The International Writers Magazine: Comment
Does Size Matter?
There is much being said presently about the British government’s deficit, with excuses flying between political parties, and everyone promising to reduce it. However, my concern is less with the size of the deficit or the amount of government debt than with its purpose.
We commonly see debt figures presented as a proportion of Gross Domestic Product, again with promises to reduce the ratio. As with government debt, it is the size of GDP rather than its constitution that is discussed.
The composition of Britain’s GDP today is 79% services, 20.5% industry and .7% agriculture. Manufacturing, which some newspapers told us is on the rise recently accounts for around 10% of GDP. There are a number of reasons why we should be concerned about such an imbalanced constitution, notwithstanding ex-chancellor Nigel Lawson’s view that ‘manufacturing does not matter’ as a modern economy is based on services. I believed him to be wrong at the time, and have found no reason to change my mind. Manufacturing is important as a producer of exports and import substitutes, and as a base for the development of important skills. Its decline leaves gaps that the service sector cannot fill.
The service sector embraces retailing, financial services, legal services, education, medicine, housing, and a number of professions requiring educational qualifications. These educational hurdles mean that a large proportion of Britain’s young people are effectively excluded from parts of the service sector simply because British education is failing to produce the goods. It was never realistic to expect this sector to compensate for the loss of exports or import replacements from manufacturing.
Services are exportable, of course, if we are offering standards that overseas markets demand, but in most cases we are not. Take education, for example. British universities have always benefited from having students from overseas. When I agreed to act as an external lecturer on an English university’s MA programme I was surprised to find the course had not a single English student on it. That was about twenty years ago, but how long can we continue to attract overseas students as the number of universities meeting international standards declines? British education is not what it once was, to put it politely.
At the beginning of the century the UK’s positions in PISA rankings (Programme for International Student Assessment) were 9th in mathematics, 5th in science and 8th in reading. By 2012 we had fallen in in all three: to 26th in mathematics, joint 20th in science (with Slovenia) and 23rd in reading. All the top places in these tables are now occupied by Asian nations, where, in the words of economist Dambisa Moyo, the focus is on merit, as opposed to the egalitarian concerns of British teachers.
As for other elements of the service sector, retailing offers employment to the relatively unskilled, but it can contribute little to the balance of trade. Indeed, British retailers are by and large selling imported products, perhaps bearing British company labels, but made abroad nevertheless. That leaves us dependent on financial services for taking up the slack. This dependence is acknowledged by the government’s reluctance to take strong action against the city. We have often heard the cry that our City workers might take their genius elsewhere if threatened with more than the lightest touch. Be that as it may, such fears simply emphasise the dangerous imbalance in our economy.
So, the constitution of our Gross Domestic Product is not only skewed heavily into the service sector, but that sector too is skewed in turn towards financial services. Another service element that I have written about elsewhere is housing and property. This too is contributing to our balance of payments by attracting foreign investment. Ironically, Britain has a Chancellor who claims he wants to build a stable economy, but who depends heavily on a property bubble and notoriously unstable financial services. GDP size is not enough, George.
Nor should we focus on size alone when considering the budget deficit and the public debt: the former is running at around 3.6% of GDP while the latter is a fraction over 91% of GDP. Either can be reduced by a government prepared to cut services and flog off public assets irrespective of social and political consequences. Whereas dictators can get away with such a cavalier approach, as they once did in South America, more caution is called for in a liberal democracy.
As for the selling of public assets one is bound to wonder how far the government is prepared to continue down that road. Quite apart from running out of things to sell, there is the question of increasing public irritation and disagreement with privatisation. The government has just re-privatised the East Coast Main Line, despite the majority of people wishing to see the railways back in public hands. The Royal Mail has been sold off in full knowledge that services will inevitably suffer, as they have in Holland. Such moves satisfy short-term ambitions to reduce public debt, but, as with the Private Finance Initiative, at the risk of long-term disaster. Such actions display either a lack of foresight, or a cynical disregard of future consequences.
The same mind-set is perhaps responsible for the myopic approach to cutting the deficit by slashing public spending on services, and an imbalanced attack on benefits. Consider what is happening to housing benefit. People who have a spare bedroom are pressed to downsize, despite a lack of suitable accommodation, and are subject to cuts in housing benefit, the so-called ‘bedroom tax’. This measure is widely regarded as unfair, unfeeling, and an attack on the most vulnerable in society. It yields peanuts. Meanwhile, housing benefit is a major subsidy to private landlords, enabling them to charge rents that would be otherwise impossible to obtain. Cutting housing benefit altogether could make a significant contribution to reducing the deficit.
Much the same can be said of tax credits to those on low incomes that act as a subsidy to their employers, allowing them to pay wages much lower than would otherwise be necessary. Again, cutting these out would make a real contribution to reducing the deficit.
It is not my intention here to suggest a manifesto for any political party. However, I do mean to show that the measures taken by the government are not about economics, but are driven by a political philosophy. Abolition of housing benefit and tax credits would necessitate state intervention in the labour and housing markets using legislation rather than fiscal measures. Reinvigorating manufacturing and improving education and training would also call for state intervention in a number of areas.
The restraints on such action are not economic, but philosophical. Indeed, it can be argued that the prevailing mind-set is inimical to economic recovery. What prevents the kind of actions I have suggested is the profound belief that the state is an obstacle to a healthy economy, a belief that flies in the face of overwhelming evidence to the contrary. This government, and the opposition parties, favour shrinking the state, whereas all the evidence, international and historical, shows that economic growth results when the state actively intervenes in the economy and acts as the driver towards a long-term vision. Sadly, that truth will only be recognised when our ‘leaders’ have completed the ruination of Britain.
© Tom Kilcourse December 10th 2014
Turning Back the Clock
Critics of the present state of Britain’s economy and society are frequently advised that ‘we cannot turn the clock back’, or told that what is happening is somehow ‘natural’.