Britain is a wealthy country, yet its people feel poor and its governing politicians stagger between fiscal ruin and ruinous unpopularity. It took a radical political turn half a century ago for the UK to reach this dire predicament, and nothing short of another radical political turn can extricate the country from it.
A year after its landslide election victory, Keir Starmer’s government looks just as mired as Rishi Sunak’s was in an austerity trap that, like any self-respecting zombie, refuses to die. Rachel Reeves, the besieged Chancellor, deserves to be lambasted for a litany of unforced errors. She tolerates the avoidable haemorrhaging of the public purse by £9.3 billion annually, a loss that results from the poor management of Britain’s debt while fighting with backbenchers over the £6.25 billion that she wanted to take away from people in genuine need. However, Britain’s inability to escape its zombie austerity trap is structural.
Government supporters go to great lengths to reject all talk of austerity. They point to the steady rise in public spending and, in particular, the extra £113 billion in capital investment (around 1% of GDP annually until 2029) unveiled in Reeves’ recent Spending Review, which even prompted the Tories to accuse her of fiscal largesse. Be that as it may, a careful look at the numbers confirms that Britain remains in zombie austerity’s trap.
By 2029 public spending will be down on everything except health and defence. Compared to 2010, education will receive 5% less, criminal justice and the prison service 15% less, welfare and pensions 30% less and, calamitously, local government 50% less. As for the new capital expenditure, to gauge its impact it must be measured against the UK’s capital shortfall.
After decades of underinvestment, the UK’s stock of capital is one third smaller than those of comparable advanced economies, a shortfall of around £2 trillion or two-thirds of GDP. Thus, Labour’s new capital expenditure amounts to no more than 5% of what would be necessary for Britain’s productivity to catch up with comparable countries. Is it any wonder that even the usually over-optimistic Office for Budget Responsibility expects a second lost decade for half of the British people?
Having long ago discovered her inner George Osborne, Chancellor Reeves is about to unveil also her latent Margaret Thatcher in a Mansion House speech foreshadowing a New Big Bang for the City of London. Like a copycat felon, she has chosen her crime scene meticulously. For it was there, in the City, that today’s problems took root when Thatcher stumbled on financialisation as the main driver of her economic and cultural revolution.
With the rare exception of Norway, whose oil and gas revenues were ploughed sensibly into public education, health and future pensions, sudden windfalls prove a curse when societies fail to invest them productively. The Dutch Disease, for example, hollowed out the Netherlands’ industrial base with a flood of natural gas revenues that pushed asset prices through the roof and increased society’s reliance on state benefits. A couple of years later, Thatcher spearheaded a British version of the Dutch Disease — on the back of financialisation.
The Iron Lady came to power determined to treat a stagnating Britain to shock therapy. Her instruments of choice were austerity (mainly massive cuts in public spending), calculated destruction of uncompetitive but productive industries, and privatisation. While Thatcher waited in vain for privateers to invest in productive capital, she had to find a source of growth to offset the ill effects of her shocks. The City of London was that source.
To get the City to deliver, her government did two things. They freed the bankers from most regulatory shackles with a Big Bang. And they threw tremendous quantities of pre-existing public wealth into the City’s financial circuitry: council houses and public utilities (gas, electricity, water) in particular.
The Thatcher government sold the family silver, including North Sea Oil, to spend the proceeds on generating a debt-driven asset price inflation that hid the gigantic fiscal and productivity costs of sweeping cuts which shrank aggregate demand and, therefore, undermined investment in productive capital. What do you call such conduct? I call it profligate austerity.
Growth did return. But it did so despite Thatcher’s profligate austerity and only because swathes of society’s common wealth were being liquidated at cutdown prices, before being thrown into financialisation’s crucible for the City to lever it up into an unsustainably private-debt-driven, Ponzi-like economy.
Thatcher’s business model remained intact under Tony Blair and Gordon Brown. If anything, New Labour boosted it handsomely by removing many of the few remaining regulatory constraints on the City, and by throwing into its financial plumbing the proceeds from deregulated public services, mainly the NHS. While their governments did use taxes on City revenues to fund the NHS and social services in a way the Tories had not, industry continued to wither in the arid shadow of a City of London that shunned industrial capital and whose recklessness brewed the mother of all financial disasters in 2008.
Politically and culturally, Thatcher’s profligate austerity was a triumph. Workers whose jobs were not culled went into debt to buy British Gas shares and their own council houses. They made a mint, jumping onto the frenzied property market escalator that transformed Britain into a financialised assetocracy, in which the fabled Sierra Man felt invested. But the bill arrived soon after.
