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UK plc goes it alone: so what now?

Updated: Feb 12

Davy Jones takes a critical look at the British economy in Johnson’s post-Brexit Britain.

31 January 2020.


As somebody said, economics exists to make astrology look respectable.


I once heard a star-fund manager confidently predict that markets would go up, down, or sideways. He got paid a shed load for gems such as that.


And so it is with the UK economy after Brexit – one of those three directions, for sure. I have little idea what GDP will be in the first quarter of this year, none at all for next year or in five years’ time, and neither does anyone else. Sadly, no-one’s paying me for that penetrating insight.


What is pretty certain, though, is the UK has created a whole load of new problems for itself as a result of bailing out of the EU, without resolving any of its existing ones. What’s interesting right now is the confusion over what exactly the government that’s executing this deft manoeuvre is actually doing.


First of all, let’s tackle whether this is a break from free-market, Thatcherite, neoliberal – call it what you will – economics. This, certainly, is what it has been pitched as.


Back in September, Chris Giles at the Financial Times wrote: ‘Economists were unanimous after Sajid Javid’s spending review on Wednesday: the chancellor’s fiscal rules were dead and Boris Johnson’s government, much like that of Donald Trump in the US, no longer cared much about budget deficits.’


That’s the message that the Tories went into the election with, and what pundits keep telling us they’ll have to stick to if they’re going to keep that coat of blue over the ‘red wall’ from flaking off.


Red Tories?


In the same spirit, following the general election, Lee Jones, over at the uber-Lexity The Full Brexit site assured his readers: ‘Far from being ‘far right’ or Thatcherite, Johnson’s new project is ‘Red Tory’, projecting a communitarian ethos and proposing far greater state intervention in the economy.’ What’s more, the Tory manifesto ‘promises stronger protections for low-paid and gig-economy workers, plus other modest improvements, with the only negative commitment being a pledge to restrict railway workers’ right to strike’.


This all sounds so good, I’m almost sorry I didn’t vote Tory myself.


When the government nationalised the Northern rail franchise after years of crappy performance, over the other side of the Channel, French leftist leader Jean-Luc Melenchon – who I always confuse with John Cougar Mellencamp – tweeted that ‘the UK, freed from the supervision of Brussels, renationalises the railway that the liberals had brought into chaos. Independence pays.’[1] I scratched my head at that one for a while, but well, yeah …


So everyone from the FT to the Lexiteers must have been pretty shocked when in late January Boris Johnson and Javid started to row back on these commitments. A letter signed by both told ministers that budgets remained tight, even after ten years of austerity, and ordered them to identify cuts of at least 5% to their department budgets, exempting only areas affecting health, crime, or regional inequalities.


‘We have been elected with a clear fiscal mandate to keep control of day-to-day spending. This means there will need to be savings made across government to free up money to invest in our priorities,’ said the letter.


Dunno about you, but I feel let down: betrayed, even. After all, who could have seen that coming?


You’ve got to wonder what the point of picking through the statements of Johnson – a man even more economical with the truth than with the economy – in order to figure what he’ll do. Instead, look at what he actually is doing, along with the pressures that the economy faces, and how Britain’s new position in the world affects this.


Spend, spend, spend


Let’s take a look at the Tories’ spending commitments. Over at The Full Brexit, Jones enthuses over the

£100bn ‘infrastructure revolution’, aimed at ‘levelling up’ the ‘left behind’ areas that backed Brexit so heavily. These terms were also used in the Labour Party manifesto. The manifesto prioritises transport infrastructure in the North, Midlands, and Southwest, with £28.8bn on roads alone, plus enhanced bus services, in addition to the regeneration of town centres.


The state is also expected to become a leading investor in science and technology-led growth, including through higher research funding, tax breaks for R&D, the crowding-in of private investment, and the use of public procurement to support innovation and start-ups.


Now, before we get all excited over Tory manifesto promises, let’s remember those pledged 200,000 starter homes from their 2015 manifesto – not one of which got built. Not one brick laid upon another. And not because everything got tangled up in EU red tape.


Will these infrastructure projects happen? Maybe. I don’t know. But another weird-haired narcissist came to power promising big infra spend: Trump committed $200bn in Federal funds to catalyse at least $1.5trn in private infrastructure investments. To date, the sound of pile drivers set to work by this plan is deafening. In its silence. And, again, the bureaucrats of Brussels haven’t stopped US development. It may happen, but infrastructure development is notoriously slow.


Where’s the money coming from for the Tories’ plans? Johnson says that Britain could adopt ‘pro-competitive regulation’ and tax ‘simplification’. That means that it isn’t going to come from taxing either wealthy individuals or corporations, as such ‘simplification’ always means tax cuts for them. So it’s got to come from gilt issuance – government debt.


