The International Writers Magazine:UK Politics 2016
Driving into town a few days before Christmas I found myself in a continuous traffic jam, moving forward a few feet at a time between enforced halts in the horrendous queue. Once at my destination I found every car-park full and the high street a sea of shoppers.
It had all the signs of prosperity, an apparent endorsement of the government’s oft repeated assertion that Britain’s economy is strong. Why then, are some economists pessimistic? Could it be that they know something that has escaped the attention of the ‘man on the Clapham omnibus’?
I confess to sharing their pessimism, an apparent paradox perhaps in someone who in the past has claimed that consumption is the lubricant of a capitalist economy: what about all those shoppers? Those I saw were certainly consumers, but my concern is about their means of payment. A few decades ago, before Thatcher embraced neo-liberalism, people borrowed only to cover the odd exceptional spend, on a house, car, or perhaps a foreign holiday. In the main, they did not borrow to cover day-to-day consumption. That is no longer the case.
As recently as five years ago British households earned more than they spent, by as much as £70bn. Today, according to the Office of Budget Responsibility forecasts, they are now spending £40bn more than they earn. * Britons ran up their highest level of new debt in November 2015 for nearly seven years, with the month’s borrowing on credit cards, loans and overdrafts hitting more than £1.25bn.
The OBR estimates that by 2020 the household debt to income ratio will reach 163%, that is, by the time of the next general election. Such a situation makes the British economy vulnerable in several respects. One has to remember that interest rates are on the floor at the moment, so present levels of debt may be affordable for many. However, the Fed has just raised the rate in America, where, incidentally, private debt levels are also high. What happens to those consumers should the Bank of England raise rates?
Since the wilful abandonment of Keynesian philosophy and the adoption of the alternative neo-liberal approach, government’s ability to control the economy has been constrained to the point where the state’s aim is simply to influence the market. The principal tool for doing that is the rate of interest. However, given the amount of private debt overhanging the economy the freedom to use that tool is severely limited. Any significant increase in the rate of interest could trigger a catastrophic deflationary spiral. Millions would find themselves unable to service their debt, and others could only do so by slashing their consumption levels. Many householders would fall into what is euphemistically called ‘negative equity’ as property prices tumbled. As consumption contracted businesses would have to cut costs to survive, not least by laying off employees. The tax-take would be reduced and benefit costs would rise, making it even less likely that the Treasury could meet its targets.
This situation has arisen because of what can best be described as a political confidence trick. Government propaganda has emphasised the need to reduce the amount of public sector debt while largely ignoring the significance of private borrowing. We have seen parts of the public sector privatised, so getting them off the government’s books, while other services have been outsourced to a variety of companies who promise greater efficiency. The principal method by which these firms reduce costs is by cutting the wage bill. By this means, people who were previously earning a living wage find their earnings reduced to the point where they qualify for working tax credits. These, which effectively subsidise the employers’ wage bill, are paid by the government, of course. By such sleight of hand the government reduces the cost of public services on its books, but raises the cost of benefits paid to individuals. In addition, we have the cost of the private providers’ demand for profit.
It can be said that private debt is more toxic to the economy than is government debt. The government has means of managing its debt that are not open to private households. The Smiths and Browns of this world cannot issue bonds or print money, nor can they raise revenue through taxation or by attracting investment. They are forced to reduce consumption to essentials, and may only be able to afford those through government subsidy or charity. An economy that is functioning so close to the edge of a precipice cannot claim to be strong. The claim that the British economy is strong because of the level of GDP, not per capita GDP mind, is frankly counterfeit. Incidentally, Britain’s per capita GDP as estimated by the IMF and the World Bank, using PPP (Purchasing Power Parity) is lower than in several other European countries.
That is not the end of the story. Not only is private debt propping up the level of GDP, it is also adding to the deficit on Britain’s current account balance, presently standing at 4.5% of GDP, the highest in the European Union. This contrasts with a surplus account of 3% of GDP enjoyed by the Eurozone. The imbalanced British economy is a net importer, yet despite this the pound is strong, held up by foreign investment, largely in existing assets. This situation makes it difficult for British manufacturers to compete in foreign markets, and explains in part why the manufacturing sector is struggling.
Underlying the problem of consumption is the growing inequality reported recently in the British press. These reports brought the usual idiotic response that opposition to this growth arose from envy. In fact, concern over inequality rests on the negative impact on the economy of shifting resources away from those with the highest propensity to consume towards those who invest the surplus largely in existing assets.
There are many other problems with the British economy, but in my view the fundamental problem is a philosophical one: the belief that the state has little or no part to play in the economy. This government believes in its soul that matters can be left to market forces, with interference by the state seen as almost entirely negative. This belief has had profound negative effects on British society, and continues to do so. Money and markets are ingenious inventions that allowed mankind to develop beyond the limitations of other species, but both are tools. As tools they are to be used rationally, not worshipped. Left unmanaged they are incapable of creating a civilised society, but can destroy one.
Allow me to finish with a relatively trivial example that is presently in the news. Some students at Oriel College in Oxford are intent, a la Islamic State, on destroying a statue, that of Cecil Rhodes. In other colleges and universities there is growing student intolerance of views with which student activists disagree. Such developments are counter to what used to be considered a university education in Britain. A few years ago tutors would have made this clear, but today they hesitate. Why? Students now pay for their education and have therefore become customers. Displease them and they may take their custom elsewhere. A minor example of the wondrous effects of market rule.
More seriously perhaps, if the OBR’s predictions on private debt in 2020 are correct, or if the deflationary spiral occurs before then, it is conceivable that Britain’s next Prime Minister will be Jeremy Corbyn. Presuming that the Labour Party does not self-destruct beforehand.
© Tom Kilcourse Jan 4th 2016
There are many in our society who are sufficiently keen to promote what they call ‘universal values’ that they play down or ignore features of our culture.