As we face attacks on living standards and stagflation, Dominic Alexander examines  how government policies, alongside the long term failure to invest and raise productivity, are leading to further attacks on workers

This week we have seen David Cameron and George Osborne line up in front of the Covid-19 inquiry to claim, in face of all the evidence, that austerity was necessary and did not damage the NHS’s ability to cope with the pandemic. Meanwhile Martin Lewis warned that the mortgage ‘timebomb’ has now ‘exploded’, as the Bank of England raised interest rates a full half percentage point to 5%, with markets pricing in further rises ahead. Inflation is certainly a major problem. Food inflation may have peaked, but at 16.5%, that still means horrendous rises. Core inflation rose from 6.8% in April to 7.1% in May. This is nearly double the equivalent US rate and notably higher than the eurozone’s rate of 7% rate in April, which came down to 6.1% in May. It is clear that the British economy is broken at a fundamental level.

Engineered recession

It has been repeatedly pointed out that inflation is not due to wage rises, but rather to supply-side problems, so suppressing demand through interest-rate rises is not addressing the causes. Yet claims of a ‘wage-price spiral’ get repeated. On Wednesday, Karen Ward, a ‘respected City economist’ on the chancellor’s council of advisers, claimed that the Bank of England, in her view, had to engineer a recession in order to push down economic demand. Despite denials from the Bank’s governor, Andrew Bailey, the rise to 5% makes it clear this is the plan.

To the extent to which there is a defence of this approach, it is possible that the UK has avoided recession thus far because of the spending of the wealthier minority. Britain is a grotesquely unequal society. Inflation is deadly for those on lower incomes, as rises in the prices of essentials make a proportionally greater impact on their household budgets than on those of the wealthier. Thus, while many people are being pushed to the brink by rising prices, the affluent can absorb them relatively painlessly, and carry on spending. Salaries in the business-services sector (better paid middle-class professions) have risen 8.8% to March this year, so unlike working-class and public-sector employees, inflation has not been biting so hard for this class.

 However, rises in interest rates are a blunt instrument, and the most pain will be borne by the less affluent households. As always in capitalism, the distribution of suffering falls heaviest on those lower down the scale, and the least able to bear it. Moreover, engineering a recession will again hit the working class harder than the affluent. Karen Ward claimed this was necessary to pressure employees away from asking for wage rises, as well as restrain businesses from putting up prices, but again, the pressure will be unevenly distributed across the economy, and, in an austerity-ravaged society, will affect most those who most need wage rises. Larger companies with dominant market positions will be less restrained from raising prices than smaller ones with weaker profit margins. This is a policy which puts the least of the burden on the richest and most powerful, and the most on the least. To repeat, what we are seeing is economic policy as class war.

The role of Brexit

This is a pattern that has been repeated in the UK for decades, as its economic trajectory has steadily tilted downwards since the 1960s. It is very likely true that the comparative extent of Britain’s inflation problem has been stoked partly by the effect of Brexit on supply chains and trade with Europe, and the weaker value of sterling internationally since the referendum. However, firms’ attempts to increase their profit margins are also part of the problem. In fact, they are a great part of it, as the Financial Times has noted: ‘According to the chief economist at UBS, we would typically expect about 15 per cent of inflation to come from the expansion of profit margins. Today, that number is closer to 50 per cent.’

The persistence of core inflation may be partly down to Brexit factors, but to focus only on that side ignores the fact of the long-term decline of the UK economy, which was happening while it was part of the EEC and then the EU. Rejoining the EU, as some are demanding, would not fix the long-term structural problems of the British economy, or prevent current profit gouging, nor would it stop Britain’s ruling class from using economic policy to wage class war.

A recent report from the Institute of Public Policy Research underlines that the key long-term issue is the failure of British capitalism to invest on anything like the necessary scale in comparison to other developed economies. In fact, the UK ranks lowest for investment among the G7 countries, and among the worst for investment in the group of 38 countries of the Organisation for Economic Co-operation and Development; only Poland, Luxembourg, and Greece are below the UK. The last time investment in the UK reached the median average for the G7 was 1990, while it fell to the bottom of the table by 2019. After the pandemic, other countries have increased their levels of investment faster than the UK, so the gap has been widening still further recently.

