The Return of the State

Restructuring Britain for the Common Good

Patrick Allen, Suzanne J. Konzelmann, Jan Toporowski, Patrick Allen, Suzanne Konzelmann, Jan Toporowski

• Publisher: Agenda Publishing
• Year: 2021
• ISBN:
  9781788213318
• Topic: Politics & International Relations
• Subtopic: Public Policy
• Index: Politics & International Relations

Pushed by the Covid-19 crisis, the UK government has borrowed massively to save jobs, businesses and the economy from collapse, making a mockery of the austerity policies that it had championed for a decade. As a result, the role of the state is now in sharp focus. The contributors to this volume assess what that role should be and how it should be harnessed for the good of the British people in all four of its nations. Together they present policy proposals capable of generating a new social settlement and a long-term, equitable economic recovery post-pandemic. It offers both a vision of a future Britain and a roadmap to getting there.

1

Introduction

Patrick Allen

The UK economy is in crisis. As a result of the economic policies of recent decades, the lives of millions are insecure. Inequality and poverty in the United Kingdom have risen to levels not experienced since the 1930s. Growth has stuttered and productivity stagnated. Despite numerous promises and eye-catching headlines to “level up” and help those “just about managing”, there has been no concerted economic policy to address the increasing gap in income and wealth in the country. Since 2016 the economy and politics have been paralysed as all other issues have been sidelined by Brexit negotiations, arguments and disagreements. When matters could not have got worse for the United Kingdom, the Covid-19 pandemic brought many sectors of the economy to a standstill.

Between February and August 2020 the lockdown of society to prevent the spread of the virus caused the economy to shrink by an unprecedented 17 per cent. At the same time, the government’s furlough scheme, under which it assumed responsibility for 75 per cent of furloughed workers’ wages, was implemented at a cost of £14 billion per month. The government has also lent substantial amounts to companies postponing their VAT and income tax payments. For the first time, people are being paid not to work, unlike unemployment benefit, when people are paid a far lower amount under the condition that they look for work.

The effect on government finances has been predictable. By November 2020 public debt had risen to £2,099 billion, or the equivalent of 99.5 per cent of GDP – a level not seen since 1961.

As the Covid-19 pandemic intensified towards the end of 2020 lockdowns were reintroduced and the furlough scheme extended, but this was too late to save many jobs. There were record redundancies, 370,000, from August to October 2020 and unemployment is expected to rise steadily as companies give up trading or reduce their workforce as a result of Covid-19.

Recovery to pre-pandemic levels is unlikely before the end of 2022, but the economy will also be affected by Brexit arrangements, which commenced on 1 January 2021. The Office for Budget Responsibility (OBR) expects that the effect of this relatively hard Brexit will be to reduce GDP by 4 per cent in the long run. Already businesses are struggling to adapt to the new barriers to trade with the European Union. Furthermore, the government has no detailed and credible plan to deal with the climate emergency, which has continued to grow unchecked while the government has been distracted by the immediate public health crisis and Brexit negotiations.

The revelations of Covid-19

The experience of the Covid-19 pandemic has laid bare many aspects of our society, exposing its shortcomings and failures as well as some resilience and triumphs.

Public services. Covid-19 has revealed the abject state of public health and other services. Ten years of austerity have left all public services severely underfunded, hollowed out and ill equipped to cope with the emergency. During the early stages of the pandemic the National Health Service (NHS) struggled with insufficient staff, beds, personal protective equipment (PPE) and ventilators. The pandemic has revealed just how reliant we are on the state to protect and look after us – as well as how inadequate the safety net of the shrunken welfare state has become.

The importance of key workers. The “Clap for Carers” initiative was indicative of our seemingly sudden realization that we rely on front-line workers – bus and train drivers, care workers, nurses and doctors – for our well-being and health. These workers, poorly appreciated and poorly rewarded in the past, have precarious and insecure jobs but they kept working during the pandemic even when it put their own lives at risk, because inadequate protective clothing and equipment meant that they were exposed to the virus, and many died while doing their jobs.

The spending power of the state. Just as in wartime, the pandemic demonstrated that the government can spend and borrow money to cover whatever is required to sustain the economy during a national emergency. This has been done without inflation or a collapse of the pound; and it has demonstrated that only the coordinated efforts and power of the state can save us at a time of war, global crash or pandemic.

