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International Socialism, September 1976


Jim Kincaid

The ‘Boom’ and the Cuts in Figures


From Notes of the Month, International Socialism (1st series), No.91, September 1976, pp.3-4.
Transcribed & marked up by Einde O’Callaghan for ETOL.


Jim Kincaid writes: Politically the Callaghan government is having a lucky streak. With no great difficulty they have pressurised the trade union bureaucracy into accepting a much tougher second phase of the social contract – an average wage increase of only 4½ per cent against inflation expected to be at least 13 per cent over the next twelve months.

But in its attempt to rationalise British capitalism the government has registered little serious progress. Since the autumn of 1974, the central aim of Labour’s economic strategy has been to improve profitability and increase the amount of capital which companies have available for investment.

In Phase 1 of the social contract, average living standards of workers were forced down by about 3 per cent. State subsidies to industry (investment grants, etc.) were raised massively. Corporation tax was cut from 20 per cent of company income in 1974 to about 12 per cent in the current year. Investment potential has been further increased by the record levels of personal savings over the past two years – a reaction by individuals to the stunning onslaught of high levels of inflation and unemployment. Nearly 16 per cent of personal income is being saved at present, compared with the normal 9 per cent.

The company sector is now awash with spare cash. Phillips and Drew, a leading firm of City stockbrokers, have estimated that total profits will rise by 43 per cent in 1976. Yet they forecast that investment will be only 11 per cent higher in 1976 over the previous year. They predict a cash surplus of £1.5 billion for the company sector in 1976, and £2 billion next year. Unless investment rises sharply in the near future, these surpluses mean more unemployment ahead, because of the reduction in effective demand which is involved.

Meanwhile Denis Healey insists that a substantial boom has started and that industrial production will rise by 18 per cent over the next three years. Certainly the Government figures show that production has risen by 4½ per cent over the past nine months. There has been a sharp rise in exports, mainly because the 13 per cent depreciation of sterling since February has made British goods cheap on world markets. (This reduction in export prices will be paid for by workers in Britain who face an extra 4 per cent on the cost of living because imports will cost more.)

Yet there is no sign of the investment boom for which the Government have imposed so many sacrifices on the British working class. On the key point of their whole strategy the Government have no control. They cannot compel the private sector to increase investment to the levels required.

As The Times put it on 4th August.there is

‘a strike of capital. Many companies are not even replacing old capital equipment as it wears out. It seems hardly legitimate for a manufacturing company ... to prefer interest receipts as a major and long term source of profits. As an example, can it really be that GEC needed cash and near cash at March 1976, amounting to close on a third of the capital employed?’

‘Legitimate’ or not, a large part of the money obtained by a forcing down of living standards is being manoeuvred around on the money market instead of put into productive investment. A fair bit – exactly how much is unknown – has been exchanged into foreign currency,The popular press continues to blame gnomes of Zurich for the recent slide of sterling. But much of the responsibility lies with the financial managers of British based multinationals, playing the currency markets.

The Cuts

Meanwhile, the Government has recently been obsessed with a quite minor feature of the weakness of the British economy. Namely the deficit between the revenue and expenditure of the State. This is expected to be about £12 billion throughout 1976, and one of the main aims of the two rounds of public expenditure cuts announced by Healey in February and in July is to push down the deficit to £9 billion in 1977.

Certainly, at about 12 per cent of GNP in 1976, the deficit (which is met by Government borrowing) looks high by international standards. The current deficit in Japan is 7.0 per cent of GNP, in West Germany 6.5 per cent of GNP.

However the size of the British deficit is a statistical illusion. As a recent article by Government statisticians explains (Economic Trends, May 1976) the practice in Whitehall is to add in to the deficit, borrowing by the nationalised industries, and money lent by the State to private industry. These items are excluded in countries like Japan and Germany. With these items left out, the British deficit is only 5.5 per cent of GNP.

In any case, as Healey has reluctantly admitted, even this deficit would fall by a further third if the British economy returned to full employment. This part of the deficit arises from the payment of unemployment benefit,plus the loss of revenue because 1½ million workers are on the dole and paying no national insurance and income tax.

Lacking the courage to point these facts to the free market dogmatists who run the IMF on behalf of the US Government, Healey has chosen instead to try to reduce the public sector deficit by increasing unemployment. By his own calculation, the July round of cuts will cost a loss of a further 60,000 jobs – mainly in the building trades where already 210,000 workers are on the dole.

Half of the cuts imposed in July are on building projects scheduled for 1977 in the educational and social service areas. But housing is to be hit even sooner. The Government has already instrcted local authorities to reduce the rate of new housing starts from the present 9,000 to 6,000 a month. The biggest single cut (£146 million) has been imposed on the local authorities mortgage scheme. The scheme was started because the local building societies were unwilling to lend to applicants in manual jobs, and on older and less expensive houses.

Denis Healey says that the building societies have promised to make good the loss by extra lending. However, he has taken no powers to make sure they do. Apart from discrimination against manual workers, the building societies have become notorious as one of the most racialist of British institutions.withholding loans from black applicants, and refusing to lend on houses in or near areas where black families have settled.

As part of Stage 2 of the social contract, the Government withdrew the 5p increase in school meals threatened for this September. This would have brought the price up to 20p a meal. Now the Government have decided that the school meal is to cost 25p from next autumn.

From April next year the maximum charge for dental treatment has been raised to £7, and spectacle lenses are to be charged at full cost. The new and urgently needed invalidity pension for disabled housewives has been postponed. No new invalid three-wheelers are to be issued. Despite persistent government concealment, the full facts have emerged about the instability and accident levels of these vehicles. But the government have decided against the issue of four wheelers as a substitute. Nor will there be any increase in the present £5 a week mobility allowance, which is all that the disabled are allowed, to meet the cost of buying, adapting and running a car.

The withdrawal of food subsidies is to be accelerated by a further cut of £80 million next year. The subsidised items are milk, butter, bread, cheese and tea. The value of the subsidies is reckoned to be 70p a week to the average family. This will be halved over the next 18 months.

There is to be a 2 per cent increase in national insurance charges paid by employers, but the Prices Code allows companies to pass on the full extra charge in the form of higher prices.

Defence expenditure is to be reduced – but only by £100 million out of a total of £5,600 million. Currently the British Government spends 5.7 percent of GNP on defence each year. The Table illustrates the exceptionally high levels of military spending in Britain.

Defence Spending as %
Gross National Product, 1975



W. Germany












United Kingdom


Source: Defence Review, March 1976

What are the prospects of a serious fightback against wage and welfare cuts? If the coming year is like the last, the position looks bleak. Not since 1967 have so few workers’ taken strike action as in the first half of 1976. At the current rate the final total for 1976 of strike days will be under 3 million. Compare 6 million days in 1975 and nearly 15 million in 1974.

But there are grounds for optimism. Militancy has been at a low ebb not primarily because men like Jones and Scanlon command the unswerving loyalty and trust of millions of trade unionists. Many companies have passed through a period of depleted order books, short-time and low profits. Workers are disinclined to fight hard for money which they don’t believe is there to be had.

But now once more, large sectors of British capitalism are vulnerable to effective strike action. The order books are filling up, exports are rising, and there is plenty of money in the bank. Yet the wage cuts built into the new social contract are more severe than those of last year.

In this situation and especially in the private sector of industry, it is going to be much more difficult for the Government and the employers to prevent major breaches in the wage freeze.

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