As expected, Rachel Reeves’ spending review took just a couple of hours to begin unravelling. Having claimed that additional spending could now be made because of the unexpected 0.7% GDP growth in the first quarter (itself largely a statistical mirage) Reeves was left to explain a 0.3% fall in GDP in April. The expectation among the professional-managerial class is that yet another round of tax increases is inevitable, including big rises in local taxes. Critics, however, point out that the raft of tax increases which began in April are among the biggest causes of falling GDP in the first place – the other being the loss of exports to the USA after the artificial, tariff-beating rise in the first quarter.
Inevitably (this is politics after all) there is a great deal of double-speak around government spending. Not least because of the self-imposed constraints of neoliberal government, which insist that governments “must balance the books” before it can borrow further. But since UK government debt is running at around 100 percent of GDP, this balancing must theoretically take place over time, with much of the debt repaid from future GDP growth. This was one of the tricks deployed by Reeves on Wednesday when she drew a distinction between capital investment (good) and day-to-day spending (bad)… the distinction no doubt derived from the wholly fatuous analogy with household budgets, where investment in a mortgage or home improvements is good while spending on alcohol and fast food is bad. But not only do economies not work that way, but the foreign investors whose dollars and euros are essential to the UK economy, may not recognise the difference anyway.
It is possible to raise a scintilla of sympathy for Reeves, since the crises breaking over her head have been decades in the making. On the other hand, as with the political class as a whole, she appears to be one of those people who is too IQ-deficient to even realise that she is thick. Nevertheless, she is armed with an ideological framework that is completely out of step with the real world, just as 80 years of bad decisions are coming home to roost.
Perhaps the first of these was the post-war decision to use Marshall Aid dollars to rebuild the British military rather – as happened in Europe and Japan – to use dollar aid to rebuild a war-torn economy. Initially, this didn’t seem to matter because British industry was sufficiently competitive to mitigate the pace at which the UK economy was being overtaken. By the 1960s though, Britain was clearly falling behind with – ironically – the nations which lost the second World War flooding the UK with exported goods.
Underlying this to some extent was Britain’s energy gap. Peak coal had happened in 1913, but it was only from the 1960s that – then expensive – North Sea oil and gas began to be produced. Raw energy though, while necessary is not a sufficient cause of economic growth. Broadly, it is the application of energy-efficient technology to the conversion of energy which create the exergy (work) which generates GDP growth. And the British disease in the post war years involved a failure to embrace improved technology even as the energy cost of energy was rising.
One of the sad truths about our predicament though, is that it just doesn’t look like that. Energy is invisible, while technology is regarded as a thing apart from the material world. Only the beads of sweat on the brow of a manual worker provides – and has provided since Adam Smith, via Karl Marx – evidence of work. So that, as the energy crisis broke in the early-1970s, it was framed in terms of bolshie trade unions versus investor flight. Indeed, far from clarifying the central role of energy, the oil shocks of the period – or at least the inflation they fuelled – were treated as little more than an additional catalyst to send the workers out on strike again.
Much less obviously, as the last trappings of the British Empire disappeared, its rulers found a use for dollars that the US Treasury could never have intended. In the massive expansion of the global economy between 1953 and 1973, demand for dollars outstripped America’s ability to supply. But the banking alchemists in the City of London found a way to loan dollars that they did not possess (in the same way as, domestically, they loan pounds into existence when people borrow). All that was required – and granted – was a relaxation of regulation on banks that were “offshore.”
Even today, this is misunderstood, with many people assuming that there are mountains of wealth parked in offshore tax havens like the Cayman Islands. In the digital age though, the currency never leaves the UK, it is merely moved from one ledger to another and back again. In similar fashion, the dollars loaned by offshore banks as part of the Eurodollar system are merely entries on bank ledgers… ledgers held on computers within the City of London, but which were treated by regulators as being somewhere (unspecified) else. And as is the case with banking generally, there is a fortune to be made from the fees charged to loan dollars that are spirited into existence for free.
