Of course, the rot set in well before David Cameron and Nick Clegg formed the Coalition Government in May 2010. 
As the Public Sector Net Borrowing chart shows, it was during Gordon Brown’s ill-fated premiership that the deficit increased massively. (The Public Sector Deficit is the difference between what the Government spends and what it takes in via taxes to fund that spending – the difference being borrowed.) To give them some credit, as the chart shows, the Coalition did bring the deficit down quite markedly in their first couple of years primarily via swingeing cuts in the public sector.
However, there are significant signs that the rate of decrease in borrowing may be slowing down. In December’s Autumn statement Chancellor George Osborne predicted that borrowing would be £108B this year, and £99B next year and just £31B in 2017-18. In his Budget last week, just 3 months later, Osborne revised those figures to £114B this year, £108B next year and £61B in 2017-18.
Hand in hand with this, Osborne was forced to revise December’s estimate of growth this year from 1.2% to O.6%. While it looks like the UK may just about avoid a triple-dip recession, the outlook for growth in the British economy is poor, with 2014 revised down from 2% to 1.8%. With the ‘Age of Austerity’ now officially extended from 2015 to at least 2018, it’s no wonder Shadow Chancellor Ed Balls shouts repeatedly that austerity isn’t working and that his Labour leader, Ed Milliband yesterday, in a speech in Birmingham, spoke of the Government having resigned itself to a ‘lost decade’ over the economy.
Of course, it isn’t Cameron and Osborne’s fault that the UK’s borrowing requirement spiked so highly in 2008-09 and 2009-2010. Nor, strictly speaking, is it Gordon Brown’s – other than that he and Tony Blair, in their spending review of 2000, moved away from the tight fiscal policy they had adopted from the previous Conservative Government and allowed public spending to increase. The result was that the mild surplus they had created was quickly reversed. Thus, when the world went into financial meltdown in 2008-09, Brown had no recourse other than to go to the markets and borrow heavily to keep the country in the style it had been accustomed to…and more than double the Public Sector Deficit in the process.
By 2010 no leading UK politician, other than Balls, was in any doubt that public sector borrowing had to be reduced. Even outgoing Labour Chancellor Alistair Darling championed cuts. The debate was not about whether to cut but how far and how fast. Labour, with their concern for the impact on the less well-off, advocated a slower reduction than Cameron and Osborne who opted for as fast and as deep as possible. Their concern was Britain’s reputation in the financial markets. Last month the UK lost its Triple A rating with leading credit agency Moody’s Investors Services. Balls was right: austerity isn’t working.
Austerity or growth?
Moody’s cited ‘subdued growth’ as one of the reasons for the downgrading.
A major problem with austerity – and something Cameron and Osborne don’t seem to get – is that you can only cut so far. What happens when there is little or nothing left to cut? This is part of the problem faced by Ireland, Greece, Spain and, to some extent, Italy as they struggle to meet the stringent reductions in debt reduction demanded as a condition of bailout by the German-dominated European Union. Since a large part of the bailouts come from the German taxpayers, it’s not entirely unreasonable that they should attach conditions to them. But how far does it go? Will a number of European governments end up stealing their citizens’ private savings to finance debt, as the Cypriot government proposed doing until its parliament was ringed with angry savers ready to commit violence upon their MPs if they had approved the proposal…?
Some see the Cypriot government proposal as a test for how such a strategy might be received elsewhere in Europe!
Last year new French president François Hollande proved a keen advocate of economic growth, daring to challenge the German mantra of austerity. (Since the Germans tend to be prudent spenders anyway and their juggernaut economy is said to be pulling back from a relatively minor slip in growth of 0.6% in the last quarter, the impact of an austerity programme on others is something they might find difficulty in appreciating.)
The problem is Hollande, the socialist, doesn’t really know how to stimulate growth. The French economy remains stalled.