Centralization, not local provision. As evident in the response of some local authorities and institutions, when global supply chains for critical medical equipment broke down, they are in the best position to assess local needs and deal with local pandemic hotspots and to implement effective track and trace measures. But they have for the most part been marginalized by central government, and sidelined in favour of private company solutions.

Privatization of key services. For ideological reasons, the government outsourced virus testing contracts worth millions to favoured private contractors, such as Serco and Deloitte, companies with no previous experience in public health. This was done without adequate scrutiny, tendering or transparency; and the results have been fragmented and dire in delivery. Tests have gone missing, results have been too slow, tracing poorly done. The Public Accounts Committee report in March 2021 found that NHS Track and Trace is budgeted to spend £37 billion by May 2022. The Chair Meg Hillier said “despite the unimaginable resources thrown at this project Test and Trace cannot point to a measurable difference to the progress of the pandemic”. Experienced public health staff were sidelined; and, without any evidence, Public Health England (PHE) was blamed for failures in the pandemic response and replaced by the National Institute for Health Protection, whose new head has no experience in public health. Scotland has appeared to do rather better and launched its own contact-tracing app on 10 September 2020. Northern Ireland’s StopCOVID NI became available in late July, using the same platform as the Republic of Ireland’s app.

How did we get here?

Austerity is the immediate cause of the problems in the British economy. This was the chosen tool of the Conservative-led coalition government elected in 2010, headed by Prime Minister David Cameron and Chancellor of the Exchequer George Osborne, to deal with the aftermath of the 2008 crash. But our problems go back much further: to the ideology of neoliberalism, which has been the key force driving economic policy in the United Kingdom since 1979 – in effect, a long-running economic experiment.

To see how policy-makers got the drivers of our economy so wrong, it is essential to look back over the entire twentieth century to see where economic mistakes were made and what the consequences were, how economists learned from those mistakes and how, tragically, politicians came to make the same mistakes again.

During the 1920s and 1930s Western economies were weakened by stresses caused by debts incurred in the First World War and by the Versailles Treaty’s punitive provisions against Germany. In the United States, an economic boom combined with wild speculation to produce the 1929 Wall Street crash, the Great Depression and high unemployment. Policy-makers applying the rules of classical economics sought to balance their budgets and cut spending in the depths of the recession. This was the first modern application of austerity, and it was an abject failure in all countries that tried it, including Britain, the United States, France, Germany, Sweden and Japan.

Austerity caused the stagnation of the UK economy for 20 years. It prevented a speedy recovery from the 1929 crash, leading to mass unemployment, poverty, political instability, extremism and – ultimately – war.

The economist John Maynard Keynes concluded that the lack of demand resulting from consumer and business uncertainty at a time of recession could be cured only by increasing government spending and investment, targeted at unemployment. This policy eventually turned around the US economy, under the New Deal of President Franklin Roosevelt, although it was spending on rearmament before the Second World War that finally ended the recession in both Britain and the United States.

From 1950 until 1979 economic policy in the United Kingdom, and the rest of the Western world, was influenced and shaped by the ideas of Keynes. Postwar politicians were determined to learn from the 1930s. The collective effort to win the war provided the conditions and support for a new economic framework. Henceforth full employment would be the target of macroeconomic policy, and government action was devoted to achieving it.

This policy was supported by a new international architecture, agreed at Bretton Woods in 1944, which created a system of exchange rates linked to the dollar, convertible to gold at a fixed rate, and transnational organizations such as the World Bank, the International Monetary Fund (IMF) and, later, the General Agreement on Tariffs and Trade. Governments in the United Kingdom and other Western countries actively managed their economies to maintain demand and keep unemployment low. There followed a period of unprecedented growth and stability, so successful that the quarter-century from 1951 to 1975 has been described as the “golden age” of economics.

Despite emerging from the war with the highest public debt in history, growing prosperity enabled the United Kingdom to create the modern welfare state and the NHS. Year on year the economy grew; and the debt to GDP ratio steadily declined. Unemployment was kept low, inflation was modest, there were no significant recessions and no financial crises. The British state was a major investor in the economy. It nationalized key industries, such as coal and the railways. Over 7 million workers were employed in the UK public sector by 1975, including 2 million in the nationalized industries and over 3 million in education, welfare and local government services. Unions played an active role in securing wage rises to match the increase in national income. Inequality fell dramatically at the same time as health and life expectation steadily improved.

