Britain - The profit explosion

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Mar/Apr 2007

Many public sectors workers must have felt outraged when, on March 1st, they heard Brown stating in the Commons, that their pay increase this year would be less than half the 4.2% official level of inflation - meaning a pay cut across the board for all. Especially as Brown had the nerve to add that "the overall award comes within the inflation target at 1.9%, demonstrating our total determination to maintain discipline and stability and continue with an 11th year of sustained economic growth.

"Stability? "Economic growth? But for whose benefit? Certainly not for the benefit of public sector workers, since, according to Brown, they are meant to foot the bill cash in hand, in advance, with a wage cut! Not to mention the shedding of tens of thousands of jobs in just about every area of public and civil services - the police and the army being the only exceptions.

Much the same tune is heard in the private sector. The language may be different, because it is more openly cynical, but the logic is not. Just as "stability" and "economic growth" have been this government's favourite watchwords, to cover up austerity measures against the working class over the past decade, "restructuring" has been the watchword of private bosses, to cover up their constant drive to increase the intensity of labour for workers and to cut, outsource and casualise their jobs.

As JP Garnier, chief executive of Britain's largest pharmaceutical giant, GlaxoSmithKline, explained, when announcing his company's financial results for 2006, in early February: "We restructure all the time. This year, we spent £200m on restructuring. And indeed, Glaxo has written off the jobs of 6,700 workers and closed down 28 sites over the past five years. Which, no doubt, is what allows this Mr Garnier to boast of his company's record £7.8bn profits last year - a 19% increase over the previous year. Never mind the fact that just the additional 19% profit that Glaxo made in one single year, would have been enough to pay every single of its 6,700 "redundant" workers a £500/week wage for over 7 years!

But, of course, catering for the needs of the working population is not the purpose of the bosses' on-going "restructuring", not any more than it is the purpose of Brown's "economic growth". For the Garniers and the Browns of this world, there is only one objective - to maximise capitalist profits, whether directly in the case of private sector bosses, or indirectly, in the case of governments, by channelling an always larger proportion of the state budget into the coffers of private companies.

How the big players fare, with Brown's help

February-March is traditionally the reporting season for companies listed on the London Stock Market. And the least that can be said, is that British capital has never had it so good!

According to an estimate compiled by Thomson Financial for Murdoch's weekly, The Business Britain's 100 largest companies in terms of stock market value (the famous FTSE 100) made a staggering £140bn combined net profit (after tax) in 2006. As this paper notes, this is equivalent to "the entire national economy of Sweden or Austria"

To compare this enormous figure to something closer to home, it is equivalent to 93% of the government's total spending on social security during the same year. But to put this parallel into perspective, one should add that while the bulk of these profits is controlled by a few tens of thousands of very rich individuals, the government's social security budget provides an inadequate but vital income to over ten million claimants among the poorest and additional benefits to many more. This gives a measure of the parasitism of the tiny capitalist minority which, thanks to its control over the means of production and distribution, concentrates this wealth in its hands. But, as we shall see later, in fact, this parasitism goes much further than that.

The Thomson Financial survey also provides some elements to compare this figure with the past years. First it notes that this £140bn represent a 28% increase over the previous year.

But how many years does it take, these days, for workers to get such an increase on their net wages? No less than seven years, assuming a 3.5% annual increase, which is far more than what a lot of workers get! And these are the very same companies which keep whining whenever they are faced with far more modest wage demands from their workforce!

However, according to this survey, 2006 is supposed to be considered as a rather "bad year", in relative terms. Indeed, in every one of the previous three years, the combined profits of the FTSE 100 increased by even more than 28%: by 71% in 2003 (compared with 2002), 107% in 2004 and 57% in 2005. But this means that their net profits in 2006 were more than 7 times higher than in 2002, which was not considered a bad year at the time, since it saw the financial recovery of many big companies, after the losses they had incurred as a result of the "dotcom" stock market crash of 2000.

It is no wonder, therefore, that the FTSE 100 index, which measures the level of share prices for these companies, has reached in mid-February, its highest point ever, since its previous peak of December 2000, on the eve of the "dotcom" crash.

It is interesting to note, in passing, that according to the Treasury's own figures, corporation tax, which is supposed to be a tax on profits, has not followed this sharp increase at all. In fact, the government's total intake from corporation tax dropped suddenly by 15% between 2001 and 2002, as a result of changes introduced by Brown which allowed more rebates than ever before. Then the intake increased from £33bn in 2002 to £49bn in 2006 - a mere 50%! And this amount, which represented in 2006 only 35% of the FTSE 100 net profits, included the tax payed by all companies, not just the FTSE 100 - meaning that the FTSE 100 themselves, paid a lot less than that!