Neither, it seems, does Ed Balls. Since 2010 he has championed such strategies as investment in infrastructure and housebuilding as stimuli for growth. Lately – and perhaps surprisingly! – Confederation of British Industries director John Cridland (2013a) has come to agree with him, calling for an investment of £1.25B to build 50,000 new affordable homes. After the Budget Cridland (2013b) castigated the Government for not doing enough on infrastructure.
The problem is that neither strategy in itself is a wealth generator – and it’s surprising, given his position, that Cridland doesn’t champion wealth-generating measures more vociferously. As he points out, investment in housing is a surefire way to kickstart the economy. It creates jobs, workers and their families are more likely to spend in the consumer society and affordable housing meets a huge social need. And certainly investment infrastructure is necessary if the economy is to grow, enabling people and goods to move around more easily. But neither strategy in itself will create sustainable growth.
The graphic above is adapted from the Henley Centre Model for Regional Competitiveness (2001). It shows clearly the relationship between the institutions of society and wealth generation through an export-driven economy. For sure, it’s a neat and overly-simplistic Functionalist model that addresses none of the social, moral and philosophical issues that a society faces such as distribution of wealth amongst its citizens. But, if a society in a late-Modern Capitalist world, doesn’t create wealth, then it is effectively dysfunctional. Road-building and house-building may create a trickle-down effect of people feeling more confident about spending which can have powerful short-term effect…but, in the long-term, like hairdressers, it is recirculating the same money within a closed economy.
For the institutions of society to be sustainable in the long-term, that society must earn as much as it spends. For it to grow wealthier in a sustainable manner, it must consistently earn more than it spends. In a chain of such economies inevitably there are winners and there are losers – the poor and the exploited. But the morality of that is for a discussion on the nature of Capitalism. Until Capitalism is superseded as the dominant economic system in the world, the UK needs to ‘play the game’ which means generating wealth to support its people.
A deficit in thinking
The big problem for the UK in playing that game is the poor quality of its leadership. Cameron and Osborne seem to be dominated by the BLUE vMEME in thinking in that efficiency is the only way to manage the deficit. Growth, for the most part it seems, can be sacrificed on the ‘Altar of Austerity’.
That Moody’s disagree with Cameron and Osborne on the importance of growth clearly hasn’t undermined their determination to stick to Plan A: austerity. Perhaps the reports of a second agency, Fitch Ratings, being about to take away Britain’s AAA on their scoring might give them pause for thought. Though probably not!
The unfortunate thing is that their much-vaunted Tory predecessors understood the importance of growth. While Margaret Thatcher reined in public spending viciously – in the 1979 election campaign she famously said: “You cannot spend what you do not have!” – she also liberated and encouraged business to make money. Indeed, wealth creation might be said to have been her mantra! Thatcher, at least in her public persona, was dominated by ORANGE (with a dash of RED ruthlessness and power-lust). There was, of course, a truly-terrible social cost outside of the South-East to her policies and it may be that she made the UK over-dependent on the financial services sector – and that in itself was a factor in the internal crash of 2008-2009. However, in overall terms, Britain recovered from the near-bankruptcy of 1976 and was on its way to becoming a wealthy country again – policies Tony Blair clearly saw fit to continue initially after being elected in 1997.
Perhaps a better model for Cameron and Osborne would be Thatcher’s sometime-nemesis Michael Heseltine. He clearly agreed with Thatcher that Britain’s old industries were unsustainable in a changing world increasingly influenced by transnational corporations who would site their manufacturing operations in the cheapest labour source – see The New International Division of Labour. But he understood the crux of the Henley Model – that export is king in the world of buying and selling and so championed niche and specialist manufacturing, arguing that British design was amongst the best in the world. While doubt has been since been cast on just how effective some of his strategies (such as the DTI Enterprise Initiative) really were, there can be little doubt that Heseltine’s championing of industry and exporting enabled an element of British manufacturing to change, survive and prosper. If Cameron these days sometimes talk up manufacturing as playing a role in any growth that might occur, he has Heseltine to thank for that. While he may have had some very different beliefs to Thatcher about strategy, Helsetine clearly was driven by ORANGE, innovating against the odds to further British industry.
