of £233/year) has been followed by the Coalition-produced reduction of £1,500 pa in average wages during the first three years of the Coalition government (2010-2013), an average reduction of £500 pa. So the Coalition Governnment is driving the great majority of the British people into more poverty, reducing their share of national income at a rate which is more than twice the historical trend.

No wonder the Conservative-led Coalition are sensitive to the charge of being the progenitors of poverty! No wonder the Labour Party have the Conservative-led Coalition on the run over the issue of declining living standards!

The justification for the policy of the Conservatives to accelerate the shift in national income from wages to profits because that higher profit level allegedly increases investment. But it doesn’t! The report “Where have all the wages gone?” also demolishes the argument that higher profits fund higher investment and growth:

“Some economists have argued that an increase in the profit share is good for economic
growth because increased profitability leads to additional funds for business investment.
However, the data for the UK from 1975 onwards show a negative correlation between the
profit share and the level of business investment. At the same time, business expenditure
on research and development – a key measure of innovation (which is essential for
economic growth) – has been falling as a share of GDP since the mid-1980s.”

The reality is that wages drive economic development while profits don’t, as the report also demonstrates.

3 UK Family Circumstances

Five million UK families are now living below the poverty line. The food banks are only providing food for a tenth of that number. Therefore 90% of five million UK families are in food or housing costs poverty. Only one job is available for the fourteen potential, currently unemployed, applicants. The Conservative idea that the unemployed are work-shy is entirely wrong because the unemployed cannot be “driven back into work” because for 93% of the unemployed, the jobs are not there. Furthermore, the position of the poor becomes much worse once the situation is analysed regionally, because most of the available jobs are in higher-growth South and South-East England while most of the unemployed poor are in the lower-growth Northern and Midland English regions far from the Home Counties.

The Coalition attacks on the poor and underprivileged are therefore entirely hypocritical. The United Kingdom, the birthplace of the industrial revolution, the highly inventive and skilled people who continue to astonish the world with their capabilities, no longer have a Government which is exercising a duty of care towards most of its people. There is no longer any adequate provision for the essential needs of a quarter of British children and recent governments – tellingly, since the Thatcher administration of 1979 – have deliberated skewed the distribution of the growth in national income towards the already rich.

Some sociologists have defined a society as an orderly arrangement for deciding who starves first if there is a shortage of food. In Britain there is no food shortage – quite the contrary – but the British Coalition Government, economically incompetent almost beyond belief, are attacking the living standards of the majority of the people in the name of a mistaken fiscal rectitude which is more easily achieved by the proper practice of investment credit economics.

4 The Effects Of Privatisation

To add insult to injury, many of the utility companies are now owned by foreign conglomerates due to “privatisation” – the sale of British previously-public companies, often into foreign private hands. Privatisation, as we now see, provides a temporary capital receipt to government at an enormous subsequent cost to the users. Energy and utility bills have risen at about four times the rate of inflation since 2007 and are one of the major factors driving UK inflation upwards. Some of these privatised companies have raised large bank loans to pay large dividends and, apparently deliberately, have placed themselves in a position in which they can make the case to the UK government for investment loans because they have exhausted their borrowing capacity and can no longer borrow more money to fund essential investment. That scandalous behaviour should be dealt with by the re-nationalisation of the companies involved. There is, of course, no chance that Coalition Government would consider applying that remedy.

The Coalition government, not understanding how credit creation can fund capital investment and wealth creation, appear to neither possess the appetite to control the rapid rise of utility bills by these foreign-owned companies nor the intellectual equipment to deal with the threats to normal life in the UK made by these Thatcher-privatised, unwisely led, utility companies, who have implied, for example, that the lights may go out in Britain if they are not allowed to continue to rip off consumers at the rate they choose. The Germans, having privatised their electricity generation, are now leading the way by considering re-nationalising energy generation.

In many ways, the privatisation of essential services such as electricity generation, gas provision, the railways, the water companies and the postal services is wholly inappropriate because these services are natural monopolies.

It is not an accident that they were in the public sector, because when they are privatised, the government has handed over part of its power to control events to private corporations who are profit-centred and over which the government and its agencies have no control. There is no point in the Conservative-led Coalition Government whining that it’s not their fault. It was and it is. It was Thatcherist economic stupidity that has led us to this impasse and Coalition policy that has deepened and lengthened the UK depression and increased the deliberate transfer, through official government policy, of larger amounts of national income from the wage earners to the already rich.

But we must not ignore the one positive effect of privatisation from the viewpoint of Coalition Government Ministers – it is job creation scheme for otherwise unemployable ministers when their government is voted out of office.

Hence the scramble for privatisation in the run-up to the 2015 election which is likely to annihilate the Social Democrats for another couple of generations and throw the Conservatives out of office, hopefully for decades.