That makes sense, after a fashion, as the rule of thumb is that governments finance recurrent expenditure – such as their workers’ wages or NHS drug purchases – from taxation, and infrastructure spend and the like from bond markets. Begs the question as to how you pay the staff for the hospitals you’re going to build, but let’s park that one.


Will the government get this £100bn from the bond markets? At the tail end of last year, Javid was saying how low rates with a steady tick of inflation basically equalled free money. And he’s not wrong: the coupon – interest paid – on a 30-year government bond is 1.75%. December 2019 inflation was 1.4%, so borrowing is incredibly cheap, and it wouldn’t take much of a lift in inflation for it to be money for nothing.


But this isn’t a new thing, as lefty economics blogger Chris Dillow pointed out back in 2017.


Could the government raise the money through debt issuance without yields spiking to punitive levels? Quite possibly. Will they do it? I wouldn’t bet the farm on it. Chancellor Philip Hammond also called an end to austerity three years ago, as did George Osborn five years ago. And yet here we still are.


So what’s stopping the Chancellor hitting up bond investors for a cool hundred billion? The government may have been reluctant to borrow in the past because of ideological reasons, where ‘debt phobia is a means of keeping a lid on the size of the state’, says leading Keynesian, Professor Simon Wren-Lewis.


Or it could be that, as Marxist writer on imperialism, John Smith, reckons:


The Bank of England’s official lending rate is 0.75%, and is negative once inflation is taken into account. This is lower than it has been in the Bank’s four centuries of existence. Ultra-low interest rates in the UK and all other imperialist countries indicate the extreme depth of capitalism’s systemic crisis – ‘a supernova waiting to explode,’ in the words of foremost bond trader Bill Gross.


I tend to think it’s a bit of both, but lean more to Smith’s interpretation. In this context, that’s neither here nor there: the point is the government hasn’t done it up till now, even though nothing prevented it from doing so – certainly not the EU. Going into more testing conditions post-Brexit, borrowing will likely be more, not less, expensive, as investors demand a higher rate from a borrower that’s seen as a riskier bet.


Productivity problem

The Tories reckon that on leaving Europe, the UK will see its sluggish productivity leap forward, like an uncaged lion. Or some bollocks like that. Johnson told the last Tory conference that they were ‘going to grow the UK economy… of the whole of the UK … creating the economic platform for dynamic free market capitalism’. Which doesn’t sound very ‘Red Tory’, but let’s not be picky.


Table 1: Productivity after UK recessions

Johnson’s not wrong to raise this as an issue. As you can see from the chart above, Britain’s productivity has not recovered in the years since the crisis. We have experienced an L-shaped recovery.


The Office of National Statistics reports: ‘Both services and manufacturing saw a fall in labour productivity growth of 0.8% and 1.9% respectively, compared with the same quarter in the previous year’ in the second quarter of 2019.


‘Since 2008, productivity in the UK has essentially flat-lined,’ said Bank of England chief economist Andy Haldane in a 2018 speech: ‘This is almost unprecedented in the modern era, a “lost decade” and counting.’


UK productivity is about 20% below its pre-crisis trend and as much as one-third below that of the US, Germany, and France. This lag is due to the large gap between the UK’s most and least productive companies: the bottom quartile of UK companies’ productivity is roughly 80% below the country median. In Germany and France, the figure is about 60%.


What’s more, the UK’s lower productivity companies employ about 80-90% of the workforce: ‘They are not the tail; they are the dog,’ said Haldane, with ‘a small set in the upper tail gazelling along the productivity high road and a much larger set in the lower tail snailing along the low road.’


The other thing you can see from the chart is that the 2007-9 recession is different from the others, because after other downturns productivity bounced back. The last one is unusual, as capitalist crises serve the purpose of destroying unprofitable capital and restoring profitability.


Interventions such as quantitative easing have stopped this: while they have prevented the global financial crisis from being much sharper, they have also blocked crises’ normal function: the ‘momentary and forcible solutions of the existing contradictions… violent eruptions which for a time restore the disturbed equilibrium.’[2]


Declining growth rates are a global problem, and show no sign of abating. The striking thing is that neoliberalism never boosted productivity. Productivity growth stayed on its 1970s trend throughout all the privatisations and free-market reforms of the ‘80s and ‘90s, and has begun to decline globally this century.


There is a great lie at the heart of the free-market project – that it swept away the inefficiencies of the previous Keynesian, statist, and trade union-bedevilled post-war period, unleashing the true growth potential of the market. Never happened.


Some representatives of the capitalist class know they’ve got a problem, and that more of the free-market medicine may not be the answer. Jim O’Neill, former Goldman Sachs economist and Treasury minister under David Cameron, stated: ‘Economic liberalism is supposed to be the best way to deliver productivity gains and in the last decade it has not done that. Across the G7 countries since the financial crisis it has not worked.’[3]


Instead, faced with persistent low profitability, companies have turned to cheap labour rather than invest in more productive technologies.


