UNASKED QUESTIONS ABOUT THE BRITISH ECONOMY
As we have seen in elections across Europe – and would no doubt see in the impending vote in Britain, too, if we had a more proportional system of representation – the public holds most established politicians in contempt.
Judging by what we are expected to swallow over economic and fiscal policy, the feeling is mutual. The voters, political leaders clearly think, are a bunch of gullible idiots.
Both of the main parties say they are committed to eliminating the fiscal deficit, even if they differ somewhat on the definition involved. Yet both have promised not to increase any of the main money-raising taxes – national insurance, VAT or the basic or higher rates of income tax – and this surely means that hefty spending cuts are inevitable.
Yet neither party has spelled out where these cuts will fall. Rather, both are bidding for electoral popularity with promises which have a net cost to the Exchequer.
Not in front of the children
All of this is very frustrating, not least because the really important issues are not being addressed at all. None of the parties have had anything to say about foreign policy, which has been disastrous under successive governments. Neither has anything significant been said about defence, where both major parties are committed to replacing Trident, yet neither has mentioned the gaping holes in our conventional defences.
Above all, of course, no-one has addressed the real issues about the economy. The Conservatives have seemed content to rest their economic case on growth and employment data, whilst Labour has talked about the cost of living without ever really getting at the fundamental reason for the deterioration in real wages, not just under the coalition but under its Labour predecessor as well.
In composing this article I have written successive drafts, each longer than the previous one and each full of data and charts. In order to “cut to the chase”, I have decided instead just to summarise the economic issues very briefly indeed.
A contrarian view
Here, then, is the contrarian view of the British economy.
1. Real living standards have deteriorated, and for a lot longer than most people appreciate. The real benchmark for living standards isn’t broad inflation but the cost of essentials, and how much money you have left after you’ve paid for them.
Since 2000, the increase in average wages (of 48%) has been far exceeded by the soaring cost of essentials as my Index measures them (+69%), meaning that real wages have deteriorated by 16% by this measure. Think about rises in the cost of gas (+245%), electricity (+135%), water charges (+87%), travel fares (+86%), council taxes and rates (+73%) and even food (+54%) and you’ll understand why people have long been getting poorer by this critical measure.
At the same time, of course, households have been getting ever deeper into debt.
2. Successive governments have pursued low-wage strategies in order to “attract investment” by making Britain “more competitive” than our rivals. A low-wage strategy, of course, is wholly consistent with reduced living standards, but it has also made the deterioration in productivity inevitable.
Small wonder, then, that taxes keep falling short of expectations, that the budget deficit persists, or that government now spends £25bn on “in-work” benefits given to working people whose wages are simply too low for subsistence.
3. The economy has swung increasingly away from output saleable on world markets. Since 1997, manufacturing output has slumped by 24% in real terms, whilst my broader measure of “globally-marketable output” (GMO) has fallen by 26%. Instead, we have shifted the emphasis to the point where 83% of our economy consists of services that we can sell only to each other, including real estate, domestically-consumed financial services, private sector “administration”, government-funded public services and a gamut of activities ranging from pedicures and fast food to gambling and “extended warranties”.
Ultimately, a country cannot pay its way in the world by “taking in each other’s washing”.
4. Moving down the value (and wage) chain has not blunted our desire to consume. Few have noted the glaring inconsistency between pushing consumerism on the one hand, and reducing both real wages and globally-saleable output on the other.
Accordingly, last year we spent a cool £412bn on imported goods – a far larger figure than our exports (£293bn) – and we are big net importers, not just of manufactured goods, but of energy and food as well. Meanwhile, the consumption of government-provided services has increased sharply since 2000.
5. We have used debt and asset sales to fill the gap between consumption and production. Between 1997 and 2014, the economy expanded by £550bn in real terms, but debt (excluding financial sector indebtedness) increased by £2.4 trillion, which means that we have borrowed £4.40 for each £1 of “growth”.
What happens next?
6. Finally, this profligacy is catching up with us. Last year, imports exceeded exports by £34bn, which in itself is nothing new. In the past, though, this was offset by the net income generated by investments overseas.
This has reversed decisively, because far more now flows out in interest and dividends than flows in. Current financial flows, in balance until 2011, have now turned negative to the tune of £27bn in 2012, £43bn in 2013 and £64bn last year. The latter formed the bulk of an unsustainable 2014 current account deficit of £98bn.
This means that we have to borrow from overseas close to £100bn (and rising) each year just to balance the books, and, of course, each new debt taken on, or asset sold, worsens future outflows. It also means that the rest of the world now funds 6% of our GDP.
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Well, there you have it – do we have an economy characterised by real growth in output and employment, or have we, instead, a system in which foreign lenders and investors subsidise our consumption as we turn our backs on well-paid, high-value-added activities?
And are we going to hear anything about any of this from politicians?
I doubt it.