Britain since New Labour came to power

Grant M.Nlle - Fri 16 Jan, 2004

...Britain since New Labour came to power...Britain also suffers from the same political and economic maladies that have befallen its transatlantic cousin...

In the post 9–11 era, Westminster has backed the US/UK "Special Relationship" to the hilt by participating in the invasion and occupation of Iraq as well as Afghanistan. Tony Blair, that muddled-headed internationalist of the centre-left persuasion, has used the War on Terror to reaffirm his country's post-imperial foreign policy role of playing Greece to America's Rome.

But far from merely sharing geopolitical preferences, Britain also suffers from the same political and economic maladies that have befallen its transatlantic cousin.

After 18 years out of office, the British Labour Party returned to power in 1997. The assent was abetted in part by tax hikes, macroeconomic mismanagement, and the general stodginess of John Major's Conservative government. Of greater importance to the 1997 general election results was Tony Blair's instrumental role in transforming his party's penchant for blatant economic interventionism into a pragmatic and centrist pandering organisation, rebranded "New Labour".
 
At the heart of the political makeover was Mr Blair's highly touted "Third Way", which promised to incorporate the best features of Clement Atlee's 1945 imposition of the welfare state on Britain and Margaret Thatcher's bid to roll back state power.

Britain since New Labour came to power: Moderation

Moderation was the order of the day in the first ‘New’ Labour government. Mr Blair scrapped his party's reputation for exorbitant tax and spend measures, opting to commandeer Tory policies instead. Indeed, the prime minister focused on modifying the British Constitution, participating in NATO's foray in Kosovo, and above all refraining from arousing the ire of centrist voters.

Her Majesty's government was aided in this endeavour by robust economic growth, which was largely driven by exports to an American economy at the apex of the boom phase of the trade cycle. Taken together, a prudent political strategy and an economy fuelled by monetary easing on both sides of the Atlantic returned Labour to power following the June 2001 general election with an even larger parliamentary majority.

Flush with victory, ‘New’ Labour then jettisoned its interventionist inhibitions and embarked upon a spending spree reminiscent of previous premierships...

Telltale signs of a statist agenda were discernible during Mr Blair's first term from 1997 to 2001 as the government launched its "New Deal" - headlined by the institution of a minimum wage. Britain's Chancellor of the Exchequer, Gordon Brown, deftly assumed the role of social engineer via his Byzantine system of tax exemptions and statutory contribution schemes, which served to further distort incentives and impair the operation of a free market.

In contravention of a 1997 election manifesto pledge that "New Labour will be wise spenders not big spenders," in 2001 Messrs Blair and Brown proceeded to posit massive sums of tax revenues into the public services. State entities, like the notoriously inefficient National Health Service - which accounts for a third of Britain's public service spending - received a dollop of cash that year 11% greater than the previous one.

The government's Office of National Statistics also indicated that total public spending for 2002 was 9% higher relative to 2001 - the fastest pace since Harold Wilson's profligate Labour government in 1975.

Britain since New Labour came to power: Labour's spending

Overall, when one includes the modest increases during Labour's first term into the calculations, national spending on health, education, transport, and the like is 40% greater than what it was prior to ‘New’ Labour's ascension to power in 1997.

Mr Blair's bid to modernise state-provided services by earmarking tax revenues for that purpose has resulted in scant improvements in delivery and satisfaction. Worse yet, Mr Brown has saddled the country with a burgeoning budget deficit, a mounting sovereign debt and a legion of newly minted bureaucrats.

British government statistics underscore the extent of Whitehall's expansion and the deficiencies of its policies. The volume of government service output from 1997 to the present grew by a mere 14% compared to the 40% increase in spending. In the span of one year - April 2001 to April 2002 - over 22,000 new civil servants were added to the government payroll, bringing the cumulative total to over 512,400. The pace of public sector hires exceeds the total increase in British employment by a factor of five.

As the public spending spree has accelerated since 2001, economic growth has slowed as America's appetite for British products has slackened. Concomitantly, activity in Britain's financial services and high technology enterprises, which account for a substantial proportion of the country's slumping industrial exporters, is subdued largely as a result of the puncture of America's stock bubble. Business investment fell by 8% in Britain during 2002 and declined yet again in 2003.

