With a focus on inequality, this post looks at the UK economy in the recent past, the current state of affairs, and the general direction we may be heading in under Theresa May.
Economic reform has been on May’s mind for a while.
Believing in free markets doesn’t mean we believe that anything goes, and it doesn’t mean that capitalism, regardless of the form it takes, is always perfect. Where it’s manifestly failing, where it’s losing public support, where it’s not helping to provide opportunity for all, we have to reform it.
How did we get here?
The form of capitalism in the UK since 1979 has been the deregulated free-market variety, also known as neoliberal ideology. Privatisation of state industries, financial sector deregulation, and labour market deregulation (mainly by weakening trade unions) have been the key changes, as well as reductions in tax rates, particularly for the higher paid.
Theresa May has supported these policies. They have shifted the UK from a post-war mixed economy of public and private sector provision (1945-79) that delivered low inequality, towards a free-market economy dominated by private sector provision (1979-present) that has delivered high inequality. Figure 1 shows how the richest 1% in the UK have doubled their share of the nation’s income from 6% in 1979 to 13% in 2012.
As well as low inequality, across the advanced capitalist countries of Western Europe (including the UK), Japan, and the US, the post-war period (1945-73) had high levels of income growth (3.8% per capita) and economic stability, becoming known as the ‘Golden Age of capitalism.’ As British prime minister Harold Macmillan said in 1957, “you’ve never had it so good.”
In the early 70s however, income growth slowed to 2% (1973-79) and inflation rose sharply, creating the conditions for a change of direction brought in by Thatcher’s free-market government in 1979 (and in America by Reagan’s 1981 administration). As well as high inequality, the neoliberal era has seen modest income growth of 1.8% (1980-2010) and increased economic instability with the 2007/8 financial crash. It was the financial sector deregulation that led to the crash, the biggest since the Wall Street crash of 1929.
Despite the inequality and economic instability, the post-crash UK Conservative-led governments (2010-present) have ploughed on with the same approach, extending deregulation and privatisation, and ‘rolling back the state’ by imposing austerity cuts to welfare support, local government, and public services. Cause and cure have been the same ideological principles. Inequality has not reduced since the crash and the economic system remains vulnerable to further crises.
The current state of affairs
Nearly a decade after the crash, it can at times still appear that “anything goes”, as May put it. So far this year, the former Chancellor George Osborne has hailed Google’s 3% tax payment (instead of 20%) as a “major success”, our own British Virgin Islands has been revealed as the most used off-shore tax haven in the Panama Papers leak, and we’ve discovered that Sir Philip Green asset-stripped BHS of millions of pounds and then sold it to a serial bankrupt for one pound, resulting in the collapse of the company, 11000 redundancies and a depleted pension pot for the 20000 members.
It looks like failure but nobody has done anything illegal. Sir Philip Green and Google, just like other companies, are pursuing profit for owners (‘shareholder value’) not necessarily what’s best for workers or customers. In doing so they are operating legally within a tax and regulatory regime set up by the UK government. Although “leadership failures and personal greed” are part of the problem, the key issue is that our deregulated free-market system empowers business owners (shareholders) and senior management far more than workers or customers. Wealthy individuals and corporations can legally get away with much more than they could in the post-war mixed economy.
For ordinary workers it’s a different story, as the BHS employees understand. Trade unions, weakened by repeated legislation, are less able to protect rights and pay. Many jobs are insecure and temporary. When out of work the welfare support is minimal following austerity cuts. Real wages (income from work adjusted for inflation) have fallen by over 10% since the financial crash. This puts Britain joint bottom with Greece. Avoiding tax by hiding your money in a secret company on the British Virgin Islands isn’t really a viable option.
Where are we heading under Theresa May?
Despite being an integral part of David Cameron’s neoliberal governments, Theresa May can see that free-market capitalism is failing, that inequality is a problem, and that austerity is unjust: “It wasn’t the wealthy who made the biggest sacrifices after the financial crash, but ordinary, working class families.” She also seems to be drawing on the most influential explanation of the Golden Age of Capitalism: that the most effective approach is to have a mixed economy combining the positive features of both capitalism and socialism, together with appropriate regulation and government intervention.
It’s time to reject the ideological templates provided by the socialist left and the libertarian right and to embrace a new centre ground in which government steps up – and not back – to act on behalf of us all.
– Theresa May, 2 October 2016
Under David Cameron the government did step back – allowing the market to decide outcomes. May’s decision to promote government intervention in order to “act on behalf of us all” could be seen as an attempt to return to the mixed economy – and lower levels of inequality – of the post-war period. She has even gone as far as to praise Clement Attlee, the Labour prime minister who had “the vision to build a great national institution [the NHS in 1948].” An example of one of the positive features of socialism, the NHS has been successful and egalitarian.
It can feel like a distinct, even radical, departure from Cameron. Yet May has said the Conservatives “will always believe in free markets”, has so far been very quiet about whether Cameron’s austerity policies will continue or not, and is full of praise for her “excellent Health Secretary” Jeremy Hunt (appointed to Health by Cameron in 2012). Hunt co-authored a book on privatising the NHS, is embroiled in a long running labour dispute with junior doctors and their trade union (the BMA), and is implementing the biggest NHS funding squeeze since the service began at the same time as cutting services.
Despite the widely acknowledged funding crisis in the service, May has told the head of NHS England that there will be no extra money or support since the government has “given the NHS more than … they said they wanted for their five year plan [2015-20].” The head of NHS England maintains that for three of the years “we didn’t get the funding we requested” and in one year (2018-19) will actually have a reduction in funding per person. The funding squeeze and cuts will continue.
In contrast, responding to the potential reduction of car production at Nissan (due to the post-referendum uncertainty around tariffs and costs to business), May has personally reassured the head of Nissan about her Brexit negotiation approach as well as providing training, grants, and research to support the car industry. As a result Nissan has announced the production of two new car models.
May steps up for private business but steps back for public services? That’s not intervening “on behalf of us all.”
For public services like the NHS it looks like continued austerity. Some say May is in denial about the funding crisis, others suggest she knows exactly what she’s doing: breaking a “great national institution” before privatising it. The key Brexit pledge of an extra £350million a week for the NHS seems like a distant memory.
May’s apparent conversion to a more pragmatic, non-ideological, interventionist approach could be more style than substance, presenting herself as different to Cameron but only tweaking his approach, rather than delivering fundamental change. Or as with the NHS and Nissan, it could be selective intervention based on her own political beliefs. If only minor changes are made around the edges of the system, or if big business is supported and public services underfunded, then inequality is likely to continue or possibly rise even more.
The next post will look at some specific areas where the economic system is failing and what plans Theresa May has to improve things.
Sources of information
Ha-Joon Chang (2014): Economics: The User’s Guide.
10 Downing Street by Sergeant Tom Robinson RLC/MOD, licensed under OGL
Figure 1 by David Clensey, the common good
BHS by Mstott4, licensed under CC BY-SA 4.0
Inequality cartoon by Harley Schwadron, www.cartoonstock.com
Theresa May, licensed under CC BY 2.0