A eulogy for Britain’s economic model
This year marks a decade since the financial crisis that marked the beginning of the end of Britain’s economic model. There has been no subsequent return to ‘normal’—for the past 10 years, the British economy has performed neither normally nor well. And yet last year marked a deeper change—a point of no return has now been reached and so a new settlement must now be formed. So what marked 2017 out as the year the model died, and why must we find a new way in the future?
Last year’s General Election showed that the condition of the British economic model was terminal. An election that was supposed to be about Brexit turned to the state of the economy and society at home. The discontent that was so starkly revealed in the Brexit referendum the year before was ignited again. The combination of stagnating wages and deteriorating public services opened up a new debate on the future direction of the country. The public’s ire turned from Brussels to Westminster.
The underlying problems that produced an unexpected election result were crystalised shortly after by the appalling tragedy of Grenfell Tower. It exposed the shocking inequalities not only of wealth but also of power. The residents’ complaints about fire safety fell on deaf ears. The local council put the aesthetics for those living around the tower higher up than the safety of those within it. The compulsion to deregulate at any opportunity had resulted in a shockingly high cost. It seemed that Britain’s social fabric had not only frayed; it had been torn.
And yet many Conservatives appeared determined to learn the wrong lessons from their unexpectedly poor electoral performance and from the tragedy at the tower. Among her advisers, all the principal architects of Theresa May’s interesting shift towards more fundamental economic reform were despatched from Number 10, and the narrative shifted from using the state to fix broken markets to a tin-eared defence of ‘free markets’ and the attendant impulse to deregulate wherever possible. A little over a year after her acclaimed speech on the steps of Downing Street, the same Prime Minister who had declared her determination to use the power of the state to confront “burning injustices” found herself delivering a speech that appeared to offer a defence of the economic status quo.
In September last year, the Archbishop of Canterbury administered the last rites to the economic model. Writing in the Financial Times to mark the publication of the interim report of the IPPR Commission on Economic Justice, Justin Welby declared that Britain’s economic model was ‘broken’. Along with his fellow Commissioners he called for fundamental economic reform. The economy exists to serve society, he noted, not the other way round. And it does not belong to those exclusively at the top: it belongs to us all.
Then at the budget in November, the Chancellor delivered the eulogy for an economic model that had fallen apart. He described an extraordinary calamity: on almost every measure the British economy is in a state of serious distress. We go into the 2020s with growth expected to fall each year. The productivity forecast had its largest downward revision in history. Wages are expected to stagnate until 2025, meaning nearly two lost decades of stagnating living standards.
Even by the measures set by the government itself, the economic news was dreadful. The budget deficit that was supposed to be closed by 2015 would not now be closed until 2031, with an additional £29bn of borrowing. There could be no clearer indication that austerity was like handing a man who had fallen into a grave a shovel rather than a ladder.
Yet the measures failed to match the scale of the economic crisis. The budget’s proposals—on housing, wages, and public services—were like eating soup with a fork: a taste of what was necessary, but ultimately insubstantial. Loan guarantees for a construction industry that does not need them (the saying “as safe as houses” exists for a reason). A promised uplift in nurses’ pay, but a continuing pay freeze for healthcare assistants, teachers, firefighters and the rest of the public sector. More money for the NHS, but only half of what is necessary to avert widespread rationing of care.
The centrepiece—the abolition of stamp duty for first time buyers up to £300k—proved to be politically popular but practically marginal. The government’s own watchdog, the Office for Budget Responsibility, thinly disguised its contempt for the measure, pointing out that the main beneficiaries would be sellers not buyers and that just 3,500 of the latter would stand to benefit, at a cost of £160,000 for each first time buyer helped. In many parts of the country, the government could buy or build a whole family home for that amount and give it away. By pushing prices up rather than bringing them down, young people were left with little more than a new railcard.
Yet despite all this, the commentariat declared that the Chancellor had succeeded. It was precisely because the bar has been set so low that the he was considered to have cleared it. A penny on a pasty in 2012 produced a fiercer backlash than the revelation of the total and comprehensive failure of economic policy in 2017. For the most part, the budget was met with a collective shrug of the shoulders by those anxious about Brexit or in despair about living standards.
The longer we spend in the hole, the harder it is to get out again, and the further behind other countries we will fall. Wages in the UK are still below their pre-crisis peak; in France and Germany they are up by 10%. There is a myth that stagnating wages are a global phenomenon, when in fact they are a peculiarity of Britain and the United States. The US has seen wages stagnate since the mid-1970s, despite rising GDP and strong productivity growth. Since the 2008 financial crisis, Britain stands alone as the only country where GDP has risen but wages have fallen. There can be no clearer signal that a fundamentally new economic settlement must now be forged.
Tom Kibasi is Director of the Institute for Public Policy Research and Chair of the IPPR Commission on Economic Justice.