Before long, they and their children were paying through the nose for lower quality services (railways, energy, sewage, social care etc.). Today, their grandchildren have no access to decent housing, to free education, to a functioning NHS, to good quality jobs. As for their governments, Tory or Labour, they are no longer able to support the struggling majority without blowing up public finances. All they can do is keep reflating housing and financial bubbles, suppressing wages, and delivering speeches in the City hoping to placate the markets’ confidence fairy.
Following financialisation’s Waterloo in 2008, and its New Labour bailout at the expense of the rest of society, profligate austerity gave its place to George Osborne’s passive-aggressive austerity or, as he called it, the policy of “expansionary contraction”. Avoiding deep, Thatcherite cuts, Osborne engineered the slow-motion starvation of public services, devolved blaming (e.g., councils “choosing” to close day care facilities due to Whitehall funding cuts) and off-balance-sheet trickery (e.g., Private Finance Initiatives, which were ruinous for the public purse).
Meanwhile, the Bank of England minted almost £895 million to keep the original Thatcher-Blair era asset bubbles inflated. Imagine how different things would have been now if, instead, Britain’s central bank had used this money to support the bonds of a new public investment bank that ploughed more than a trillion into new green technologies!
Osborne’s passive-aggressive austerity came to an end when the discontent it had caused played a key role in tilting the Brexit referendum in favour of Leave. It had to go. After period of stasis, under Theresa May, Boris Johnson was inspired by US Republican presidents: win a mandate on austerian promises to “starve the beast” (the voracious welfare state) but, immediately after, spend liberally on your pet projects while granting lucrative contracts and tax cuts to your rich mates. Alas, as Liz Truss was to discover painfully, this sham austerity requires a state that issues the world currency, not the pound.
And that’s how we got to Rachel Reeves’ touchingly delusional, social democratic austerity. In fact, its originator was Peer Steinbrück, the social democrat German finance minister who, in a parliamentary speech delivered in 2008, argued, as Reeves does now, that cutting expenditure to create fiscal space is essential for democracy — in order to preserve space for democratic choices.
Why do I call this delusional? Because, as Osborne and Steinbrück found out, and Reeves is now discovering, in societies with inflated asset prices and low productive investment, where massive money printing for the few has, for so long, walked side-by-side with austerity for the many, slushing social expenditure gives the Chancellor no new fiscal space at all. All that happens is that, like a deranged cat, the Chancellor ends up chasing his or her own tail.
Make no mistake. As Rachel Reeves is delivering her Mansion House address to the fine people in the City of London, her audience knows all this. They know that Ms Reeves, just like her predecessors, cannot balance the books. They know that the point of fiscal policy is to keep the underfunding of government expenditure at a level consistent with long-term debt sustainability while Britain’s productive capacities continue to wither. And they do not care. The only thing they care about is to keep alive the corporate and financial zombies created and sustained by the state intervention. And for this they need austerity to shift as much of the economic pain as possible from asset owners to non-owners, in the labour market, in housing, in utilities etc.
Does this mean there is no alternative? Hell, no! Britain is a rich country. Its welfare state’s bankruptcy is a political choice, a collective choice — albeit a deeply undemocratic one. One option is to continue using the state’s powers to inflate unsustainable asset prices at the expense of the majority who do not own them and who are, in the name of a fictional shareowners’ democracy, condemned to zombie austerity.
“Britain is a rich country. Its welfare state’s bankruptcy is a political choice.”
Another option is to remove the supply of goods essential to civilised society (e.g., basic housing, university education, elderly care) from markets that can never supply them efficiently, let alone equitably. Naturally this will mean that asset prices will fall to much lower, albeit sustainable levels. But that’s the price of liberating half of the population from savage private housing markets (i.e., reversing Thatcher’s vandalism of council housing), ending the pretence that there can ever be well functioning electricity markets, founding a proper public investment bank, creating decent fiscal space and, last but not least, reining in a Bank of England whose quantitative easing, and then tightening, policies have done so much harm.
What a splendid day for democracy it would be if British voters were given this choice at the ballot box. But can you imagine any political party proposing the second option being given the opportunity to present its agenda, given the demonisation that the parasitic assetocracy would undoubtedly unleash against it? I can’t.
This being ten years since my experiences as a finance minister elected to end austerity, I take the liberty of drawing a comparison. It is a difficult comparison because Greece and the UK are, obviously, ever so different. Unlike in Britain, where austerity was homegrown and chosen at the ballot box, it was imposed on the Greeks by external forces who presented it as an invading army would present terms of surrender to a country defeated at war.
Yet a chief similarity is quite revealing: two left-of-centre Prime Ministers, elected to end austerity, who ended up making austerity permanent because of an inexorable desire to be liked by those who never did and never will vote for them.
The key to escaping this fate seems to me a certain disregard for what the types Rachel Reeves is about to address in the City of London think or covet.
