Not making good

Autumn is frequently portrayed as the season of mists and mellow fruitfulness. This year, autumn has witnessed the publication of a series of reports which presage prolonged austerity, unprecedented in modern British political history.

In its analysis of the autumn statement, the Institute for Fiscal Studies (IFS) has claimed that, in terms of spending cuts and falls in real terms incomes, ‘Certainly there has been no period like it in the UK in the last 60 years’.

The IFS’s own estimates have suggested that ‘real median household incomes will be no higher in 2015–16 than they were in 2002–03, more than a decade without any increase in living standards for those in the middle of the income distribution’. Moreover, ‘in the period 2009-10 to 2012-13 real median household incomes will drop by a whopping 7.4 per cent — another record matched only by the falls seen between 1974 and 1977’.

In the face of this gathering tempest, George Osborne began his autumn statement by affirming his own and the Coalition’s commitment to navigating the United Kingdom through ‘the debt storm’. He sought to export the origins of this economic and political tempest well away from his own Plan A for growth to the Continent of Europe, since ‘Much of Europe now appears to be heading into a recession caused by a chronic lack of confidence in the ability of countries to deal with their debts’.

Most of the remainder of Osborne’s statement was devoted to measures to control public debt, while simultaneously ‘doing all we can to build the foundations of future growth’.

However, while focusing upon addressing the debt storm in relation to public debt, Osborne’s statement failed to address two parallel deficits, either or both of which could combine to threaten the United Kingdom’s credit rating and future living standards.

Indeed, the Coalition must now confront the consequences of the failure of successive British modernisation projects from the premiership of James Callaghan to that of Gordon Brown to build the foundations of future growth in the United Kingdom’s beleaguered manufacturing industries.

First, while Osborne noted that long-term interest rates for UK public debt now stood at less than 2.5 per cent, compared to the 7.2 per cent for Italian public debt, he failed to mention that his Plan A for rebalancing the economy is as dependent upon the further growth of private household debt as it is upon the control of public debt.

In its Economic and Fiscal Outlook, the OBR has forecast that household liabilities, which stood at £1,543.3 billion at the end of the second quarter of 2010, as the Coalition took office, will grow to £2,038.3 billion by the end of the second quarter of 2015, in the month after the next general election is due to be held.  

Consequently, it can be seen that Osborne’s Plan A is offering no protection for households from the private ‘debt storm’, whose magnitude is greater than the tempest surrounding public debt. According to the OBR, an additional £495 billion of private debt will be acquired during the Coalition’s planned tenure.

In the United States, this trend has been traced to the early 1970s, and the point at which the United States began the liberalisation of financial markets, and exposed its workers to the full rigours of untrammelled global competition. The attempt of American householders to maintain their material quality of life in the face of sustained static wages has resulted in household indebtedness amounting to $16 trillion dollars, exceeding net public debt of $15 trillion.

Second, the Office for National Statistics’ Pink Book 2011 has reminded policy makers of the extent to which, even before the Northern Rock debacle and the onset of the ongoing financial crisis, the so-called ‘nice’ decade of non-inflationary continual expansion was marked by a continuous structural deficit in the United Kingdom’s balance of payments.

Indeed, the Pink Book 2011 has recorded how in 1984 the United Kingdom’s current balance moved to a deficit of £1,294 million or 0.4 per cent of GDP (including a trade deficit in goods of £5,409 million), from a surplus of £1,258 million or 0.4 per cent of GDP in 1983.

Thereafter, during an era in which the institutions of the British developmental state invested tens of billions of taxpayer support in direct subsidies and tax relief for home ownership, council house sales, share trading and the construction of a new financial district at Canary Wharf, the Thatcher governments offered no equivalent scale of state support for civil manufacturing.

Consequently, from 1984 to 1989, the consumer-, property market- and privatisation-led economic boom was marked by a further deterioration of the current account to a peak of £25.5 billion in 1989, equivalent to 4.9 per cent of GDP. The UK lacked the industrial capacity to supply the demand from domestic consumers for manufactured goods.

Rather than rebalancing, under the Thatcher governments, the pace of deindustrialization continued unabated. Indeed, from 1979 to 1989, investment in manufacturing grew by only 12.8 per cent.

By comparison, investment in the UK services sector expanded by 108 per cent, and investment in financial services by 320.2 per cent. In 1992, UK manufacturing output was less than one per cent above its 1973 peak. During the same period, the output of German manufacturers had risen by 25 per cent; French manufacturers by 27 per cent; Italian manufacturers by 85 per cent, and Japanese manufacturers by 119 per cent.

While the current account balance narrowed to a relatively paltry £812 million or 0.1 per cent of GDP in 1997, even in that year the deficit on the UK’s trade in manufactured goods was £12.4 billion. Thereafter, during the tenure of the Blair government, the current account deficit expanded to £43.1 billion or 3.2 per cent of GDP, while under the Brown government the deficit on the UK’s trade in manufactures soared to a record £98.5 billion in 2010, equivalent to 4.6 per cent of GDP.

It can therefore be seen that whether the British economy was experiencing a sustained boom during the 1980s or between 1992 and 2007, or a prolonged bust as from 1979-1982 and 1990-1991, the UK’s manufacturing industries continued to display the same longstanding supply-side deficiencies in investment, skills, product and process innovation.

Starved of patient, long-term investment, the stark truth is that the new generation of entrepreneurs, celebrated in Margaret Thatcher and Sir Keith Joseph’s ambition to restore a Victorian ‘enterprise culture’, have built very few significant and lasting industrial businesses.

The commitment of Lord Young’s 1988 white paper, dti: The department for enterprise, to combat the ‘past anti-enterprise bias of British culture’ through the promotion of open markets and individual initiative, failed to address the longstanding institutional short-termism and myopic decision-making of domestic investors. James Dyson’s success in producing and globally marketing a brand of highly innovative vacuum cleaners and allied consumer products has proven to be very much the exception that proves the rule of British deindustrialisation.

In many respects, the political choices now being made by the Coalition to strengthen and deepen the return to Depression politics are a direct consequence of the bipartisan political consensus between the Labour and Conservative frontbenches which has endured for the past 35 years. In the face of the deindustrialisation of those parts of the United Kingdom whose living standards have not been dependent upon the City of London’s financial markets, successive British governments have failed to make the rebalancing of the United Kingdom’s economy a central priority of economic policy.

It is not acting with hindsight to point this out. The bookshelves of the House of Commons Library now groan under the weight of a plethora of parliamentary select committee reports and academic inquiries which have warned of the supply-side weaknesses constraining British industry.

At least as far back as the 1928 Liberal Industrial Inquiry, with its critique of the illusory merits of ‘private competition, unregulated and unaided’, and the 1931 report of the Committee on Finance and Industry, with its identification of an investment ‘gap’ in the provision of capital by equity markets to medium-sized companies, repeated warnings and recommendations for immediate and decisive action have been met with political and administrative inertia.

If the United Kingdom has now replaced the ‘nice’ decade with a ‘nasty’ decade  of ‘non-stop austerity stretching (for)ten years’, it is because of a series of flawed but by no means unavoidable political choices made by the British political establishment.

The massive private indebtedness of British households, and the era of an unprecedented diminution of living standards which now confronts the British people, are both direct products of the indifference and inaction of successive British governments in the face of deindustrialisation.

An industrial developmental Bank for England and/or a sovereign wealth fund for infrastructure investment, both of which could be funded by bonds sold to British savers rather than offshore funds, are needed urgently.

Dr Simon Lee is Senior Lecturer in Politics and a Director of the Centre for Political Economy, University of Hull.