Out of the frying pan, back to a FIRE economy…
We have just come through the 'Great Recession' where between 7 – 8% of our national GDP was wiped out and we witnessed the first true existential crisis of our current capitalist system.
How have we as a nation emerged from the numerous and complex crises that have emanated from this experience?
Well, pretty much the same. It appears to be common knowledge now that even during the boom years, prior to the banking crisis, the UK was running a relatively large structural budget deficit (i.e. that portion of the deficit which remains unaffected by the cyclical nature of the economy and reveals the underlying imbalances in Government revenues and expenditures).
This fact is underlined by some scary numbers. In 2010, when the coalition came into office, the UK deficit was c. £170bn and national public debt stood at approximately £900bn. Today the deficit is c. £108bn and national debt is estimated at a staggering £1.4trn – and rising. To put that into perspective, that equates to a bill of around £20,000 hanging round the neck of every man, woman and child in the UK today.
Going by the figures from the last Budget (March 2014), servicing our debt was the Government's fourth highest sector for spending. That is to say, we flush more money down the drain (paying interest on our debt) than we do on: transport; defence; public order and safety; industry; housing and the environment; culture, media and sport; and social services.
What's more, national debt hasn't even peaked. The deficit is 'forecast' – 'forecast' being the euphemism that economists use which translates to "no-one really knows but we’ll have a wild guess at it" – to fall into surplus at around 2019. So until that point, UK government debt will go up and up, year on year.
So where do these daunting economic realities lie in conjunction with the current political landscape?
There is an idiosyncrasy unique to the last recession as compared to previous recessions – we have not experienced the levels of unemployment that should follow from such a steep decline in GDP and, indeed, that are currently ubiquitous across Europe. The Government has made a conscious effort to mitigate job losses in the public sector as a trade off against wage rises. This, you might think, would be a very good thing for the Government's electoral aspirations. What history demonstrates, however, is that higher employment levels are not necessarily of higher political value than increases in living standards. The 1980s is a paradigm of this notion.
Mrs Thatcher's Government oversaw one the greatest increases in real-terms economic growth in the post-war era. Her Government also, however, presided over some of the highest levels of unemployment across the same period. And yet, she still managed to secure 3 consecutive General Election victories as part of an 18 year Parliamentary dominance by the Tories. The fact is, regardless of how much GDP growth the economy generates or how stable employment levels are, if you can't make that broad group of people who are often termed the 'strivers' or 'aspiring middle-classes' better off, then you cannot guarantee electoral victory. Ronald Reagan's 1981 campaign was centered on the simple slogan – "are you better off now than you were 5 years ago?" Reagan's campaigners knew that playing on how people felt in their back-pocket was key in securing wide-spread voter support.
Back to today's reality. Both the Conservative party and the Labour party are languishing at around 30-35% in the polls. The post-war standard that has always seen one of these parties being a rising force against the incumbent is well and truly dead. Although not directly a matter for this article, my general belief is that as both ends of the political spectrum trample over each other to reach a political 'centre-ground' (picture a politicians' Becher's Brooke) the general public have lost interest in a political establishment where conviction and principle are confined to those 'in extremis' – that is not to say that I agree or disagree with so-called 'consensus politics', but it is hard not to argue that voter apathy is now widespread as a result.
While Labour is bearing the brunt of the responsibility for not creating a fiscally stable base to rebound off when the crisis of 2008 hit, the Conservatives are failing to attract the types of voter mentioned above. The emergence of UKIP has, ostensibly, mopped up a great many of them (along with some other potentially colourful characters). Only time will tell if the latter of these facts falls into line with previous political history that sees voters return to one of the established parties at the General Election (thus confirming the title of 'protest vote' for the newly resurgent anti-EU party).
As was confirmed in the Chancellor's Autumn Statement, whichever party wins the next General Election will be faced with having to implement even more spending cuts and tax rises. Moreover, real-terms rises in wages and subsequent living standards will continue to be the centrepiece of contemporary economic/political debate. The challenge will be improving productivity, addressing the trade deficit and encouraging more private sector investment. The massive welfare bill (approx. £220-250bn) that currently churns out billions in pensions, in-work benefits and housing benefit will need to be squeezed and it will require political nerves of steel to tackle the respective issues of the 'grey vote', wage levels and social housing reform.
How, however, do we tackle the issue of rising public sector debt? Well, one possible suggestion might be to not let politicians bribe us with our own money. Gordon Brown's greatest legacy will be bastardising the annual budget and turning it into a way for economic policy, specifically fiscal policy, to be used as a tool to garner electoral support – in other words, giving selected groups of people free stuff, funded by everyone else's, as well as their own, money.
Only with a strong economy can we continue to fund the elements of the public sector that we deem vital and have, over time, attached to our collective concept of citizenship – the NHS, for example, would feature highly on this list. As I have alluded to, this will inevitably mean addressing broader notions about where it is exactly we feel the state should or should not be playing an active role. Weaning ourselves off of the financial teat of the state must be pre-empted by addressing the financial and, to a large extent, moral obesity that has subsequently been allowed to flourish in recent years.
It is often suggested that we should go after those at the 'top' of society and those at the 'bottom' of society as both groups might seek to benefit from the perceived 'something for nothing' culture of optional taxation at the 'top' end and large state-sector handouts at the 'bottom'. I wouldn't argue with that as a starting point for the development of future Government policy in order to tackle the ongoing debt crisis. Let's hope that our current political leaders and the voting public can muster up the courage required to action this vital change.