How healthy is the British economy?

Has British capitalism has finally overcome what used to be called the British disease: slower growth, higher inflation, continual currency crises and a falling behind in living standards compared with the US, Europe and Japan? Growth figures actually disguise a far more diseased system that the media would like us to see. Just before Gordon Brown announced his 2004 budget, the European commission declared that the British economy was one of the healthiest and strongest in the European Union.

Of course, that is not saying much. The Commission forecast that UK national output would rise by 2.6% in 2004, more than double the expected Eurozone average of 1%. The Commission also predicted that the rate of growth in the number of jobs likely to be created in Britain this year - at 0.5% - was second only to Spain and Luxembourg. By contrast, Brussels estimates that seven EU member states including Germany will see jobs disappear. The unemployment rate will be lower, the government debt is lower and even after Gordon Brown's increased public spending, the government's budget deficit will be lower as a % of national output.

If the UK is the best with just 2-2.5% annual real growth, then all this just shows what a terrible state European capitalism is in. Europe, it seems, cannot manage to grow or find jobs for its people.

But it does pose some questions. Why is the UK apparently doing better? And does this mean that British capitalism has finally overcome what used to be called the British disease: slower growth, higher inflation, continual currency crises and a falling behind in living standards compared with the US, Europe and Japan?

The reality is that the underlying health of British capitalism is really no better than it was in the terrible days of the 1970s and 1980s. It certainly has not returned to the brief halcyon golden days of the 1960s. Consider these facts. National output rose an average 3.4% a year in the 1960s. During the 1970s and 1980s it managed only 2% a year. Now after the great 'reforms' of the Thatcherite days and under New Labour, it manages 2.3% a year.

And as for the manufacturing sector, it has been decimated. Whereas it grew at a 3.6% clip in the 1960s, it failed to grow at all for two decades in the 1970s and 1980s and is now growing at just 0.8% a year. And of course, it is now a pathetically weakened and forgotten part of British capitalism, employing less than 3.4 million workers out of a total workforce of 30m. Indeed, last year for the first time since before the industrial revolution, more people worked as self-employed in various useless services (estate agents, financial advisers, advertisers, etc) than now work in British manufacturing making something!

Only the services sector (finance, property etc) has kept the UK economy growing. New Labour's pathetic trade and industry secretary, Patricia Hewitt, says that "modern manufacturing is central to our future as leading knowledge-based driven economy". The problem is that British capitalists don't agree. They prefer to invest in financial services or send their profits abroad. As a result, British industry is increasingly not British-owned at all. Whereas in 1973, 17% of UK manufacturing output came from foreign-owned companies, now that figure has reached 25%, and the share of British workers in foreign-owned manufacturing companies has risen from 13% to 17%. Inward investment from foreign companies was just 0.5% of GDP back in days of Harold Macmillan.

Now our prosperity and the financing of our trade deficit depend on nearly 3.5% of GDP coming from investment by foreign manufacturers (over half of which are American). And that's the big worry for British capitalism. If inward investment should die, the UK will be exposed.

UK capitalist business is the least efficient in Europe, with the exception of Greece and Portugal. Manufacturing productivity is just 67% of that of the US, while France is up to 85%, even though French workers have the longest holidays and shortest working week in Europe. Whereas in the 1960s, British productivity (the amount of output per employee) grew at 3.2% a year, in the 1970s and 1980s, that rate fell back to just 1.6% a year. In the 1990s there has been no improvement.

Indeed, the government's own survey of industry found that of 18 industrial sectors, British productivity was lower in eight (media, insurance, chemicals, autos, engineering, electronics and other manufacturing) compared to Europe. It was higher in just five (banking, oil, pharmaceuticals, supermarkets and retailing).

It's no surprise that the UK leads in the 'rentier' industries of finance in the City of London and retailing (a nation of shopkeepers) but not in the heartland of new technology and industrial innovation. The British economy is a parasite on the rest of productive capitalism.

But does it matter that British capitalism is no longer industrial capitalism? After all, if we can all make a living, why worry if it is in a factory making a car or in an estate agents selling a house or in club lapdancing?

