https://consciousnessofsheep.co.uk/2024/12/19/it-isnt-only-labour/

Inevitably, sections of the establishment media linked the decline in UK GDP in October to Labour’s budget in the same month. And there may be just a sprinkling of truth to it:

“Given the latest dip in GDP, which covered the four weeks before the Budget, some economists have laid the blame squarely at the door of Rachel Reeves, accusing her of damaging growth by overdoing the doom and gloom.”

However, the latest headline figure is likely evidence of why the outgoing Tories called an early election. As I explained in May:

“… the two down to earth reasons for calling a summer election having told even their own MPs that the election would be in the autumn, were economic – that the economic trends were going in the wrong direction – and political – to wrongfoot Reform UK, who have yet to select all of their candidates.”

July’s election was as close to the fabled “good election to lose” as you will find… and the Sunak campaign team went out of their way to lose as badly as they could manage. Providing Labour with a “super majority” in July was the political equivalent of a hospital pass… which Labour foolishly leant into by pledging to make the UK the fastest growing economy in the G7, and by making unachievable promises on renewable energy, housing, and hospital waiting times. While the budget included additional borrowing to fund these pledges, the UK lacks the skilled workforce, the resources, and the surplus energy to succeed. Moreover, in the current global economic climate, private investment has also fallen… even for state-backed projects.

The budget did contain one economic hand grenade though – the massive increase in Employer’s National Insurance (ENI)… a de facto tax on jobs. Not only did the tax rate increase, but the threshold was lowered to encompass most low-paid, part time employment. And while some additional relief was available to the smallest employers, this only cancels out some of the increase.

National Insurance was introduced in the aftermath of the Second World War as part of a new social contract. Like private insurance – although underwritten by the state – everyone would pay in as a way of offsetting the risk of becoming unemployed, homeless, sick or disabled, and to provide a basic pension in old age. Employers would also make a contribution toward the various state services they received, such as a healthy and educated workforce along with access to public infrastructure. Unfortunately, over time, governments of all colours undermined National Insurance by using it to fund those who had not contributed (a current concern in the UK because of the massive influx of migrants) but also by treating it as just another tax… a means of increasing income and corporation taxes without technically doing so. Today, businesses regard ENI as just another cost levied against each of their employees – and as a deterrent to hiring more workers.

Nor did UK employers wait until next April to begin to adapt to the higher cost of employment. As Delphine Strauss at the Financial Times reported last week:

“UK job postings were 13 per cent below their pre-pandemic level and 23 per cent lower than a year ago, according to figures published on Tuesday by the job search site Indeed — a bigger retrenchment than in any of the other markets it covers, including the US, France, Germany, Canada and Australia…

“The UK is unusual because it is also seeing a sharp drop in hiring in low-wage sectors where other countries still have high vacancy rates — with job postings a third below their 2019 level in hospitality and tourism, and down by more than 10 per cent in retail compared to that year.

“These worries will now be compounded by the rise in employers’ national insurance contributions, which will hit hardest in low-wage sectors where a high proportion of employees work part-time.”

Obviously, this is not entirely, or even mostly, Labour’s fault, since they inherited an economy which was already in trouble, along with a Bank of England interest rate policy deliberately designed to generate higher unemployment to force down inflation. What Labour’s budget did reveal though, was that fast-failing neoliberal economic policy would continue – albeit with some tweaking of priorities (Labour’s growth projects are the equivalent of the Tories’ “levelling-up,” and will be no more successful). Absent was any hint of a radical departure from the established order which just might mitigate the worst of what is coming:

“Britain is far from alone amongst Western countries in experiencing the effects of economic deterioration. The average British person has gradually been getting materially poorer ever since 2004, but the accelerating pace of this impoverishment has been driving social discontent and political fragility just as surely in France, Germany and America as in the United Kingdom.

“Britain does, though, stand out from the crowd in several significant respects. As we shall see, these include excessive indebtedness, and outsized exposure to rate and currency risk.