The point being that, where the UK might have focused investment on one or two speciality manufactures – in the same way as Germany and Japan focused on cars – the City of London became a cash cow for an economy in freefall beyond the city walls.
The inflationary crisis of the early-1970s might have marked the end of even this prosperity had it not been for the first North Sea gas arriving onshore and prompting a nationwide upgrade to gas appliances to allow the shift from “town” (i.e., coal) gas to “natural” (i.e., not manufactured) gas. This, of course, was followed by the end of the decades by the flood of oil which gave the UK one final burst of growth… the big question at the time being what to do with the huge revenues that came from oil exports?
The 1974-79 Labour government had wanted to invest oil revenues in revitalising Britain’s manufacturing base. Instead, in the hands of the incoming Tories, oil revenues were allowed to over-inflate the value of the pound, helping to bring about the destruction of the manufacturing base. Meanwhile, where the Norwegians and the Saudis built up huge sovereign wealth funds, the UK’s oil revenues were squandered on tax cuts and corporate welfare for the already wealthy. Indeed, it was only the complexity of Britain’s older economy which hid the “curse of oil” more obviously afflicting oil states like Venezuela:
“Of course there are many differences between the situation in the UK and Venezuela. The UK (or at least its affluent regions) is still dining out on the wealth generated during the era when it ruled a global empire. Venezuela, in contrast, was and is on the receiving end of European and US imperialism, and thus never had the chance to build the developed economy that the UK is currently clinging on to. The relative simplicity of Venezuela’s situation, however, allows us to identify an alarming trend which is also present within the UK; and which will very likely see the UK collapse in a similar way in the not too distant future.”
Squandering oil revenues, cutting taxes, selling off billions of pounds’ worth of public assets, and deregulating banking and finance all fed into the debt-based boom inherited by Blair’s neoliberal Labour government. But the goose that had been laying the golden eggs stopped laying. In 1999, North Sea oil and gas production peaked, with oil revenues falling fast thereafter. And by 2005, the UK had become a net importer of oil and gas once more. Not that this necessarily spelled collapse. Japan, for example, had built a prosperous hi-tech economy without producing oil and gas (although this stagnated from the 1990s) while, prior to the insanity of the current decade, Germany had been an industrial powerhouse with no indigenous oil and gas industry. What made Britain a basket case was the failure to revitalise the manufacturing base in the belief that banking and finance would save the day… a belief that was seriously undermined by the 2008 crash and the ongoing depression which followed.
Which brings us back to – and puts into perspective – Rachel Reeves’ spending review last week. Because there’s not much left for the government to do. Cutting public spending has seldom generated more than a fraction of the required savings. And when it comes to cuts, few politicians are brave enough to refuse to cave in to pressure from the electorate and from their own MPs. Nor is there any obvious way of raising revenues. There’s not enough oil left in the North Sea to raise enough revenue to cover the cost of decommissioning, still less to repay government borrowing. Nor is there much left in the way of public assets to go for one last fire sale (although I’ve always liked the idea of converting Buckingham Palace into an exclusive hotel for ripping off the godzillionaire class). Taxes are already way past the sweet spot on the Laffer Curve, so that more hikes are likely to result in falling revenues. Borrowing, then, is the only means available to cover the cost of a bloated state… but the limits to this are dictated by a long-term bond market that is likely to demand better returns (interest rate rises) to cover the additional risk and may refuse to fund further borrowing entirely in the absence of growth.
Maybe borrowing to the hilt while hoping the growth fairy puts in an appearance is the least unrealistic policy left on the table… after all, as the old saying has it, if you owe the bank a million pounds, you’re in trouble but when you owe the banks billions of pounds it is the banks which are in trouble. And for most people, a good old fashioned banking collapse in which the wealthy take a very big haircut is preferable than the alternative of stagflation in which the poorest take the biggest hit.The last working-class hero in England.
Clio the cat, ? July 1997 - 1 May 2016 Kira the cat, ? ? 2010 - 3 August 2018 Jasper the Ruffian cat ? ? ? - 4 November 2021
on June 19, 2025, 10:48 pm