The paucity of quality thinking amongst the Tory strategists these days is shown clearly in Cameron’s delusion that the private sector would grow so fast it would give jobs to all the public sector employees made redundant in the cuts. According to David Blanchflower in March 2012, in the previous year 44,000 more public sector jobs have been lost than private sector jobs created. In the 3 years of the Coalition Government, little has been done either to increase inward investment (from abroad) or to boost exports.
Cameron and Osborne’s BLUE strategies to cut public spending may be successful to a notable degree so far in cutting the requirement for public borrowing; but, in addition to doubts about how much further it is possible to cut, there is the ‘elephant in the room’ that hardly anybody is talking about and which the Cameron-Osborne tactics are not going to even scratch: the size of the National Debt. Both Moody’s and Fitch have expressed concern about UK debt. 
As seen from the chart left, this was stable but not decreasing under Blair. However, it has grown considerably since Brown’s spike in public sector borrowing 2008-2009 and has continued to increase under Cameron. This, put simply, is because each year of deficit and the interest that goes with it increase the overall size of the debt – estimated in December 2012 to be around 89% of gross domestic product (GDP). Some commentators, such as MoneyWeek magazine, believe the size of the National Debt is simply unsustainable and that Britain going bust sometime in the next decade is inevitable. This is probably unlikely, given that other Western or ‘westernised’ countries are carrying far higher debt-to-GDP ratios. For example, Japan has a national debt of around 194% of GDP whilst that of Italy is more than 100%. The US national debt reached 100% of GDP in November 2011. In the aftermath of World War II, the British National Debt reached 180% of GDP.
What is clear, though is that, if the National Debt can’t be reduced in the short term, then British GDP has to increase.
The social cost of debt reduction
BLUE cut-back thinking on its own is simply not enough for the economic problems Britain faces. It requires at least ORANGE thinking. So, if Cameron and Osborne can’t manage that, they have to go.
There are certainly signs that a number of Tory MPS are profoundly dissatisfied with Cameron’s leadership. There is even talk of a leadership challenge prior to 2015. There will certainly be one if the Tories are unable to form a majority government the day after the election. While Cameron and Nick Clegg appear to have formed a reasonable working partnership, many Tory backbenchers hate the alliance with the Liberal Democrats. Their natural preference under pressure is to lurch to the right and try to appeal to voters on xenophobic issues such as immigration and the testy relationship with the EU – appeals that hit on PURPLE’s susceptibility to prejudice & discrimination against those not-of-our-tribe.
A slide down the Spiral is not, however, what the UK needs. Such slides on a macro-cultural level tend to lead to extremist groups gaining ground – eg: the rise of the Golden Dawn neo-fascists in Greece. In a country like the UK, where there are large Muslim populations, a slide down the Spiral may also lead to increased fundamentalism amongst such communities.
What the UK needs is at-least ORANGE thinking in economic issues. However, there needs to be thinking more complex than that if a real economic recovery, along the lines Margaret Thatcher piloted, is not to produce the kind of huge social costs British society is still paying for more than some 30 years after Thatcher first started implementing her policies.
While ORANGE is well-suited to driving economic performance in a Capitalist global system, its workings need to be managed from a 2nd Tier perspective. This meta-thinking can anticipate the effects of economic and fiscal actions on communities and modify them and/or compensate for the unavoidable side effects. 2nd Tier overviewing is also necessary to keep ORANGE on the right tracks and prevent it deviating into the kind of loans and investments which led to the burst bubbles of 2008-2009.
Unfortunately there seems to be little sign of 2nd Tier thinking amongst our political leaders. Without it, regardless of which party is in power, the mess is likely to get worse, not better.