Home Articles About Chartist Subscribe Links Search
This month
Archive of past articles
Labour movement
British politics
International politics
Economy and society
Science and culture

Are we really having it so good?

Frank Lee tackles the left-liberal literati about the UK economy.

‘If appearance always coincided with essence there would be no need for science.’ Karl Marx

The UK economy has experienced nine years of unbroken growth, low inflation, and full employment under Gordon Brown and his former chief adviser, now Economics minister at the Treasury, Ed Balls. Sounds impressive; moreover, the statistics seem to stack up. We are constantly told that this is New Labour’s, read the Balls/Brown duumvirate’s, greatest achievement.

The UK economy is now ‘strong’ - a showcase for the rest of Europe to follow.

That’s the conventional wisdom, even on the left; and although the left-liberal literati don’t openly admit this, they are stuck with an inescapable conclusion: namely, that Mrs Thatcher and her policies were, albeit in a crude and brutal manner, broadly speaking correct. Neo-liberalism, under the various semantic flags of convenience, namely, ‘reform’, ‘globalization’ ‘flexible labour markets’ et cetera, has worked. The UK economy has enjoyed its success because New Labour adopted the market oriented neoliberal approach of its predecessor.

Looking behind the headline figures reveals a rather different version of economic history than that described in headline journalism. Taking the claims in turn, firstly GDP growth.

Gross Domestic Product (GDP)

This is a measure of economic activities carried out in a country expressed in monetary terms. GDP growth is the change in this figure measured in yearly intervals. Gross National Product (GNP) is like GDP but factors into its calculations income flows from the overseas earnings of corporations and individuals. Earnings from outward investment (e.g. UK investment abroad) counts as a positive income stream, whereas the earnings by foreigners and foreign companies whose operations are based in the UK count as negative income streams. So GDP and GNP can be very different figures. Moreover, GNP would seem a more reliable indicator of a country’s economic growth than GDP. Japan for example has a much higher GNP than GDP because of the extent of its companies’ overseas earnings.

It is the opposite with countries such as Ireland which has practically no outward investment but a very large volume of inward investment. The distorting effect of this GDP methodology makes Ireland the 5th richest country in the world after Luxembourg, Norway, Switzerland and Denmark, which patently is not the case. This is because 50% of Ireland’s GDP is produced by foreign corporations and most if not all of this is wealth created by inward investment which will as a matter of fact be repatriated to its country of origin. So Ireland is not necessarily as rich as the GDP figures would suggest. The same is true of the UK although there is more in terms of outward investment.

Income Inequality

Then there is the little matter of how GDP is internally distributed – who gets the growth? Well, it should be known by now that the UK is the most unequal income and wealth economy in Western Europe. In terms of the ‘Gini Coefficient’ (the standard method of measuring income/wealth inequality) Britain is seventh in the league table of inequality sandwiched between Georgia and Azerbaijan, Russia being top of the league.

UK GDP per capita is $30,000 but this figure is a purely mathematical construction. It says nothing about the distribution of wealth. The same is true of average income. The fact is that modern Britain has become so economically and socially Balkanised, with regional, ethnic and gender variations, much of its economic activity moved offshore, and much of its GDP being the wealth of overseas companies and individuals, that the whole concept of GDP and growth is becoming increasingly meaningless.


The claim that we are or have been experiencing low inflation is at best highly questionable and at worst blatantly fraudulent. Ultimately it all turns on definitions and which measure of inflation is chosen. From the standpoint of the current orthodoxy rampant asset-price inflation, in the property market, a trend now spreading to other commodities, such as base and precious metals, oil and gas doesn’t count! Why it does not count is not explained. The government’s preferred inflation measure is the Consumer Price Index. This leaves out items like Council tax, energy costs and mortgages. Little wonder it is the government’s preferred instrument! It is all too reminiscent of the Tories under Thatcher when unemployment was constantly redefined and after every redefinition the headline figure for unemployment fell. When the present government changed from the old inflation system RPIX to the new CPI in December 2003 the rate of inflation fell from 2.5 to 1.4%. Strange that!


Numbers out of work (note, we will exclude the two million or so ‘economically inactive’ on Incapacity Benefit – that’s a separate discussion by itself) has risen every month since January 2005. The present level – using the Labour Force Survey – indicates 5.1% or approx 1.5 million unemployed, the highest figure since 2003.