This certainly says volumes about the mysterious tricks, loopholes and deals passed between companies and the Inland Revenue. This is a world to which ordinary taxpayers have no access. It is shrouded in secrecy, behind the veil of "commercial confidentiality". And this is how Brown's business-friendly tax system helps companies to boost their profits!

The banking sharks

Outside half-a-dozen mining and oil giants, by far the biggest sharks in the world of British big business are the handful of institutions which dominate the banking industry.

According to the figures released by City analysts, Britain's six largest banks made a £38.5bn combined pre-tax profit (i.e. before corporation tax) in 2006. These include, in decreasing order of size, HSBC, Royal Bank of Scotland, Barclays, Lloyds-TSB, Halifax-Bank of Scotland and Standard Chartered. All of them show profit increases which vary between 11% for Lloyds-TSB to 35% for Barclays.

What is maybe even more significant is that to these already considerable profits should be added almost £10bn of exceptional provisions for bad debts made by these banks, maybe partly for tax reasons but also because of the present increasing rate of default on personal lending. Indeed, these banks concentrate in their hands the bulk of the personal unsecured loan business and a large chunk of the personal mortgage market. In other words, the real combined pre-tax profits of these six banks in 2006 is probably closer to £50bn - or the equivalent of 2/3 of the government's total spending on education for over 15 million youth, in 2006!

Against the backdrop of the colossal indebtedness which has developed among all sections of the population over the past decade, but most dramatically among the poorest, the bank sharks appear to many, and rightly so, as profiteering out of poverty. And even more so, given the extortionate rates they charge for credit card lending and authorised overdrafts, and the extravagant fees they impose for the smallest unauthorised overdraft or bounced cheque.

The scandal caused by these ludicrous charges has become such that, despite its long-standing resistance to any form of constraints on the bank sharks, the government is now talking about introducing some form of regulation over current account charges. But it did not take long for the bank giants to retaliate. They have since warned that, if such regulation was to be imposed on them, the days of "free banking" may well be gone forever.

The joke is that, by resorting to an accounting trick, which involves separating on paper their high street business from the rest of their activities, the big banks manage to make out that high street banking has now become too costly for them to run in the way they used to. Except that, of course, the huge profits they make through their investment businesses, would just not exist if it was not for the pennies and pounds deposited by millions of working people in their current and savings accounts - that is through their high street branches.

Indeed, by far the largest source of profits of the bank sharks is what they call "investment banking", which, despite its name, has nothing to do - or very little - with investing resources in the productive economy. The most lucrative part of this activity involves lending money to big time speculators for large-scale short-term operations, whether directly on financial markets or, less directly, in the form of mergers and acquisitions. Such operations can reach enormous notional values - notional, because the amount of actual money which changes hands is comparatively small - and since the very tangible fees they attract are calculated on the basis of this notional value, they can be very high. Hence the ludicrous profits made by the largest banks thanks to the role they play in such deals.

But once again, these banks would never be able to play this role of trusted high-flying intermediaries if it was not for the massive stock of money they control, thanks to the pennies and pounds of high-street working class customers.

As to using the huge reserves of cash they hold in order to invest in new useful production, this is considered too "risky", but above all, not profitable enough, by the banking sharks. The days of rising capitalism, in the 19th century, when the banks played such an important role in many parts of the world, by concentrating the available capable in order to develop new industries, such as the railways in particular, have been over for a very long time. Today, the enormous financial power concentrated in the hands of the banking system is primarily designed to make either a "quick buck" or a "big and safe buck", by taking opportunity of whatever chance of profiteering may present itself, but certainly not by creating it.

Profiteers, yes - investors, no.

One of the features of British companies has long been, at least according to most British economic experts, the large rates of return that they offer to shareholders.

Despite the large profit increases registered by big companies in 2006, it is often the case that the same companies increase the dividends they pay to their shareholders by an even larger percentage. Royal Bank of Scotland, for instance, increased its pre-tax profits by 16% but its dividends by 25% (for the 2nd year running, in fact).

Other FTSE 100 companies, like tobacco manufacturer BAT, oil major BP, mining giant Billiton, and many others, do not limit themselves to double-digit increases in dividend payments. In addition they also offer to buy back a large chunk of shares from their shareholders, often at a premium prices. Of course, this is a one-off handout and those shareholders who choose to take such an offer loose the benefit of future dividends. On the other hand, they generally make a hefty profit thanks to the buy back, without having to pay a stockbrokers' fee to sell their shares and without taking the risk of choosing the wrong date to sell them. As for companies, the advantage of buy-back operations is to reduce the number of their shares available on the market, thereby making it possible to increase substantially the dividend paid for each share and pushing their price up into the bargain.

