Great Britain's economy

Dora Maurer, Stage II, 2016
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By MICHAEL ROBERTS*

Given the outlook for the world economy, perhaps this is a one-term Labor government in Britain

There was once an “abeconomy” in Japan; a “modeconomy” in India and even a “bieconomy” in the USA. We now have a “secure economy” in Britain. This may seem like elegant terminology to present the fundamentals of the economic policy of the new UK Labor government – ​​as laid out by its new finance minister (curiously called Chancellor of the Exchequer), Rachel Reeves, who was once economist at the Bank of England.

When Reeves was in Washington before the recent UK election, she told the audience that “globalization as we knew it is dead.” And she was right. The great boom in world trade since the 1990s came to a screeching halt after the Great Recession of 2008-9, and since then world trade has essentially stagnated. Now, this trend was also expressed in the United Kingdom, as it now has the largest trade deficit in its history. And it's not just about trade.

Foreign investment has been declining and British capital has increasingly depended on it since the 1980s. The UK is now receiving less productive investment from foreign companies in the economy. The number of foreign direct investment (FDI) projects coming into the UK has fallen by 6% year-on-year over the past two years, reaching a low in 2023. This represents a significant decline of 16% since the pandemic.

The COVID pandemic was the last straw for the stroke. Global supply chains have collapsed, trade and investment have shrunk. World economic growth began to slow down. The IMF calls this the “roaring twenties” and the World Bank predicts the worst growth rates in 30 years. It was clear to Reeves that Britain could no longer rely on global expansion for its own expansion. Britain therefore now has to fend for itself.

Declining growth prospects
Global economic growth projections for the next five years. It is noted that they have been decreasing since the 2008 crisis (source: IMF technical staff)

That’s what we have now: a “secure economy.” It is, in fact, a nationalist approach to the capitalist economic problem. The buzzword among many G7 economies is “industrial strategy”. So-called “free markets” are no longer on the agenda. Now governments must launch policies that guide and encourage their own capitalist sectors to invest and produce in the “right areas” to drive economic growth. 

While “abeconomics,” “modieconomics” and “bieconomy” consisted of a mix of old-fashioned Keynesian fiscal and credit stimulus policies to boost “aggregate demand” and employment, with neoliberal structural measures to weaken the labor movement and privatize state assets, Reeves claims that the “secure economy” aims to be different.

In her recent conference at Mais (Mais is a business school in the heart of the city of London), where she spoke to representatives of large companies and finance, Rachel Reeves presented a different vision than the usual one; she said that only an “active” state can guarantee the security of companies. Thus, it is through providing a security “platform” that the State can “drive sustainable economic growth”. As she said:

“Sustained economic growth is the only way to improve our country’s prosperity and workers’ living standards. And this is the Labor Party's first mission when it is in government. It's about being pro-business and pro-worker. We are the party of wealth creation. A “secure economy” implies making the economy dependent on a dynamic state that has a strategy for the future. But that doesn't mean bigger and bigger government; Rather, it means a more active and intelligent government that works in partnership with companies, unions, local leaders and decentralized governments.

Therefore, the new Labor government will not wait for the capitalist sector to invest, employ and grow; will intervene to “encourage” it in the right direction for Britain’s industrial renaissance. This is not a question of taking over capitalist sectors, which would then be managed by the State. Yes, there will be more public investment, but only “where it can unlock additional private sector investment, create jobs and provide a return for taxpayers”. Therefore, the Labor Party's industrial strategy will be “mission-oriented and future-focused. To this end, the government will work in partnership with industry to seize opportunities and remove barriers to growth.”

This is very reminiscent of the economic strategy of Mariana Mazzucato, the Italian-American left-wing economist; She, as we know, proposes that what modern capitalism needs is a “purpose-driven” partnership between the public and private sectors. Mazzucato defends public-private partnerships that she believes can “capture a common vision between civil society, companies and public institutions”. In her view, governments and capitalist companies must share the risks and then share the rewards: “it is not about fixing markets, but about creating markets”. Mazzucato summarizes: “the missionary economy offers a path to rejuvenate the state and thus repair capitalism, rather than end it.” Now, this is also the purpose of the “secure economy”.  

But can the “secure economy” “disrupt” and “de-stagnate”, causing the British economy, which is broken and stagnant, to return to normal? The key to success is a sharp increase in productive investment to restore economic growth. This will provide more income for everyone and more revenue for the government to invest in meeting social needs in health and social care, education, transport, communications and housing, sectors that are in starvation in a broken and stagnant Britain.