Consumer debt, together with government expenditure has without question been the main driver of the UK economy during the Balls/Brown ascendancy. And driving this debt creation has been house-price inflation which has enabled homeowners to obtain loans on their properties, through refinancing and remortgaging – Mortgage Equity Withdrawal. Inspired by their US mentor, ex-Fed chief, Alan Greenspan, the Balls/Brown GDP growth in the UK has been a function of a general policy and culture of easy credit and cheap money. Household debt at £1.158 trillion is now larger than annualised GDP by £30 billion. Correct me if I am in error but isn’t this an example of a fools’ paradise?

Don’t get me wrong, I’m not against debt or deficit financing –household, business or government - provided it is cyclical. Cyclical debt financing means you borrow in the bad times and pay back in the good. That is, as I understand it, Keynesian monetary policy. Keynes, however, did not envisage a permanent infusion of liquidity into the economy regardless of capacity constraints. Such a policy would lead inexorably to structural debt and unavoidable inflationary pressures, in addition to problems with balance of trade. However, our present debts are structural – which means they don’t get paid back and therefore just get bigger.

Unsurprisingly financial distress is now gradually assuming significant proportions in the UK. The number of people filing for insolvency in Britain rose by almost 50% to new record levels over the past year as consumers struggled to cope with the debts amassed in recent years, according to government figures released in April 2006. Personal insolvencies were up by 11.6% in the third quarter of 2005 and 46% higher than in the same period a year ago. If current trends continue Britain could see more than 100,000 people being declared bankrupt by the end of 2007.

Of course this was bound to happen just as it is bound to get worse. If the present policy of debt driven growth is carried on it will simply lead to an inflationary collapse – no question. It worked in the short run, but it can never work in the long run. Unfortunately the government doesn’t seem have a plan B. Or if it has it is not telling. I suspect it is simply crossing its fingers and hoping for the best.

Trade Deficit

I’ll leave this bit to the excellent Larry Elliott of The Guardian:

‘It's hard to credit that governments used to be obsessive about the balance of payments when today there is barely a flicker of concern in the City that the UK's deficit on goods hit £65bn last year, more than 5% of GDP. Services and financial wheeling and dealing mean that the current account is a lot smaller than that, around 2% of GDP, but the notion that an economy running a trade deficit of that size is in rude good health is, frankly, risible.

A shrivelled manufacturing base also has an impact on Britain's productivity performance. Why? Because it is easier to boost output per person in a car plant than it is in a barber's shop or a dentist's surgery. A haircut or a filling takes the same amount of time as it did 10 or 20 years ago; the output of the public sector (although difficult to measure with any degree of accuracy) has almost certainly not been keeping pace with the resources pumped into it.

What that means is that the UK is a long way from being the knowledge economy of the government's dreams. It has pockets - in London and along the M4 and M11 corridors, but in reality there has been no economy-wide shift of people out of manufacturing and into the high-powered bits of the service sector.’ Enough said.

Productivity and R&D

One of the reasons why the UK GDP is (slightly) larger than France is that we Brits work longer hours, have less holidays, and have longer working lives. France’s productivity levels are higher than the UK. In fact most developed countries levels of productivity are higher than the UK. We simply do not invest enough particularly in terms of Research and Development (R&D).

In spite of recent improvements, the UK still spends a paltry 1.9% of GDP on R&D, compared with the 2.2% spent by France, 2.5% by Germany, 2.6% by the USA and 3.2% by Japan. Even worse, a third of R&D is foreign-owned and of no particular benefit to the UK, which is bad news for a government whose stated tactic for beating off competition from emerging economies is to boost significantly the "value-added", knowledge-led economy.

Neither do future commitments look good. At its Lisbon summit in 2002, the EU set a target to increase R&D spending to 3% of GDP by 2010. Britain could only agree to a limited 2.5% by 2014.

Given the continuous Panglossian drivel peddled on a daily basis in the media and by politicians, think-tanks and soi-disant ‘experts’ on the subject, this analysis is deliberately bearish.

The implications of the current orthodoxy is that we can spend and borrow our way into prosperity since property prices will rise forever, and anyway structural debt and deficits on current account don’t matter any longer. It also seems to imply that asset price inflation is the same as wealth creation. We thus can sit back and get wealthier as house prices rise. If only …

In fact prosperity is brought about by increasing the social productivity of labour and by spreading these gains evenly throughout society; the prerequisite of this is saving and investment (in both public and private sectors). This is the tough reality of economics. Unfortunately it looks as though we’re going to have to learn it the hard way.