Both mechanisms of redistributing profits to shareholders involve colossal amounts of cash. A study published last year estimated that over the three years up to 2005, British companies had paid a total £190bn in dividends, while buying back £118bn worth of their shares from their shareholders. According to the same study, around 41% of company profits had been paid in dividends, while 25% had been repaid in the form of buy-backs, leaving companies with only 34% of their profits in hand.

Of course, there are all sorts of pressures on company boards to maximise the share of profits which is redistributed to shareholders. Board members themselves, for a start, often get their cut of company profits in the form of share options or bonuses whose values depend on the price of their company's own shares. Besides, poll after poll conducted among shareholders shows that they favour large buy-backs, particularly the large institutional investors - investment funds, insurance companies, pension funds, etc.. - which own the bulk of the big companies' shares.

But, ultimately, what this really means is that British companies have nothing more productive to do with their profits than to hand them back to their shareholders, instead of reinvesting them to modernise existing production or create new ones - and by the same token, create new real jobs to replace the lousy casual non-jobs into which so many workers are forced these days.

As a result, industries are starved of new investment, industrial equipment tends to be used longer than it should, regardless of the health and safety risks this may create for workers, and, above all, jobs are constantly cut in order to produce always more profits from the same narrow production base. And when big companies do invest some of their profits, it is at best, to buy one of their competitors, often mainly to take over its market share, without even keeping its entire workforce, so that instead of creating new jobs this investment actually results in more redundancies!

In fact, this is a tendency which affects all the industrialised countries these days. But apparently more so in Britain than many others, judging by an article published in the Guardianon 26 February. Having divided the economy into 33 different sectors, this article states that the operating profits of British companies as a proportion of sales are higher than the European Union average in just ten of these sectors. However, if, instead, retained profits (i.e. operating profits minus dividends, cost of buy-backs and corporation tax) - the profits available for re-investment - are taken as a proportion of sales, British companies do better than the European Union average in only 3 sectors out 33!

Since corporation tax in Britain is among the lowest in Europe, if this is not a measure of the greed and parasitism of British capital, what is?

Reversing the trend

The explosion of company profits is a trend which goes back to the late 1980s and has continued unabated ever since, with only a few limited periods of retreat - mainly caused by the stock market crashes in 1987, 1997 and 2000-2001. Together with the large cuts in income tax for top-earners introduced by the Conservatives in the 1980s and reinforced since by Labour, this explosion has fuelled the enrichment of a small layer of super-rich, at the very same time and in the same proportion as it was feeding on the casualisation and impoverishment of a growing section of the working class.

According to Inland Revenue estimates, 24,000 British citizens will earn £500m and more during the current 2006-2007 fiscal year. Among them, the fortune of the wealthiest 1,000 has increased by 600% over the past 15 years. And there are now 54 billionaires among them, more than there were millionaires 50 years ago, including a number of wealthy foreign magnates, who have come to Britain to enjoy the benefits of the tax haven regime created here by the combined reforms introduced by the Tories and Labour. Indeed, according to estimates provided by financial adviser Grant Thornton, out of their combined fortune of £126bn, these 54 billionaires pay a total tax of only £74.5m a year!

We discuss, in another article of this journal, the corollary of the profit explosion - the rise of poverty, including among workers in employment, and the endemic problem of child poverty.

The super-rich may well spend their days in gold-plated private swimming pools surrounded by the luxury that their millions or billions allow them to buy. They may award themselves the bonuses they like and drown in champagne if that is what they want. Who cares? But what is intolerable is that millions of workers, pensioners, children should be forced to live in poverty as a result of their parasitism.

These growing inequalities, which are primarily the result of the employers' on-going attacks against workers' jobs and standard of living are not inevitable, nor is it impossible to stop them. The record level reached today by capitalist profits is glaring proof of the fact that the present trend of growing poverty among the working class could be reversed. It shows that it would be possible for companies to create useful jobs on decent wages, out of the mountains of surplus profits with which they stuff the pockets of shareholders year in and year out. Just as it would be possible for this government to tax the extravagant wealth of the super-rich, the surplus profits of their companies and all financial profits, so as to raise enough resources to bring back public services under public control and to create the public jobs which are desperately needed in so many spheres of society.

None of this will happen by itself of course. It will require a full-scale mobilisation of the working class behind a fighting programme aimed at forcing the capitalist class to loosen the stranglehold it has over today's society. But one thing is certain. The affluence of the capitalist class and the huge wealth generated by workers (and by workers only) through its production machinery shows that the material basis for the success of such a counter-offensive of the working class exists. And if it exists, the chance is worth seizing.