Britain’s economic model is deeply flawed, but the government is doing nothing
This blog first appeared in Left Foot Forward on19 March
In tomorrow’s budget, the Chancellor is set to plough on with a fourth year of his economic experiment – a mix of super-charged austerity and hope for the best. The outcome is all too predictable - the economy will continue to falter, living standards will carry on sliding and investment will stay at near-historic lows.
One effect of this strategy can be seen in recent World Bank growth figures. The UK economy is more than 2% smaller than in 2008 - fractionally better than Spain and just behind Italy, but a much weaker performance than in the US, Denmark, France and Germany.
Per capita growth 2008-2012* (2008=100)
* Gross national income ( GNI ) per capita based on purchasing power parity (PPP). PPP GNI is converted to international dollars using purchasing power parity rates.
The UK’s tepid economy is largely down to a prolonged contraction of demand since 2008. The economy’s vital blood supply has been drained by sustained cuts in public spending, shrinking real wages, a collapse in private investment and a failure of exports to respond to the falling value of sterling.
One of the key reasons for sluggish demand is the way the output of the economy has been divided in recent decades. Since the early 1980s, economic policy has encouraged the share of the cake going to profits to rise, and to wages to fall. As a result, while the UK has become an increasingly low paid economy, its corporate sector is sitting on record, but largely unspent, piles of cash. Mark Carney, the Bank of England Governor-designate, has called this ‘dead money`.
The present economic paralysis is in part down to austerity, but can also be pinned on this entrenched economic imbalance - low wages and consumer demand on the one hand, and a mountain of unspent corporate cash on the other. The government has been willing companies to use this money to boost investment, but such calls have fallen on deaf ears. Instead, the cash pile has continued to mount and much-needed investment has failed to materialize.
Corporations say they can see no prospect of a return on investment. But dead money is also a product of Britain’s deeply flawed economic model. The rising profit share of the last thirty years, according to market theorists, should have unleashed an investment boom. In fact it has been associated with an investment slump. Instead, during the feast years, the profit bonanza was poured into a range of largely unproductive economic activities, from financial engineering of companies to private equity acquisitions. Such activity enriched the corporate and financial architects of the deals and reduced the corporate tax base but did little to boost productivity.
The likelihood is that when these cash piles are finally used, they will merely trigger the next boom in speculative financial deal-making and corporate restructuring, the kind of activity that helped push us over the cliff in 2008. Indeed, there are already signs – take the £15 bn takeover of Virgin Media by the US media giant, Liberty Global in February – that the next wave of such lucrative financial deal-making may come even before recovery is properly underway.
None of these issues is being properly addressed by the government. The budget is likely to ignore mounting calls to stimulate demand. Even more alarming, one of the fundamental faultlines of the British model of finance capitalism - its failure to steer resources into the real, productive base of the economy - is not even on the government’s agenda. Here’s why the prospect of sustained recovery is proving so elusive.