Where will the extra investment come from? As I showed in my previous post on Britain's economy, the UK's investment-to-GDP ratio is pathetically low (around 17% of GDP compared to the G7 average of 23%) and large corporations is even lower, at 10% of GDP. As for public investment, this proportion is as low as 2% of the UK's GDP.

Great Britain's public sector net public investment
1995-2023 and forecast until 2029
Source: author analysis

A recent LSE (London School of Economics and Political Science) study called for an increase in public investment of 1% of GDP, i.e. an increase of £26 billion per year at current prices. But what are Rachel Reeves and the Labor Party proposing? They plan just £7,3 billion “over the course of the next parliamentary government”, through a “national wealth fund” that will be built up “through transformative investment in every part of the country”. 

The Corbyn-led Labor Party has proposed £25 billion; but the Reeves/Starmer leadership proposes only a quarter of that and a fraction of what even LSE economists consider indispensable. In fact, what is needed for a proper transformation of industry and public services turns out to be more than £60 billion a year over the next five years, or an increase of at least 2-3% of GDP every year. Instead, the Labor Party's plan actually implies a fall in public investment as a proportion of GDP in the next parliamentary government!

Of course, the hope is that this small increase in public investment will attract “three pounds of private investment for every pound of public investment, creating jobs across the country.” But even if that were to happen (and that is very doubtful), the total increase would still be far, far short of what is needed to transform the UK economy.

Why are Labor leaders so shy about increasing public investment? The first reason is that because the UK economy is so weak, government tax revenues are too low to fund increased investment. The only way to do this would be for the government to take out more loans, that is, to issue government bonds to be sold in the financial market through banks. But this would increase the government budget deficit; It would also increase the level of public debt – already at a growing and record level.

Weight of taxes and public debt as a percentage of GDP
Weight of taxes in % GDP (Financial Times)
Weight of Public Debt in % of GDP (OBR, ONS, LSEG 2023-2024)

Yes, the government could ignore the lack of “fiscal margin”, as this limitation is usually called; by doing so, he could simply go ahead and borrow a lot more with the expectation that the extra investment would increase growth and revenues and thus pay for itself and avoid an increase in the debt burden. That's what Sheila Graham, the left-wing leader of Britain's biggest union, UNITE, suggested to Reeves. In fact, if the proponent is a supporter of Modern Monetary Theory (MMT), he would not even bother issuing bonds; instead, he would just print money at will, that is, force the Bank of England to credit billions to the government account.

But what would foreign investors and bondholders think of this? In October 2022, indeed, in her quest for more growth, the briefly appointed Conservative Prime Minister Liz Truss proposed just that. What happened? The Bank of England did the opposite and increased interest rates, as bond holders, especially foreigners, began to flee capital, to such an extent that the pound plummeted in value. Labor leaders fear a similar investment strike from financial markets if they borrow “too much.” So instead, they are planning to borrow very little.

The Starmer/Reeves government has also appeased the City of London by announcing that it will not increase income tax or social security rates (given that tax revenue relative to weak GDP is on a post-war high). In fact, they even committed not to increase corporate tax on large companies – it stands at 25% and is already the lowest in the G7 – so as not to “dissuade” investment. They even say that if other countries cut their rates, they will follow the race to the bottom by cutting even more. And they will continue to provide 100% tax exemption on capital investment. The irony raised by this proposal is that tax cuts and corporate exemptions have failed to boost private investment anywhere over the past two decades.

Where will the “safe economy” concentrate its timid strategy of leveraging investment? The answer lies in financial services, the automotive industry (wholly owned by foreign companies), life sciences and the “creative sectors” (cinema, design, theater, fashion, etc.). These are supposedly the sectors where the UK has an advantage.

But what will be left for Britain's broken public services? As we know, the British National Health Service (NHS) is short of funds and staff. During the election campaign, Reeves promised not to increase top tax rates, which account for three-quarters of total tax revenue. Instead, it is pinning its hopes on further growth along with a narrow band of revenue increases worth around £8bn.

According to the latest optimistic estimates of UK economic growth, this means that Reeves only has around £10 billion left in improving public services, unless the Labor Party breaks its promise not to raise taxes or not to take more loans. This means that the vicious austerity experienced by the NHS, local governments, schools and universities over the last decade will not end, but will continue – at least until the miracle of faster growth emerges.

Indeed, the Nuffield Trust reckons the new Labor government's current spending plans for the NHS will mean a new period of austerity. Total annual health spending growth of 0,8% would result in a squeeze for the next four years; and they would be the tightest in the history of the NHS under Labor promises – tighter even than the “austerity” period of the former Conservative coalition government, which saw funding grow by just 1,4% in real terms a year between 2010 /11 and 2014/15.