5 The Coalition-Driven 2013/14 Decline in the Wage Share

The UK is likely to have economic growth of about 1% this year. The UK’s 2013 £1.5 trillion pound economy is therefore likely to have real growth of about £15 billion. Assuming wages and salaries are about are about 53% of the economy, and these are likely to decline by 1% this year, the monetary value of the wage share would fall by about half of one percent of GDP, creating a monetary reduction of about a £8.0 billion in total wages and salaries. But inflation is likely to run at about 3% for the year, adding inflationary costs of about £45 billion to the economy. So the result of this year’s growth and inflation is likely to be as shown in the table below.

The Coalition-Driven Decline in the Wage Share 2013 to 2014

This is the greatest income shift from wage-earners to the non-wage share ever experienced in a single year, although the floating of the pound during the Thatcher-Lawson years may have had a similar effect when about 20% of British industry experienced reduced demand or was shut down.

This result is the culmination of Coalition Government Policy – the wealth and welfare of the British people has been completely detached from UK economic growth. Despite the small shoots of a 1% economic recovery, the great mass of the people will not only not feel any benefit but will suffer a decline of about 4% in their living standards (equal to wages reducing at -1%, plus inflation at about 3%).

The Cameron-led Coalition Government – their defence of their wealth-destroying, wage-reduction policies because “We are all in this together” when we are obviously not – are a bunch of liars. When Cameron said he would not privatise the NHS he lied. When Clegg promised not to raise student fees he lied. When Osborne rejoices in an economic recovery which will give no benefit to the British people, he is rejoicing for the rich, and his policies are detrimental to the “hard-working people” he pretends to care about. The Coalition Government have no interest in removing or reducing poverty, they have exercised no duty of care towards the wealth and welfare of the British people. Their only priority is to sharply increase the wealth of the rich and privileged by increasing the share of economic growth devoted to the highest incomes and to profits by wage cuts, even in a growing economy, and at the expense of the vast majority of the British people.

The Cameron-Clegg-Osborne Coalition and the Conservative Party look stupid at first glance because their stated policies of reducing the government deficit cannot possibly be achieved and will not deliver higher growth. But the “Stupid Party” is not really that stupid – their claim to be re-establishjng fiscal balance is a deliberate misdirection, a feint to mislead the public, the press and their political allies about their real intentions and their delivered results. “Let’s reduce average living standards so as to divert more national income to the already rich and privileged” is the actual aim of the Conservatives but it is a very poor election slogan and a guaranteed vote-loser. Clegg may not be adequately intelligent for the Deputy Prime Minister post he holds, but he would have enough political nouse to realise the political suicide involved in an open statement of that programme. Clegg has consented to the cover story but may not even be aware of the real programme of the Conservative faction of the Coalition Government.

As the evidence shows, their actual policy is to ensure that the gains of growth go to the already rich and if British economic growth is not high, then a deliberate decline in average living standards can be brought about to finance a greater diversion of national income to the already rich and privileged. The Coalition Government is actually and deliberately malign, not acting in the interests of the British people. In their Britain, the Coalition created growth industries are the deliberate creation of massive levels of poverty, the growth of food banks to feed half a million people, the rise in the number of people not earning a living wage to five million, the creation of the circumstances in which 25% of British children are living in families below the poverty line, and the explosive growth in high street rip-off payday lenders, which many Conservative MPs may be advising.

All of these negative trends will be made much worse by the deeper wage shift share reduction this year.

6 Conclusions

If the Coalition Government imagine that they can win an election in the year following the greatest ever one-year decline in British living standards, then I envy their optimism but I do not value their judgement.

Paxman is quite right to dismiss Parliament , as it currently operates, as a “remote and self-important echo-chamber.” But it does not have to be like that. And Paxman’s further comment in the Guardian of 5 November 2013 that

“We ignore the democratic process at our peril…people died for the right to choose their government, because otherwise power is weilded by the rich and strong for the benefit of the rich and strong”

is a bit misplaced because the Coalition Government is a government by the privileged, of the privileged, and for the privileged. The increasing poverty of the British, the victimisation of the poor and sick, and the reduced share of wages in national income are not some accidental by-product of Government activity during the last 35 years. It is the central focus of current Coalition Government policy. It was a deliberate creation dating from Thatcher’s Conservative Government activity of 1979. The destruction of union power in the UK (and in the USA under Reagan) is probably the major factor in the decline of the wage share in national income. Given their real agenda, there in no hope that the Coalition Government or any of its Ministers will ever act in the interests of the wealth and welfare of the British people. They are quite hopeless and useless except to their real supporters among the already rich.

When the Government of a democratic nation does not act in the interests of the majority of its people but elevates the interests of a small section of the population above the wealth and welfare of the majority of its people, there is only one effective thing that the people can do. Vote them out!

The solution is not a revolution on the streets because any such uprising would be very bloody. All the arms and powers of rods and axes are in the hands of a regressive, inept and wholly inadequate government. Britain needs another reforming government, another “Spirit of 1945” government which possesses the essential economic understanding, the appropriate vision and the parliamentary majority to deliver the required improvement in Britain’s future.

Britain could have a better future after May 2015. When Polling Day comes, let us vote for the hope that we can make that so.

© George Tait Edwards 2013

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This post was written by George Tait Edwards