Dead Men Left

Monday, June 20, 2005

Brown and the UK economy

Written for elsewhere, don't know if it'll get used:

Gordon Brown, Prime Minister-to be, is feted to the skies for his supposedly adroit management of the UK economy. Even his most hardened critics, like Tony Blair, grit their teeth and claim Brown is the “most successful Chancellor for 100 years”. For some of those in Labour circles disillusioned with Blair, Brown-nosing has become second-nature; but in flattering the man, they sign up to his mythology.

Once, the soft Left condemned the ascendancy of the City of London and its cosy relationship with the most patrician of all government departments, the Treasury. Now, under Brown, the dense network of contacts and contracts established between Whitehall, the major financial institutions, and ever-present management consultants is lauded to the skies. Where Will Hutton once condemned the “gentlemanly capitalists” controlling economic policy, he now praises Brown’s courting of the same City gentlemen. Ken Livingstone, who at the GLC ferociously attacked the “parasites” in the Square Mile, now relies on consultants PWC to oversee the London congestion charge.

Private Finance Initiative schemes have been transformed from a crazed last-gasp fantasy of a senile and dying Tory administration into a multi-billion pound industry, and a fundamental hinge of government economic policy. City suits become Whitehall mandarins with ever greater frequency, government spending on management consultants rising every year under Blair, to over £1bn in 2004. One-third of all consultancy income in the UK now comes from the public sector. The revolving door between lucrative consulting jobs and senior government posts was notoriously revealed in the transfer of Sir Michael Barber, Blair’s top advisor on policy “delivery”, to secretive management consultants McKinsey - just as former McKinsey consultant, David Bennett, stepped in as Blair’s top advisor on policy “reform”.

The flourishing offspring of intimate relations between the Treasury and the financial institutions, as chaperoned by the “politically independent” Bank of England, personal debt in the UK has soared to a record of over £1trillion, 80% of which is used to finance house-buying. With rising property prices underlined by easier access to credit and low interest rates, millions of Britons have been able to borrow and spend far beyond their earnings, fuelling a consumer boom. More recently, this private sector debt has been joined by a public deficit, Brown’s increases in public expenditure pushing government borrowing upwards. Both have enabled British capitalism to simultaneously squeeze take-home pay and yet maintain high levels of consumption expenditure, keeping inflation low whilst promoting a boom.

Gordon Brown’s economic policies have created a dangerous bubble that barely conceals the creaking economic gears beneath: the collapse of Rover was only the most visible point of a tremendous strain that has been placed on British manufacturing industry, with over 800,000 manufacturing jobs lost since 1997. The debt-fuelled boom in consumer spending has failed to boost manufacturing output: a high pound has meant cheap overseas goods can be bought with cheap domestic credit. Over £92.2bn flowed into the UK in 2004 to finance borrowing, a substantial increase on the previous year. From Tony Blair’s first election victory onwards, almost the entire rise in spending on consumption goods has gone on imports. Britain’s trade deficit now stands at 5.2% of GDP, nearly as high as under the worst years of the 1980s.

None of these deficits have produced a “miracle”. The huge flows of funds now rushing into the UK have not fundamentally resolved its longstanding economic problems. Disparities of wealth have grown as a direct result of the bubble economy, with the richest 1% of the country increasing their share of national wealth from 20% to 23% under Blair. The poorest 50%, by contrast, saw their holdings decline from 7% in 1996, to 5% today. Unemployment remains very high, and often concentrated in declining areas: in addition to the 2m on incapacity benefits, a recent study suggested some towns in Britain have as many as 40% of the population out of work. Stephen Machin, of the Centre for Economic Policy Research, found that Britain is now a significantly less economically mobile society than in the 1960s and 1970s, with the children of the poor more likely to remain poor throughout their lives.

Business investment has fallen since 1997 to just over 10% of GDP, close to the levels of the 1990s recession, and significantly below that of other developed countries. The government’s apparent commitment to “high-technology” is undermined by the slide in R&D investment from 1.5% of GDP in 1990 to just over 1% today, lower than any other G7 economy. Brown’s increases in public spending have only slightly increased public investment, which remains below the level under Margaret Thatcher and John Major.

Each worker in the UK uses 25% less capital than their US counterpart, and 60% less than each German worker. This lack of capital, and the slide in investment, helps to explain Brown’s failure to significantly close the “productivity gap”: each worker in the UK is less productive than a worker in Germany, France or the US. This makes British capitalism less competitive than capitalism elsewhere, and has driven constant exhortations for greater effort on our part to compensate. Even in the context of a global capitalism that has been unable to sustain economic growth and maintain profits for the last three decades, British capitalism is a ramshackle edifice. Only the strenuous efforts of British workers, and the recklessly liberal application of debt finance, has maintained its recent, slightly quicker pace.

What the bourgeois economist John Maynard Keynes called the “liquidity trap” has reappeared: instead of risky investment in productive industry, capital is retreating into property and consumer debt, actively encouraged by the government. The risks in the system are thrown onto individual workers expected to compensate low wages through borrowing, but who cannot afford the consequences of a burst economic bubble.

The possibility of that bubble bursting grows daily: should property prices fall, banks will become uneasy about their mortgage liabilities and consumers consequently wary of spending. Either outcome could be disastrous, breaking the debt-consumption-debt cycle Brown has relied so heavily upon. A socialist alternative would promote the use of the public sector to democratise investment decisions, wresting control away from the City and the Treasury. The case for nationalising the pensions funds and the banks, removing them from shareholder diktat, is there to be made. Above all, there has to be a recognition that a sustainable and equitable economy cannot be built from debt-fuelled financial speculation.