Although the UK posted the highest GDP growth rate among G7 (2.1%) countries and third highest in 2002 (1.7%), the results were well below the Bank of England's (2.5%) and the Treasury's (2.75%) trend rates of growth. In 2003, the numbers put Britain at the top of the tree again...yet capex fell to its lowest in 20 years, as a proportion of GDP. The driving force for GDP then? Rampant consumer borrowing and government spending.

Her Majesty's Treasury optimistically projected the government's budget deficit to exceed £27 billion or 3% of GDP in fiscal year 2003. Many private sector forecasters spotted early that the shortfall would increase to nearer £40 billion per year by fiscal year 2005. And so it came to be in 2003 - a total £37bn deficit.

Britain since New Labour came to power: Future spending plans

More troubling for the maligned British taxpayer is the budgetary chicanery implicit in Gordon Brown's future spending plans. In his spring budget last year, the Chancellor announced that government expenditure growth would drop from 4.5% per annum from 2002 to 2005 to 2.8% per annum from 2006 to 2008, allowing public services' budgets to grow by 3.5% per annum in the latter period.

However, as The Economist noted back in early October, substantial spending commitments have already been made for the NHS from 2006 to 2008, and the current pace of education spending (6% p.a.) is unlikely to be curbed. This portends an abrupt freeze in all other departments' funding growth if Mr Brown's budget projections are to be met.

If one knows anything about politics, then capping spending on transportation, defence - especially when playing No.2 in America's war on terror - and other services is simply unfeasible. [Leading to a shortage of appropriate body armour in the theatre of war, for instance.]

Britain now confronts the unsavoury prospect of tax hikes, better known as "making the pips squeak", and swelling budget deficits in the near term and possibly beyond. And even if the Tories can surmount their electoral difficulties, their position on public spending today differs little from Labour. The new leader, Michael Howard, said as much last month.

Meanwhile, apart from an increase of the repo rate from 6% in 1997 to 7.5% in 1998 and another brief increase at the zenith of the 1990's transatlantic boom, interest rates in the United Kingdom have fallen largely in tandem with the United States. Currently, Britain's repo rate stands at 3.75%, the lowest since the mid-1950s; the American equivalent is 1%.

To be fair, rationalisation has occurred within Britain's corporate sector. But the contraction of businesses and rectification of malinvestments that one would expect to occur in the bust phase of the trade cycle have been forestalled by the Bank of England's monetary easing.

As for Britain's households, debts are being amassed at a record clip. On October 29th, the Bank of England announced that consumer borrowing in September 2003 topped the previous all-time record. Britons tacked on £10.7 billion of debt that month, up 14% since September 2002. Mortgage lending led the charge, increasing by £8.8 billion in September, another record.

Britain since New Labour came to power: Consumer borrowing

Although the rate of borrowing has eased a little since, November and December both outstripped the previous all-time records set earlier last summer. And not since the late 1980s, when Britain last suffered from a housing price bubble and its subsequent puncture a couple years later, has the cost of acquiring a home risen so quickly. Meanwhile, unsecured lending, particularly in credit cards, continues to grow by over 10% at an annualised rate.

The most important factor in explaining the relentless consumer borrowing remains the Bank of England's interest rate tinkering. Growing increasingly concerned, albeit at the eleventh hour, about the unmitigated accumulation of household debts, Bank of England Governor Mervyn King and the Monetary Policy Committee raised interest rates by a quarter point when it met on 6 November, the first such rate rise since the early months of 2000.

"I have a horrible feeling that some people are in for a nasty shock,” said the chairman of Britain's Financial Services Consumer Panel, Ann Foster, “particularly those who took out mortgages in low-interest rate times. Some people have been borrowing to the limits because of high house prices."

But without self-inflicted financial fires to extinguish, where would central bankers find employment?

As for Her Majesty's government, it may want to take heed of the Conservative Party's travails amid the housing boom and bust of the late 1980s and early 1990s, which undermined the British middle class's confidence in the Tories' economic policymaking competency. History may repeat itself for New Labour in the twenty-first century, with Tony Blair being ignominiously remembered as George W. Bush's articulate patsy and as another Labour "tax and spend" prime minister.


Regards,

Grant M.Nülle
for the Daily Reckoning

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