The United Kingdom has a new King and a new Prime Minister. In normal times, (remember them?) new incumbants get a grace period before being subject to criticism. Not so for Liz Truss, the newly appointed Prime Minister, whose chancellor delivered his emergency or ‘mini’ budget this week. Cue waves of depression from anyone with a smidgeon of understanding of economics. The UK economy is in a mess and needs a plan for growth, yet the one we’ve received looks more like a plan for recession. I’m no economist, I’m simply a graduate who has read a few economic textbooks and takes an interest and a budget that consists of borrowing money to fund tax cuts for the very richest during a cost of living crisis seems to be beyond dumb, but rather a more a wilful destruction of the UK economy. I wish I was exaggerating.
Economic growth is basically an economy producing more value over time, the goods and services that are produced have more value than those produced before. The main way of achieving growth is through raising productivity, i.e the amount of value produced by the economy. Or very simply, being able to make 11 of something in an hour, when previously 10 was produced.
The main way to increase productivity is through investment. Investment pays for new equipment, software, staff training, more efficient systems and so on, that allow productivity to increase. There are two main types of investment, public and private.
Public investment come from the state and usually concerns improvements to infrastructure of the economy. Such as improving the transport infrastructure so that goods and people can move around the country more quickly and more cheaply as a result of the investment. Similarly improving education gives an economy workers with more and better skills able to be more productive than less well educated individuals.
Private sector investment does the same thing, investing again in better equipment, buildings etc, but at the level of an individual organisation, to improve it’s productivity and this to improve it’s competitiveness in the market place. This individual organiastions success contributes to the economies productivity and helps public investment as it pays more in taxation.
Stop investing and things go into a decline. For example older equiment over time becomes less reliable and less efficient. This can also apply to nation states as a whole, if the infrastructure gets worse, productivity falls. UK productivity has overall flatlined now for over a decade, whilst other nations have managed to keep productivity increasing. This is a very general simplisitic model of the economy, but illustrates how the UK seems to be getting this very basic stuff wrong.
Getting this basic stuff wrong goes back to Margaret Thatcher’s tenure as UK Prime Minister in the 1980s. Thatcher’s understanding of economics at a nation state level was weak , however during the 80s an economic boom was engineered and the Tory party were percived as being the architects of this success. The modern Tory party now see Thatcherism as a kind of religion and Thatcher herself as some kind of goddess. She wasn’t and this was pointed out by the Left at the time. Growing up in Wales I saw it for myself, coal mines were closed and no new economic investment replaced them, those parts of Wales rapidly declined. I have never voted Tory and never will, but some have forgotten.
What Thatcher did in the 1980s was sell off national infrastructure from the state, energy companies, telecommunications, social housing, coal mining and so on to the private sector and cut taxes, particularly for the better off, creating a short term economic boom, atrick you can only pull-off once, lavishing the City of London’s financial services industries with cash at the expense of the UKs long term infrastructure and stability.
Roll onto the 2008 economic crash and the Tories return to power in 2010. The Cameron regime implemented a policy of austerity. The UKs national debt was seen as the greatest problem, so public investment was reduced to reduce the deficit. i.e weakening the productivity supported by infrastructure, to deal with the deficit. Interest rates were reduced to practically zero and quantitative easing introduced to liquidate (give lots of money to) the banks in the hope of encouraging private investment. Whilst it produced some investment, it wasn’t a lot. The UK was the last major economy to come out of the 2008 recession and little growth was produced.
All this was compounded by events, firstly Brexit, making it harder for companies to export goods and services to the UKs largest market, the rest of the EU, then Covid, effectively shutting down much economic activity and now an inflation causing energy price spike caused by Putin’s deranged invasion of Ukraine. Solutions to the current UKs woes are hard to find. The Lefts solution of increasing public investment to take the place of private investment until that recovered was rejected because it’s “socialism”. Hence the government rejected a broad range of economic strategies.
The new Tory regime beholden to their goddess Thatcher are essentially a one trick pony, all they know is reducing public sector investment and giving tax cuts to the already wealthy. Hence the basis for this budget is just more Thatcherism and this makes so little sense as we already know it doesn’t work and actually makes things worse. it’s just depressing.
Of course cutting taxes for the wealthy does improve the UK as an attractive place to invest in and give the wealthy more cash to potentially invest. However it is very very unlikely to produce a return on the estimated £144 billion of new debt to the Uk government, maybe as little as 5-10% of this figure will be new investment. Would not the £144 billion be better spent in public sector investment, i.e get 100% of the money invested just make more sense?
The second issue is the attactiveness of the UK as a place to invest in. Even if the taxes are lower, who is going to invest in a country that is weakening it’s infracture, reducing the productivity of it’s workforce and has a population with effectively lower wages who spend increasing proportions of their money on the relatively fixed costs of housing, energy and food, the basics of existence and whom will now have very little disposable income to spend in the economy. Or to put it another way who is going to invest in a country where the consumers have no money to spend on the products that investment will create?
We’ve already seen this since 2010. The wealthy top 5% had lots of cash, even if they didn’t they could borrow at near 0% interest rates, but this investment didn’t happen. Nothing has changed, so why is cutting taxes for the rich suddenly going to work now? Much of that money didn’t just sit in the accounts of wealthy organisations and individuals. It was spent on extractive rentierism, or buying property. This landlrdism has given greater returns than investments in companies that could raise productivity in a depressed market. In fact it has a negative effect on economies as businesses and individuals have higher land costs to pay, this reducing their consumption in the real economy. i.e people had less to spend so their was less consumption to support those who did invest in new products and services as few could afford them. which was why the potential investment went into property instead.
As someone who lives in the UK it’s so depressing. I cannot now as easily leave the UK to live in Europe, though many people already have and we face a rapdily declining economy with a weakening currency, seemingly without hope.
Yet hope remains. Firslty even the Tories are not convinced by this policy, it’s entirely possible they could vote down their own party’s budget and trigger an election and let the Labour party deal with the mess. Democratically this makes sense. The Tories are known not caring about Britain instead favour for feathering of their own nests and protecting the Tory party. It will be interesting. Alternatively we can re-build Britain, with independence for Wales and Scotland, new electoral systems and a fundamental reviews of economic policy, free from party political ideological dogma. i.e seek practical solutions rather than tribalism.
Squimple 