The system came under strain during the late 1960s and early 1970s. Excess demand in the United States, fuelled by spending on the Great Society programme and the Vietnam War, spilled over, via the growth of the US trade deficit, into the rest of the Organisation for Economic Co-operation and Development (OECD) countries, leading to rising inflation. The United States was unable to maintain the dollar–gold peg, and in 1971 abandoned the fixed exchange rate mechanism of Bretton Woods. The quadrupling of oil prices in 1973/74 magnified inflation. Trade unions sought to protect the living standards of members, which led to industrial unrest and, in the United Kingdom, the “winter of discontent” in 1978/79, when low-paid public sector workers went on strike.

High inflation and the trade union action prepared the ground for a counter-attack based on the ideas of economists such as Friedrich Hayek, the principal influence on Margaret Thatcher, who became UK prime minister in 1979 and Ronald Reagan, who was elected president of the United States in 1980. Both had a similar plan.

On her election, Thatcher rapidly implemented the “neoliberal agenda”, which championed free markets, deregulation, privatization of state assets, removal of higher-rate income taxes and the introduction of curbs on trade union activity. Keynesian economic management was abandoned and the target of economic policy shifted from unemployment to inflation. The state was seen to be a burden on free enterprise, so its role was to be diminished. Reagan did the same in the United States from 1981 onwards.

Interest rates were raised to drive out inflation. The resulting high exchange rate of sterling damaged the international competitiveness of UK manufacturing. Unemployment shot up to over 3 million as large swathes of industry were destroyed. The economy went into a self-inflicted recession, the deepest in UK industrial history, with a 20 per cent loss of manufacturing capacity and the destruction of 1.7 million manufacturing jobs, To this day, many parts of the country have never recovered from these losses. Between 1983 and 1991 more than 70 state-owned enterprises were privatized, including telecoms, water, gas, electricity and the railways.

Unemployment remained high for the remainder of the 1980s. But the loss of manufacturing was not mourned. Instead, services – especially financial services – were now the preferred drivers of the economy. High unemployment was explicitly used as a tool to control both trade union and working-class bargaining power and inflation. As Norman Lamont, the Chancellor of the Exchequer from 1990 to 1993, put it in a speech in the House of Commons in May 1991: “Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying.”

This came at considerable social cost; and there was a dramatic rise in inequality and poverty, as wealth was diverted from wages to profits, and to the higher-paid and wealthy. Reforms to trade union law made it more difficult for unions to protect their members. The share of income going to the top 1 per cent returned to levels not seen since the 1930s.

It was claimed that wealth incentives with low taxes, and the unrestrained free market, would be a spur to growth, and that this would in turn “trickle down” to raise the income of the lower-paid. But all indicators during the period following 1979 were worse than during the Keynesian postwar period.

Some of the ill effects were mitigated by the New Labour government from 1997 to 2010, with increased public spending, tax credits and benefit improvements. But there was no challenge to the overall direction of a slimmed-down state, privatization, deregulation, increasing financialization and rising inequality.

Deregulation of the ever-increasing and powerful financial services sector was a contributory factor in the Global Financial Crisis of 2008, the worst global recession since 1929. A massive property bubble had been created by deregulated banks in the United States and Europe, driven by sub-prime lending and the sale of bundled mortgage derivatives. Many banks went bust and had to be rescued by their governments. The United Kingdom – with its large financial sector – was particularly badly affected. GDP dropped by more than 6 per cent between 2008 and 2009. It was a spectacular failure of the private sector.

The policies that had produced the 2008 crash should have been met with a new approach to policy. But Cameron and Osborne used the crisis to intensify the neoliberal agenda. They claimed that the deficit and rise in public debt that had followed the crash were attributable to excessive public spending. The reality is that they were consequences of the crash – and the government’s rescue of financial institutions deemed “too big to fail”.

Austerity, the failed policy of the 1930s, was reapplied. Public spending was cut, allegedly to reduce public debt and the deficit and achieve a ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• List of Contributors
• Preface
• 1 Introduction
• Part I Foundations
• Part II The public service sectors
• Part III Reform of corporate governance, industrial strategy and finance
• Part IV Tackling poverty and inequality
• Part V A progressive recovery
• Index