[Edward] Heath simply did not understand British capitalism. Given the right expansionist conditions, Heath believed, British banks and investors would pump funds into the domestic manufacturing economy. But they didn’t. Why? … Absent an activist state capable, on the French and German model, of strategic planning, the private sector didn’t know how to invest while minimising risk. On the other hand, the relatively risk-free business of blowing financial bubbles beckoned.
Robin Ramsay, Well, how did we get here? (Lobster magazine, winter 2010)
Free movement of capital, a fixed exchange rate and an independent monetary policy – a country can have any two of these policy settings but not all three. They are simply incompatible, given that the first would be likely to wash away the second while the second would rule out the third, because rates would automatically need to be set to maintain the currency parity.
Here is another ‘perm any two from three’ line-up: an over-mighty financial sector, a hands-off industrial policy and a re-balancing of the economy away from consumption, property and debt towards manufacturing and exports. While an active industrial policy would allow for the financial sector to be cut down to size to free resources for the real economy, its absence would leave the imbalances exactly where they were.
More than five years ago, George Osborne became the latest Chancellor to try to defy this iron rule, and resuscitate manufacturing – ‘a Britain carried aloft by the march of the makers’ – while remaining solicitous to the needs of the City. On 7 January, he all but admitted defeat.
The economy, said Mr Osborne, faced a ‘cocktail of new threats’, adding that people must not be ‘complacent’ that the economy is fixed. ‘Anyone who thinks it’s mission accomplished with the British economy is making a grave mistake,’ he told an audience in Cardiff.
Really? Here is a certain George Osborne speaking on 25 November 2015:
Since 2010, no economy in the G7 [Group of Seven advanced nations] has grown faster than Britain. We’ve grown almost three times faster than Japan, twice as fast as France, faster than Germany and at the same rate as the United States… Five years ago, when I presented my first Spending Review, the country was on the brink of bankruptcy and our economy was in crisis.
We took the difficult decisions then. And five years later I report on an economy growing faster than its competitors and public finances set to reach a surplus of £10 billion.
In the 44 days separating his Autumn Statement speech in the House of Commons from his remarks in the Welsh capital, something must have clouded this sunny vista. ‘I worry about a creeping complacency in the national debate about our economy,’ he told business leaders.
So what were the ingredients of this cocktail, a beverage apparently still lurking below the counter in November? Oh, well, falling commodity prices, ‘the slowdown in China, deep problems in Brazil and in Russia’, not to mention the heightened tension in the Middle East between Iran and Saudi Arabia. In reality, only this last factor is new – even the New Year stock-market turmoil in China adduced by the Chancellor was only the continuation of the 2015 rout on the Shanghai exchange.
Some suggested Mr Osborne was trying to lay the ground for the European Union referendum, whipping up fears of the big, bad world in order to persuade people to vote ‘remain’. Indeed, one passage – ‘You don’t avoid the world’s problems by trying to pretend, in the modern age, that we can be completely self-contained’ – is pretty much word-for-word what the ‘yes’ campaign was saying during the 1975 vote on Europe.
Others claimed he was getting his alibi in early, ahead of a renewed economic and financial crisis observable on the Treasury’s horizon-scanning equipment but not to the naked eye.
There may, however, be a more simple explanation, which is that, more than five and a half years into the job – a longer stretch than Denis Healey, Geoffrey Howe or Kenneth Clarke – Mr Osborne knows he has failed to rebalance the economy and that the UK remains hopelessly dependent on financial services, debt and property speculation, not to mention borrowed money and cheap foreign labour (sorry, ‘global talent’, in the preferred phrase of the boardroom).
The writing was on the wall well over a year ago. Or rather, the writing was in the financial paper City AM on October 20 2014, where the main-story headline read: ‘The City is back: Number of people working in London’s financial sector soars past its pre-crash peak’.
As Sarah Palin may have put it, how’s that ‘rebalanced economy’ stuff working for you?
The Chancellor’s mistake was to follow pretty much exactly the same strategy (for want of a better word) as his predecessor-bar-one, Gordon Brown, which can be summed up as ‘light touch for the City, fiddly and largely pointless measures for industry’. That the Conservatives in office had never been serious about ‘getting tough with the bankers’ has been amply demonstrated since the election, with the ousting of consumer champion Martin Wheatley as chief executive of the regulator, the Financial Conduct Authority; with the reversal of a planned ‘burden of proof’ on bankers to show they had taken reasonable steps to prevent wrongdoing (now the authorities will need to prove that they had not); and with the choice of ‘defending the City’ as a key issue in the ‘renegotiation’ (it isn’t) of Britain’s relationship with Europe.
Industry, meanwhile, has been bombarded with mini ‘initiatives’, none of which will do very much by way of rebalancing the economy. Here is a choice selection from the Red Book, the full version of the Summer 2015 Budget: a pledge to ‘identify potential areas of strategic focus for different regions through a series of science and innovation audits’, to ‘make amendments to the tax-advantaged venture capital schemes’, and to review ‘the longer-term future shape and financing of Network Rail’.
To be fair, the apprenticeship levy is probably a step in the right direction, provided the apprenticeships delivered are not infected by the low-quality and sometimes outright spivvery that has plagued industrial training in Britain in recent decades.
But none of this gets to the heart of the matter, which is that shifting the emphasis from finance, debt and imports to manufacturing and exports will fail unless it is the absolute top priority of economic policy, rather than one of a number of desiderata, especially if that number includes taking care of the City.
Only when all economic policy is judged by the extent to which it pushes forward this aim will there be the remotest chance of the sort of rebalancing that could, eventually, eliminate the current account deficit that we have been running every single year since 1984.
Or, to end with some words from the Chancellor in Cardiff, we need ‘action to address historic weaknesses in the British economy’.
Historic – and future, it would seem.