The drama about who is to be the next prime minister has been resolved for now, but I think it might be useful to think instead about what is the actual state of the country, and what can actually be done about it.
Many commentators are arguing that we are reaping the whirlwind of Brexit. That is true. Trade with the EU, our nearest neighbour, and therefore the place with the lowest shipping costs, has declined, by up to 25% according to some estimates. Supposed new deals with other countries are only rehashes of deals we already had, or as in the Australian case, disadvantageous for us. But I do not think Brexit is the only cause. We have to go back further.
A need to adapt
When countries appear to decline and lose their share of world trade, it does not mean that they get worse, just that others get better. Pre-Independence in 1948 for example, India was obliged to buy British cars. Now they own a large chunk of our car industry. Countries in our situation have to adapt, not wish things were as they once were, which unfortunately was one of the messages of the Brexit campaign.
Post-war reconstruction
I feel the real problems began after the end of World War ll. Being on the winning side gave us considerable pride, but also a sense of complacency. The fact that we had to borrow money from America was dwarfed by the feeling that we were a major player in the world. Britain also received the biggest chunk of the Marshall Aid programme, organised by America to help the European countries devastated by war. We only invested about a third of it in new industry, unlike many European states, but crucially spent a considerable amount on re-equipping our armed forces.
Partly as a result of this investment, European countries like Germany reconstructed and were able to overtake us economically in the 1950s. Meanwhile, Britain engaged on a military adventure in 1956 to occupy the Suez Canal zone in collusion with Israel and France without involving the United States. (The canal company had been owned by Britain and France but Egypt nationalised it.)
With the threat of international war looming, America compelled Britain and France to withdraw using economic pressure. This revealed the vulnerability of Britain’s supposed global role. Britain’s desire to continue to be important had got us nowhere while we had neglected industrial reconstruction.
The European option
Following the Suez Crisis Britain began to look at the European option. The Treaty of Rome, in 1957 founded the European Economic Community. Britain declined to join. By the 1960s the EEC as it was then called, was proving to be an economic success. Britain tried unsuccessfully to join for several years, finally succeeding in 1975 after a referendum.
Before this, in 1972, the Conservative chancellor, Anthony Barber, tried a ‘dash for growth’, rather similar to Liz Truss’s recent antics. There was a brief ‘Barber boom’ which led to a wage-price spiral and high inflation. In 1976 the then Labour government suffered a sterling crisis and had to call in the IMF to bale us out. Public spending was curtailed and there was industrial unrest leading to the ‘Winter of Discontent’.
Being in the EU was economically beneficial for Britain. During the 1980s, of course. Margaret Thatcher destroyed many traditional industries and encouraged the growth of the financial and service sectors. This led to increasing inequality between north and south.
The 21st century
Britain began the 21st century with an economy that was weak industrially, but strong in finance and services. It was also very unbalanced. Growth was sluggish, and the demands of the health and social care sectors increased as the population aged. Other countries had the same problem but were able to pay for it with a better functioning economy.
Because of our low growth rate the amount of money the government has had to borrow increased. Much of government debt is owned by pension funds and insurance companies, and over 25% is owned by overseas governments and investors. As any household knows, it is unwise to be too indebted and people will charge more if they think you, are a bad risk. This is what happened recently, and the effect on ordinary people is that the cost of borrowing and mortgages went up.
The way to solve this is to grow the economy so we are not so reliant on debt. The theory that simply cutting taxes and hoping rich people will invest the results here has little evidence to back it up. They might simply invest it offshore.
The other alternative is for the government to encourage investment in new industries, preferably in areas away from the south. This is what Joe Biden is doing in America and Labour is proposing in this country with new green energy initiatives. Borrowing money to invest is a bit different from borrowing to bale out the budget. Investing in industries which will make us a powerhouse for the green economy is a much more productive way to encourage growth and hopefully reduce regional disparities, than hoping rich people will invest.
I have tried not to be partisan. Governments of all stripes have not been able to solve our economic problems. Britain does need growth, but in a fair way that will reduce the economic north-south divide and aim to solve the problems of the future.