“Even more seriously, the steps necessary for effective preparation for economic contraction may be hard to implement in Britain because they run contrary to long-established, cross-party support for the failed and divisive doctrine of extreme neoliberalism.”

The more cerebral commentators of both the political right and left at least acknowledge that the British disease goes back much further than October’s budget or even the election of Boris Johnson. On the right, Tony Blair is the arch villain whose involvement in public-private partnerships with massive transnational corporations are believed to have undermined the UK economy. On the left, it is St. Margaret of Finchley, whose destruction of Britain’s industrial base in the early-1980s left the UK over-reliant upon imports and foreign capital. James Callaghan and Denis Healy are less likely villains, but it was their turn to austerity cuts and monetarist economic policies in response to the inflation of the mid-1970s which paved the way for the destruction that followed.

In those days, commentators talked about a “North-South” divide. London, the Southeast, and the West Midlands remained prosperous even as the North and West of Britain were deindustrialised and impoverished. This was in large part due to the cradle of the Industrial Revolution being in the north and to the trading ports growing in the west. In the twentieth century, as the old, steam-powered industries fell into decline, the establishment of new, oil-age, industries in the south generated a newfound prosperity even as the north and west withered. In the inter-war years, Tory governments tried to resolve the problem by encouraging workers from the north and west to relocate to the prosperous regions (many did, leaving a brain and skills drain behind them). After the Second World War, nationalisation provided a brief hiatus to the declining industries of the north, where failing industries like shipbuilding, mining, railway working and steelmaking masked the mass unemployment which would have resulted from their closure.

Britain’s blessing in the nineteenth century, was to be sat on top of coal deposits equivalent in energy to Saudi Arabia’s oil. Its curse was to reach peak coal in 1913, to be stuck thereafter with increasingly expensive coal, and (prior to the oil shocks of the 1970s) to be dependent upon imported oil. The logical response – attempted in part by the governments of Harold Wilson and Edward Heath – was to adopt the corporatist models successfully employed by Japan and West Germany. However, the central role of the City of London and its position in the global Eurodollar system worked against this – investors preferring unproductive asset speculation to funding real economy investments.

The misdiagnosis of the inflation of the 1970s (militant trade unions rather than expensive energy) coupled to the City of London’s preference for unproductive speculation paved the way for Thatcher’s misguided attempt to cut her way to prosperity. Trade unions, the argument went, were too powerful and made excessive wage claims which ultimately drove up prices. It followed that to bring inflation down, wage increases had to be brought under control. And that the way to achieve this was to crush the trade unions. To do this required exposing industry to global competition (including allowing corporations to move their operations offshore) and to create a “reserve army” of lower-paid workers (the main reason behind equalities legislation) to compete against organised labour.

The far from obvious reality, is that wage claims were the result rather than the cause of rising prices (which disproportionally impact those at the bottom of the income ladder). The biggest cause of inflation (although complicated by the USA’s misuse of the Bretton Woods currency system, and later by Nixon ending the gold standard) was the sharp – but hidden – increase in the energy cost of energy following the peak of conventional oil extraction in the continental USA. Because both Keynesian and neoliberal economists regard energy as a relatively cheap and inconsequential input to the economy (one often left out of econometric models entirely) even the sharp rise in the price of oil in 1974 and 1979 appeared small compared to the monetary cost of wages. What they missed – and continue to miss – was that the energy contained in a single barrel of oil is equivalent to four-and-a-half years of human labour, so that a doubling of the price of oil amounted to a halving of the benefits of productivity (although from the 1970s, this was offset by various technological efficiency savings). Worse still, because oil is the “master resource” in our economy (almost everything is either made from, made with, or transported using it) the rising cost of oil fed into a rising cost of everything else.