‘While machines now make everything from shoes and shirts to cars and computers, there has been no significant uptick in the pace of labour-saving productivity growth in industry in recent decades,’ says University of Chicago academic Aaron Benanav, with ‘the real problem’ being ‘a pervasive and increasingly global economic stagnation – affecting industry especially – that is marked by low rates of investment, low rates of economic growth, and hence low rates of job creation.’


McJobs


Jobs, though, have been created. But those jobs have tended to be low quality and low paid, reflected in the massive expansion of zero-hour contracts and the precariat workforce.

Since the global financial crisis, the UK has pursued profit through the growth of low-paid work rather than investment in technology, to such a degree that the country was an outlier among advanced economies, in seeing both growing GDP and falling real wages (see chart below).


Table 2: UK: economic growth without wage growth

‘The UK sits on its own as a rich economy that experienced a strong economic performance while the real wages of its workers dropped,’ wrote the FT in 2017. While real wages have since trended upwards, the increase has been far from dramatic.


And here’s the rub: growth has been achieved by increasing the workforce through immigration, largely from Europe, and reabsorbing the unemployed into low-productivity jobs. GDP growth is down to growth in the workforce, not in the productivity of those workers. Doing this through importation of cheap labour will be more problematic now, and with labour markets tight, there’s little chance of drawing in more of the potential domestic workforce.


So will the government facilitate the transmission of growth from high to low productivity companies, as Haldane says is needed? It makes intuitive sense, but the level of investment needed is massive.


Labour had a fairly credible plan, with the creation of a national investment bank, etc. Will the Tories steal their clothes? Again, I wouldn’t bet the farm, especially given recent pronouncements, and the removal of EU-derived labour protections in the Withdrawal Agreement Bill in December, further eroding workers’ rights and conditions. Even if the Tories overcome the debt phobia Wren-Lewis talks about, Smith’s underlying systemic crisis still lurks.


Johnson goes woo


It’s important to note that all the problems outlined above are either general issues for capitalism globally, or ones that are particularly acute for British capitalism. Nothing above results from the UK’s membership of the EU. However, there are reasons to believe that Britain leaving will exacerbate the problems with its ailing economy.


As the FT points out: ‘Leaving the EU single market will create friction and costs at the border for manufacturers with intricate supply chains – notably aerospace, automotive, chemicals, and pharmaceuticals – which are largely based in the industrial areas Mr Johnson has wooed.’


Marxist economist Michael Roberts reckons the future of the British economy is dismal, with the degree of relative loss as a result of Brexit estimated at between 4-10% of GDP over the next ten years, depending on the terms of the deal with the EU. I won’t repeat Roberts’ arguments here, but follow the link to his analysis – it’s very well argued and backed up.


British capitalism faces issues of inadequate infrastructure, low investment, and low productivity – none of which are due to membership of the EU. Indeed, post-Brexit, UK companies will struggle more: exporters will likely encounter greater costs to trade, and imports will likewise become more expensive.


If you believe the government (bless), this won’t happen, as not only will Britain maintain free trade with the EU, but extend it with other countries. But that is the remotest of possibilities, given British capitalism’s weakened bargaining position.


Finally, John Smith points out the grim logic of this:


Britain’s economic stagnation will inevitably be aggravated by disruption to trade with the EU, the destination for over 40% of the UK’s exports. Economic nationalism and nostalgia for empire will mutate into ever-more virulent variants.


That last point bears emphasising: there’s no reason to believe that the evaporation of the Little Englander fantasy of Britain great once more will produce a left reaction. Nationalism, scapegoating of the ‘other’ – from migrants to LGBT+ – will likely exacerbate.


The point has been made by some, such as left journalist Paul Mason, that Labour failed because it fought the election around economic issues, while the Tories had successfully moved the terrain to one of culture.


There’s some truth in this. But the economy – the stuff we produce, how we produce it, and who gets to have it – still underpins it all. And all Johnson’s phantasmagorical uncaged Brexity lions aren’t going to turn its rusted wheels.


Davy Jones is a Labour activist in West London.

[1] Is the nationalisation of Northern rail significant? Are the Tories pinching choice bits from Labour’s programme? Well, firstly you don’t have to go back as far as 1945 to find other examples of rail nationalisation. How about two years’ ago? East Coast was nationalised in 2018. This looks like more of the same – socialising losses and privatising profits. As with East Coast, for private rail operators to make profits, the government will need to pay for major upgrades and then reprivatise.


[2] Karl Marx, Capital Vol. III, Chapter 15. Exposition of the Internal Contradictions of the Law, https://www.marxists.org/archive/marx/works/1894-c3/ch15.htm


[3] Quoted in the Financial Times, Brexit: will Boris Johnson reverse Thatcherism?, https://www.ft.com/content/7ee8c8ec-41ba-11ea-a047-eae9bd51ceba