Way back in 1959, some of us older ones can just remember the slogan of the then Tory prime minister, Harold Macmillan, as he went into an election, that Britain has “never had it so good.” The 1959 election took place after a four to five years of steady economic growth and employment.
In his March budget, just a few weeks before New Labour announces a widely expected election for May, Chancellor Gordon Brown harked back to the same idea as the Conservative leader of the late 1950s. Only his claim has even more hubris. According to Gordon, the UK has enjoyed, under his stewardship, the longest period of sustained economic growth since 1701!
Far be it from me to deny that Gordon is right. I don’t have the data before me to prove otherwise. But it does not say much for capitalism and the British variety of it that the longest period of economic growth in its history is just seven years.
Of course, Gordon’s proud claim was mainly designed to whip up support for another victory for New Labour in the upcoming election. And perhaps even more important, it was the foundation for his bid to take over the leadership from Blair some time in the next couple of years. He may well succeed in getting both these objectives.
But much more important for the rest of us who have to live under New Labour’s management of British capitalism is, first, do we really feel that we have never had it so good? And second, can we really expect this much-vaunted prosperity to last through the next parliament?
Are things really so good, Gordon? Each day we read of another horror story in the hard-pressed NHS, whether it is MRCA deaths because of the lack of skilled cleaning staff, people left on trolleys in corridors because of the lack of beds, people waiting years for operations, or hospital trusts going bankrupt.
In education, education, education, we hear of schools with huge vacancies for teachers as more leave the profession than are recruited or of so-called privatised academy schools finishing bottom of the qualifications league despite various companies and business tycoons being fed huge dollops of taxpayers money to run them in any way they like – apparently one academy in the north-east is teaching the creationist view of the universe because it is owned and run by some Christian fundamentalist businessman!
And then we have transport. Thanks to New Labour and particularly to Gordon Brown and his obsession with the so-called Private Finance Initiative, we have a rail system that remains privatised and broken up into ‘franchises’ run by a bunch of private bus companies, cowboys and Richard Branson. And the annual cost of subsidising these people is now greater than the subsidies to British Rail and yet the punctuality and safety are near third-world levels.
And don’t forget pensions. The state pension has been stripped to the bare minimum, despite some small improvements by Brown and now the government is slashing the benefits of public sector workers and making them work longer or until they drop to get it. Of course, private sector workers have already said goodbye to final salary schemes and any other benefits won over the last 50 years since Macmillan said that they had never had it so good.
And as the pages of this journal have explained in previous issues, all this takes place in a society where inequality of wealth has widened under Gordon Brown and New Labour, while the gap between the poorest income earners and the fat cats in the City with their bonuses has never been greater. No wonder British jails (many privatised) are bursting at their seams with a prison population second only to Turkey in Europe and where one-third of female prisoners try to injure or kill themselves through depression.
Okay, okay, Gordon might respond, but the capitalist economy is growing well and unemployment has never been so low. And these other things will get better.
The reality is that the apparent success of British capitalism is based on the fact that is hardly British. The UK economy is increasingly an economy of international finance capital and professional services. Manufacturing makes an ever smaller contribution, less than 15% towards annual national output and less than that towards employment. The UK is increasingly dependent on the success of the world’s stock markets, banks, insurance businesses and property. It now runs an ever-widening trade deficit with the rest of the world for the goods that we need to consume or use in the services sector. The UK is what we call a rentier economy; dependent on the fees and rents it can get from countries that do actually make things.
Because of this, the success of UK capitalism depends on the success of world capitalism like it has never done before. So far, it (and Gordon) has been lucky. The US economy continues to motor on, based on its own property boom and cheap money pumped into the economy by the Federal Reserve bank and by the Bush administration’s big budget deficits.
But huge debts are building up both in the US and the UK. American and British households now have an average debt (mostly mortgages) equivalent to 120% of their annual income. So far, the cost of paying the interest and repayments on this debt has not been too severe because interest rates have been so low. But now interest rates are on the rise in the US as well as in the UK. The Fed is set to double interest rate levels over the next year in order to try and control rising inflation. That will hit the housing boom. Even more worrying has been the news that General Motors, once the flagship of US manufacturing superiority has run up such a large debt burden ($11bn) that its creditors are now demanding early payment of their bills!
Rising interest rates in the US will mean the same in the UK. Even after successive rate hikes last year, the Bank of England is still planning to raise them further again after the lection. And it is not just rising interest rates that the UK citizen faces after the May election. Taxes will go up again too. The Institute of Fiscal Studies reckons that an increase equivalent to 3p in the £ in personal taxes is necessary if the Gordon Brown is to keep to his ‘golden rule’ of budgeting. This states that the government should not borrow any money from the City of London unless it is for capital investment.
A Taxing Problem
There is a problem now because the government’s tax take is down while spending commitments are up. Tax revenues have been less than expected because British corporations are paying even less tax than under the Tories in the 1990s and other incentives to businesses have reduced their tax burden so much. At the same time, the average UK family has faced rising national insurance contributions and various other hikes in petrol duties, insurance premiums etc.
At the last election, New Labour pledged to step up public spending to solve the chronic state of public services. Under Gordon, after years of cutting back, public spending rose by over 4% a year over and above inflation. But the budget that Gordon presented last month revealed that the ‘golden days’ of public spending are over. From here, spending will be no faster than any growth in the economy.
Of course the government expects 3% annual growth from here. But most experts reckon that 2.5% would be good going. Why the difference? Well, the experts reckon there is one sector of the economy that does not want to pull its weight and that’s big business. Despite huge tax cuts under New Labour, business is expected to invest hardly any more in the British economy. The likes of Shell, Glaxo, Vodafone, Tesco, etc continue to ‘globalise’ their business. In other words, they prefer to invest in cheaper wage-cost, lower tax countries like Eastern Europe, Latin America or Asia, than in the UK.
And what if the world should slow down? The US is key to British capitalism. The US economy is expected to grow by around 3.5% this year. That would be good news for the UK. But the risks of a sharply slower outcome are high.
America’s huge trade deficit, now 6% of annual output, is getting wider. At the moment, this is being financed by Asian and OPEC oil exporting countries recycling their export dollars back into the US to buy US government bonds or companies. The trouble is that as soon as they buy them, their value falls as the dollar weakens. And each sale they make to the US is paid in dollars that are worth less. So the Asian and oil exporters are being fleeced. How much longer will they put up with it, strong-armed as they are by the US government to go on buying American bonds?
Already, there is increasing talk among the officials of China, Japan and even Saudi Arabia that they may want to switch their surplus cash into euros, which are gaining in value, and away from dollars. If they start to do that in a big way, then the dollar will plummet and interest rates will rise even more and the US will slip into economic recession.
That will hurt the UK more than any other G7 economy. A sizeable proportion of its goods and services sold abroad go the US. Much of the inward investment into UK capitalist businesses comes from the US, and of course, the US and UK financial markets are like two brothers. If big brother falls down, little brother will drop too.
It may not happen this year, but it’s on the cards. Then British capitalism’s apparent stability that Gordon Brown wants to take the credit for will crumble away. Remember that Macmillan won the 1959 election and promptly the economy entered its first post-war recession in 1960-61, complete with spending cuts and rising unemployment. The Tory government fell in 1964.