The initial response was to accept being held hostage by the OPEC cartel, and to attempt to adapt to higher energy prices. But higher prices also prompted the opening up of oil fields which had previously been too expensive to bother with, including the North Alaskan slope, the Gulf of Mexico, and the North Sea. In this, the Callaghan government was unlucky… the North Sea oil arrived too late to buy off a disgruntled electorate, and Thatcher was swept to office (largely on the back of baby boomer votes) in May 1979.

Thatcher’s stated belief was that Britain’s old and failing manufacturing base had to be replaced by new, leading-edge ITC industries, the potential of which was only beginning to be recognised in 1979. Although the 1971 Kenbak-1 is widely held to be the first desktop pc, and despite various home gaming systems being sold during the 1970s, it was the arrival of the IBM 5150 in August 1980 which marked the point at which businesses entered the ITC era. This was followed three years later by the other ITC technology in the shape of the Motorola DynaTAC 8000. In the UK, both technologies were readily embraced by the City of London, where they were to accelerate financial processes… particularly following the 1986 “big bang” deregulation.

This created an apparent paradox. Because despite large swathes of ex-industrial, rundown seaside, and small-town Britain being plagued by unemployment, the City of London (and anyone associated with it) was flourishing. How could a financial system centred around the UK’s currency be booming when the economy which ostensibly supported it was collapsing? In three letters, oil! As former Welsh First Minister Rhodri Morgan reflected just before his death:

“Back then [1983] whoever was running the Government had this amazing ability to spend oil revenues. Governments could afford things. They didn’t have to worry about where the next few quid was coming from. The Falklands War was eminently affordable. Paying the cost of the rocketing unemployment benefit bill, as dole queues doubled, then trebled, wasn’t a problem.”

Although not obvious because of Britain’s economic complexity, under Thatcher it had succumbed to the same “curse of oil” which was all too obvious in the many dictatorial oil states around the world. Emma Ashford in her review of Leif Wenar’s Blood Oil: Tyrants, Violence, and the Rules that Run the World sets out the problem:

“Oil wealth pours into these states, enriching elites, enabling corruption and repression, and damaging the prospects for economic development and good governance. In buying their oil, we are enabling the addiction.”

And it was a massive flow of wealth for those fortunate enough to get hold of it. As Guy Lodge at the New Statesman points out:

“Thatcher missed a trick in not diverting some of the proceeds of oil revenue into an oil fund, like Norway and others did. Instead she used the lot to support current spending, including covering the costs of large-scale industrial restructuring and funding expensive tax cuts to woo middle England.

“And what a lot it was… In the years between 1980-81 and 1989-90, the Thatcher governments received a staggering windfall of £166bn [adjusted to 2011 pounds].”

The oil bonanza though, created lots of losers in addition to the relative handful of big winners. As William Borders at the New York Times reported at the time:

“[Thatcher’s supporters] like to point to the one bright spot on the economic horizon: the steadily swelling flow of oil from the North Sea. With current production of 1.7 million barrels a day, exceeding such giants as Indonesia and Kuwait, Britain has become self-sufficient in oil, saving this country billions of dollars in import bills…

“But even that good news has a dark side. The oil production has been a major factor in the appreciation of sterling, which is now trading at a level 50 percent higher than in 1976. Though good for some people in Britain, the strong pound has had a devastating effect on exporters, making their goods more expensive abroad…

“Sir Michael Edwardes, the chairman of BL Ltd., the automobile company that used to be called British Leyland, expressed a widely held view among industrialists when he declared in exasperation that, if the Government could not figure out a way to keep the oil from hurting big business, it should ‘leave the bloody stuff in the ground.’”

Leaving the oil in the ground was never an option for governments presiding over an economy which had long since lost its ability to pay its way in the world. Indeed, not only was the UK surviving on a mountain of debt floating on a once-and-done glut of oil and gas, but the only way it could raise the foreign currency required to fund its imports was to sell off its public assets, thereby leaving the rest of Britain to the mercy of foreign corporations and foreign governments which had little commitment to the UK, but mostly sought to syphon as much wealth out of Britain (just as Britain had done to its imperial possessions in the nineteenth century) before closing down what had previously been key public infrastructure.

