It’s not the economy, stupid

Why wasn’t the economy an issue in Britain’s recent General Election?

Many commentators argued that the strength and stability of the economy – those ‘historic’ 50, now 51, quarters of continuous expansion – and an accompanying sense of wellbeing, pushed the economy down the agenda. Others added that chancellor Gordon Brown’s ability to present himself as a competent economic manager – legitimately or otherwise (‘he was just maintaining the momentum started by the Tories in the mid-1990s’, several claimed) – has removed Labour’s traditional liability compared to the Tories in the electorate’s eyes.

But there is a deeper reason why the economy didn’t register at this election. It is the consequence of the principle of ‘there is no alternative‘, otherwise known as TINA, and the abandonment of any intellectual alternative to capitalism since the end of the Cold War in 1989. This point was made in an interesting article by The Times (London) columnist Anatole Kaletsky in the May issue of Prospect (1).

Prior to the 1990s, people and politicians regarded the economy as important – but this was not because of a heightened awareness of economics per se, or of interest in relative capabilities in economic management. It was never the case that narrow economic determinism settled the outcome of elections. There have been many General Elections where the incumbent government lost during times of economic prosperity, or won during economic hardship.

Rather, the economy was important because it expressed alternative ideologies to the market and to capitalism. While the pre-1990s Labour Party couldn’t be described as ‘anti-capitalist’, it did take a critical stance on the market system. The two big parties were seen to be on opposite sides of a political contest about how society should best be organised.

Today the lack of contestation reduces political economy to narrow economic management. There are only nuanced party differences, and these amount to whom can best present themselves as competent administrators. The acceptance of a technocratic approach to government is illustrated by the broad agreement that Brown’s best act as chancellor was his first – giving away the setting of monetary policy to an independent Bank of England. Brown’s reputation for onerous micro-management and regulation also derives from a neutering of political economy, even if this is generally seen as less positive.

In this election, there wasn’t even much difference between parties’ policies on the size of the public sector and levels of taxation. Despite some huffing and puffing on the issue, and that famous pair of £35billions that got thrown around, in the end there were few significant differences. All parties promised to spend more on public services, in a more efficient and less wasteful way. They all accepted that they would have to rely on higher tax revenues, but hoped they could avoid putting up taxes at all or by much.

As an aside, it is not inconceivable that the Tories could rhetorically have pushed a clearer ‘smaller state’ alternative to Labour – something that was such an important part of their ideology in the past. Although past Tory governments failed to deliver much in this area – John Major left Number 10 in 1997 with government spending at pretty much the same level (about 38 per cent of gross domestic product) as when Margaret Thatcher first arrived there in 1979 – at least the Tories used to have some conviction. The £4billion tax cut promised by Tory leader Michael Howard and chancellor Oliver Letwin was a rather timid and defensive echo of the past.

So long as the contours of politics remain the same, it is unlikely that anything much will change in four years time. Anticipation that the economy may weaken, and that Brown’s image will tarnish (whichever Downing Street house he is working from), won’t manage to resurrect the status of ‘political economy’. That requires a fresh start in public affairs, and the rise of a politics of progressive social transformation.

What are Britain’s economic prospects in the third term? Two things stand out. First, the fortunes of the British economy and employment are more than ever outside the sway of Westminster, Whitehall and the City. This is not because of any diminution of state power in the age of globalisation, or the new ravages of global competition, which are neither as novel nor as pronounced as they sometimes seem. Rather it is the continuation of a long-running trend forcing Britain to become the most internationalised of the old industrialised economies.

Being the oldest capitalist economy Britain ran into the market system’s barriers to sustained development earlier than anywhere else. This has been driving British capitalism overseas for well over 100 years, as it sought to compensate for domestic economic difficulties by generating sales and profits elsewhere. Ever since, British economic performance has rested on punching above its weight in foreign trade and foreign investment. For example, by the end of the 1970s overseas investment income accounted for one tenth of total gross national income, peaking under New Labour at 14 per cent at the turn of the millennium.

During the 1990s, Britain has also benefited from a surge in service exports to the rest of the world, driven primarily by a doubling in the relative importance of the overseas earnings from the financial and business services sector to about £50billion by 2003. It is overseas financial institutions based in the City that sustain Britain’s prosperity, just as it is Japanese and other foreign plants that now carry out all of British car production. British national wealth would be a shadow of itself without a world economy to provide capital, markets and remittances.

Britain’s more pronounced internationalisation means that it has benefited as much as any old economy, and more than most, from the relatively benign climate of the past 15 years – which has included more subdued economic cycles, and shallower world recessions. But at some time the huge underlying consequences arising from developments in the US and East Asian economies, and especially the imbalanced relations between the two, will catch Britain up in the backwash.

Second, it is probable that the UK economy will slow anyway over the next few years. The economic cycle is more muted but it is not dead. More importantly, while there are no definite limits to credit expansion, the credit-fuelled spending that has been another important stabiliser in Britain – and elsewhere, including importantly the USA – cannot keep up the momentum forever. The easing up in consumer credit growth that we have already seen in Britain, with some premonitions of the same occurring on the other side of the Atlantic, will slow things down across the economy.

This will make it even less likely that Labour can meet its public spending plans without those much predicted tax increases – either explicit or by stealth. The more important consequence is that Blair and Brown can’t pull off the same pump-priming boost given to the economy since 2000 by fiscal easing. From 2000 to 2003 the fiscal balance of government income and spending moved by seven per cent of GDP, from a four per cent surplus to a three per cent deficit. This level of extra state support that helped the UK avoid even technical recession can’t be repeated in the next couple of years. The government will therefore have less room to manoeuvre when troubles occur.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000 (buy this book from Amazon (UK) or Amazon (USA)).

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(1) ‘Apolitical economy’, Prospect, May 2005