But it does matter. It means that all of us who work in this country are now even more dependent than before on the rest of capitalism succeeding. Britain no longer drives industrial growth globally or in Europe. So if industrial growth collapses elsewhere, we shall be hit the hardest. British capitalism's dependence on the rest of world's capitalists means that it has done well in the boom years. But it also means it will do badly in the lean years. .

That is the danger that lies ahead. British economic growth is not driven by investment in productive capacity. Indeed, although the economy grew by 2% last year, investment by big business as share of their profits fell to an all-time low! All the economic growth came from incomes made in 'business services' like insurance, banking, property, consultancies etc. That is the name of the game for the UK.

In the last few years, the average British household has not increased their living standards much through increased wages from work. It came from borrowing more and more to finance spending on homes, cars and life. Whereas the average household used to save 9% of income after tax in the 1980s, now they save just 2.3%. And we know that huge swathes of people save nothing and borrow more.

And inequality has never been so bad for over one hundred years as a result of becoming a rentier economy. The latest analysis by the Rowntree Trust shows that poverty (defined as an income 60% or less of the average) is still just as bad as it was when New Labour came to office in 1997. Indeed, whereas inequality (the share of income going to the top 10% versus that going to the bottom 10% of income–earners) rocketed under Thatcher's Tories in the 1980s (the top 20% of income earners saw their incomes rise 30 times faster than the bottom 20%!), it was actually reduced a little under Major's government. Under Blair and Brown, it has widened again.

The latest data show that the top 10% households spend nearly seven times more than the bottom 10% of households every week. The rich 10% spend £850 a week on average, while the average household spend £390 a week and poorest 10% spend just £125 a week. The rich 10% spend ten times as much on eating out or going to the theatre or holidays than the poorest 10%. And they spend 14 times more on their motor cars. But just as depressingly, the rich 10% spend only 50% more a week on cigarettes and cigars than the poorest 10%.

One of the worst features of the rentier economy must be housing. We don't build houses, we just speculate on the price of the existing ones. We are now in massive property bubble that will eventually burst, but in the meantime it is creating more and more inequality in wealth and income.

The supply of 'social housing' (good accommodation at reasonable rents) has disappeared. Thanks to destruction of council housing by the Tories and New Labour, there is no decent public housing to live in and rents in the private sector have rocketed. The Rowntree Trust found that new house construction is at its lowest level since 1924!

Young people are forced to stay with their parents (the average age of a first-time buyer is now 34 compared to 29 three decades ago), or crowd into shared flats or spend hours commuting. At the same time, rich property owners are using their wealth to buy more property to rent out to the poor. The rich 10% are turning themselves into a rentier class. Left to the market, the housing needs of the average Briton will never be met. Public ownership and national planning is essential, just as it is for public transport.

'Education, education, education', was the cry of Tony Blair. His name is synonymous with raising educational standards. And yet the latest report from the OECD shows that the UK's total spending on university education in 2000 was just 1% of GDP, with just 0.7% from the public sector. The overall share was well below the OECD average of 1.3%, let alone the US share of 2.7%. The UK's share of GDP spent by the public sector was lower than that of every member country, except Italy, Japan and Korea (where the private sector is bigger). No significant change in this picture is in sight. By 2005-06, public spending on tertiary education is set to reach about 0.8% of GDP. To add insult to injury, government has increased its inspections and regulations, as it has reduced resources per student.

So the UK may be doing better than Europe – briefly. But British capitalism is now a huge financial parasite, providing services for those sectors of the world that are creating productive wealth. In 2003, the world's financial markets went up sharply after three hard years. That helped all the parasitic sectors of capitalism, like the City of London, the banks and the consultants, to boom. Huge bonuses in the City were paid out after Xmas and the property boom resumed.

British capitalists gave up on manufacturing and industry in the 1970s. They left it to the Germans, the Japanese, even the Americans and finally the Chinese. They became internationalist, they became financial – in short they became like a large island Switzerland. Now nearly 60m people depend for their prosperity and their ruin on world finance capital avoiding any crises. .

But if economic growth in the US and even China should slow later this year and the financial markets turn back down, then it is the parasite economy of Britain that will suffer the most. British capitalism's future has never been so closely tied to the movement of stock prices on Wall Street and the London Stock Exchange and on the 'confidence' of the speculators. It's a sobering prospect.