Still, so long as the oil and gas kept flowing, the investor class could continue to party while those in government – elected and permanent – could bury their heads in the sand in the hope that the eventual reckoning would land on someone else.

The first foreshock of that reckoning landed on Thatcher’s less fortunate successor. On 6 July 1988, a series of explosions created a catastrophic fire on the Piper Alpha platform in the North Sea. Understandably, media and political attention was on the 167 who died, and on “learning lessons” (something we seldom do) to prevent anything similar in future. Far less obviously though, because Piper Alpha was a key node for pumping oil from across the North Sea back to the mainland, for the next four years Britain lost the oil exports which had been propping up the value of the pound on international markets… which led remorselessly to the “Black Wednesday” crisis in September 1992.

In the long term, being unceremoniously ejected from the EU Exchange Rate Mechanism (the precursor of the euro currency) proved to be fortunate – had Britain been in the euro in 2008, it would have experienced a worse sovereign debt crisis than Greece. As it was, its ability to issue its own currency and to sell its own bonds prevented the worst of the fallout from the 2008 crash. Nevertheless, by 2008, Britain had ceased being a net exporter of oil and gas for the last time. And with the banks having to be continuously bailed out thereafter, the party was over. Although, as we see in the lag between the Piper Alpha disaster and Black Wednesday, these things take time – sometimes a lot of time – to unravel.

And unravelling is imminent in a UK which is rapidly losing its ability to pay its way in the world. The fallout from the pandemic restrictions (broken supply chains and higher prices) and the ill-judged and self-harming sanctions on Russia (too expensive energy) have greatly accelerated the coming crash, as the British part of the UK economy is neither able to absorb the additional costs nor pass them onto consumers who are increasingly struggling to meet the higher cost of essentials. The UK government is in an equally impossible bind. Even if its proposed infrastructure building could generate growth (it won’t) before it can even get off the ground it requires massive government borrowing which must ultimately be repaid from taxes on workers and businesses… you know, the ones who are struggling to make ends meet. And while government could “monetise the debt” (i.e., “print” money) it can only do this for pound-denominated debt. And only then at the cost of devaluing the currency… which, in an import-dependent economy like the UK’s means eye-watering inflation. What the British government can’t do (which is why the Thatcher approach cannot be repeated) is to offset the deficit with foreign – mostly US Dollar – currency… the oil has gone and there are no more public assets left to hawk to the corporate vultures (although I suppose we could still rent out the Royal Family).

This is the trap the UK is stuck in. It cannot raise more taxes because its indigenous businesses and workforce is mostly tapped out. Nor can it borrow much more in financial markets which are increasingly aware that the UK state may well default – a problem currently exacerbated by a global dollar shortage which is seeing investment ebb away from Europe and Asia and into US Treasury Bonds. Nor though, following decades of underinvestment, does it have the skills and resources required to begin the painful process of import substitution which might, eventually, allow a much poorer UK to pay its way in the world. Instead, and for as long as the music keeps playing, the giant multinationals which overshadow the rest of the economy (and which are masters at tax avoidance) are providing just enough crumbs from the top table to give the illusion of prosperity to the professional-managerial classes who make economic policy.

What would end that illusion? The process has already begun. As I explained in my book Breakdown, while energy spikes do not cause bubbles, they invariably burst them. And the world oil production peak in November 2018 is proving to be the pin that punctured the “everything bubble.” For the UK, 2025 looks set to see a return of stagflation, as domestic businesses shrink or close and unemployment and under-employment increase. Nevertheless, at the top the price of discretionary goods and services will continue to rise where customers still enjoy asset income, while at the bottom, prices will be held up by higher utilities and housing costs. Overshadowing everything though, and entirely beyond the power of any UK government is the coming repeat of the 2000 DotCom bust, as AI fails to live up to its promises (not least because the energy and resources required don’t exists) and stock markets around the world face a big correction.