What about housing? The new Labor government says it will aim to build 300.000 new homes a year over the next five years. It sounds good, although it is far less than needed and far less than Labor governments built in the 1950s and 1960s. But how should it be done?

It will not be through a national corporation that would directly employ construction workers, architects, etc. with the aim of building good houses and flats to be owned by the local council at reasonable rents for tenants to reduce huge waiting lists. No, the entire housing plan will rely on private developers, expected to build homes for sale with minimal monitoring for 'affordable homes'.

  Labor leaders are more concerned about removing planning regulations in local areas so that private developers can build where and how they want. And who are these developers? As already pointed out, they are like BlackRock, the American investment company, which already owns 260.000 British homes on which it is charging some eye-watering fees, around £1,4 billion last year. Therefore, companies like BlackRock will be the beneficiaries of this housing expansion.

A “safe economy” means that there should be no public acquisition of the productive sectors of the economy, the financial sector or even large investment funds. Look at the Royal Mail disaster and scandals since its privatization; it is now being sold by its private equity owners to a Czech billionaire. 

But what will it do, what is the Labor Party's plan? “Royal Mail remains a fundamental part of the UK’s infrastructure. The Labor Party will ensure that any proposed takeover is rigorously scrutinized and that appropriate safeguards are put forward that protect the interests of the workforce, customers and the UK, including the need to maintain a comprehensive universal service obligation. So it is regulation, not the restoration of public ownership of this “fundamental part of the UK’s infrastructure”.

Then there are the energy and water utilities. The scandal of these privatized concessionaires has now broken out for all to see: shareholders have received billions in dividends, while debt and prices are rising. The total collapse of water infrastructure has reached the point where the UK's water supplies, rivers and beaches are no longer safe to drink or touch. And yet the Labor Party has no plans to bring these public services back into public ownership. Instead, he wants “better regulation”. Apparently, he wants less regulation in housing and more regulation in public services and the postal service.

The Labor Party has promised to bring the railways back into public ownership, but only gradually, as private franchises expire (around ten years). The Labor Party under Corbyn promised free broadband for all as a public right. And this was called “communism” by the right-wing press. The Labor Party under Starmer proposes only “a renewed drive to deliver the ambition of full gigabit and nationwide 5G coverage by 2030”.

Security, however, means more investment in a key sector: national defense. The new Labor government has promised to increase defense spending to 2,5% of GDP in this parliamentary exercise in order to “protect” the country, supposedly from the threat of invasion from Russia or China – but in reality to meet demands of the USA and NATO. UK defense spending is already 2,3% of GDP, but more must be spent while the NHS remains in austerity mode.

The “secure economy” really consists, once again, of a return to the idea of ​​“public-private partnership”. What this means is that the government will borrow or tax a little more to invest a little more, mainly to encourage and subsidize the capitalist sector to invest more and let them keep the lion's share of any extra revenues produced.

Public sector investment will be used primarily to help the capitalist sector invest, not replace it. And that makes sense if your fundamental belief is to make capitalism work better. Capitalist investment in the UK is around five times greater than public investment. It would be a different economy if this proportion were the other way around. But that won't happen.

The problem is that the capitalist sector has not been able to invest enough in the last three decades and a large part of its investment has not been in productive sectors of the economy, but in finance, real estate, defense, etc. The reason this occurred is linked to profitability; behold, it was not profitable enough to invest in the productive sectors. The Labor Party's plans suggest no change in this trend.

Great Britain: profit rate (trend)

The “secure economy” is supposedly a strategy for British capital to “take control” of its economy with the help of a pro-business government and thus fend for itself in an increasingly stagnant and protectionist world economy. But the UK economy is fragile and has not and will not escape the twists and turns of the global capitalist economy. There is every likelihood that the world economy will enter a new recession before the end of this decade. Recessions appear every 8 to 10 years and the last two were the worst in capitalist history. Even without a recession, global growth is slowing and trade is stagnant, with few signs of improvement ahead.

The Labor Party’s plans do not provide “insurance” against the crises of capitalist accumulation. After each previous recession, the incumbent government was ousted (the Labor Party in 2010 after the 2008-9 recession and the Conservatives eventually in 2024 after the 2020 pandemic recession). Now, given the outlook for the world economy, perhaps this will be a one-term Labor government.

*Michael Roberts is an economist. Author, among other books, of The great recession: a marxist view (Lulu Press) [https://amzn.to/3ZUjFFj]

Translation: Eleutério FS Prado.

Originally published in The next recession blog.


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