The failure of British capital to invest is surely the source of the UK’s persistent problem with poor productivity, which is 20-25% lower than in Germany or France, and is notably failing to recover from the pandemic. Poor investment in technology and R&D is part of this; UK investment here is one-third less than the OECD average. British capital is reluctant to invest, not just in fixed capital, but in labour as well; the UK has one of the highest shares of under-qualified workers among OECD countries, and is at the bottom of the table again in spending on ALMP (active labour market policies) by percentage of GDP. It is evident that being in the EU did nothing to wean British capital away from its long-term reluctance to invest. I’m not arguing that membership of the EU was the cause of this in any direct way, but it clearly was not the solution before, so it won’t be the solution in the future.

The shape of decline

British economic decline has been the source of unending argument for decades, but the shape of it is clear. Although by the 1950s, Britain had long since ceased to be the world’s leading industrial power, the economy was still balanced between manufacturing at 40% of output and services at 50%. It was the crisis of the 1970s that led to a conscious decision on the part of the ruling class to sacrifice manufacturing, in order to break working-class combativity and enable Thatcher’s neoliberal restructuring programme. The recession of the early 1980s resulted in the loss of one in four manufacturing jobs. By 2011 around 80% of British workers were in service industries and only 10% in manufacturing.

Paralleling today’s policies, this was a class-war strategy, whose main target was destroying the strength of the organised working class in the trade-union movement. The argument from neo-classical economics is that a country should concentrate on economic areas where it is most competitive, and for the most influential sections of the ruling class that was the financial-services sector in the City of London. The Thatcherite programme of privatisation and deregulation favoured the City above all, and fuelled the boom in house prices, creating today’s housing crisis, which blights the lives of millions.

Deregulation leads only to low-paid jobs, weak growth, and profits for the multinationals, whose wealth, as we know, completely fails to ‘trickle down’ to the rest of society. Following the free-market dogma – letting supposedly weak sectors fall by the wayside – became a self-fulfilling prophecy which has decimated whole towns and regions, and created a low-productivity, low-wage economy and the grotesque inequalities which are the root of the present crisis.

Marxist economists point out that finance is a necessary part of capitalism, and there is no neat division between a ‘good’ capitalism of manufacturing, and a ‘bad’ one of finance; the two sectors are mutually dependent and entirely intertwined. However, in the UK, we have a national economy that is now almost entirely dependent upon financial services, to the point that London has become renowned as a destination of choice for corrupt money and shady billionaires.

The capital that flows into London from the exploitation of people and resources across the world does not pool to the benefit of most people. In fact, working people largely suffer as a result of side-effects such as unaffordable housing and the over-concentration of jobs in London. The activities of the finance industry in the UK means the active misallocation of capital, such that investment in the FIRE sector (finance, insurance and real estate) means that less than 4% of financial institutions’ business lending goes to manufacturing. One study estimated that between 1995 and 2015, misallocation of capital accounted for a £2.7 trillion loss to the economy. The dominance of City interests not only makes ordinary people poorer, it is actually the cause of economic stagnation.

Tony Blair’s New Labour did nothing to reverse the malign dominance of the City, and even extended its parasitic reach through the use of private finance initiatives as a replacement for public spending. There were over 700 such schemes, whose capital value amounted £59.1bn in 2017, yet whose lifetime cost to the public purse will total £308bn. And still the call is for more involvement of private interests in public services. Starmer’s plan for a ‘Great British Energy’ company to fund renewable energy schemes will undoubtedly prioritise profits ahead effective green investment.

By the end of New Labour’s reign, the interests of finance capital had become the unarguable orthodoxy of economic policy, such that austerity for public services was the only possible response to the crisis caused by the banks’ own reckless behaviour leading up to the 2007-8 crash. The grip of City interest over the political representatives of the ruling class has also surely driven the Tories’ obsession with the dogmas of deregulation and free trade, which reached its abject nadir with the Liz Truss adventure. The damage done to market confidence in Britain by that escapade is likely as much a cause of the current situation as any other recently acting factor. Britain’s economic problems are squarely the responsibility of its blinkered and vindictive ruling class, which is desperate to retain something of its imperial past through the international weight of the UK’s finance sector.

As always, the enemy is at home, and it is our own ruling class. There is no economic saviour across the Channel. Our only path to fundamental change lies in rebuilding the fighting capacity of the working class on the ground.