My Lords, our economy is in deep trouble. Pace the noble Baroness, Lady Wheatcroft, this is not on account of Brexit, which the Chancellor barely mentioned. Though he touched on some of the problems—lack of technical skills, poor productivity and erosion of the tax base—his chirpy report on the performance of the UK economy in 2016 betrays a failure to recognise the systemic nature and scale of our predicament. Just as the dispensation of Bretton Woods, neo-Keynesianism and the corporate state hit the buffers in the 1970s, so the dispensation that followed, of neoliberalism, free markets and the small state, crashed in 2007-08.
In the 1950s we saw large improvements in living standards across society, the creation of great new public services and, for all the class consciousness of those days, a sense that we were one nation. What has neoliberalism brought us to? As corporate profits have risen, the share of income going to investment and labour has fallen. Higher productivity has not gone through to higher median pay, as the noble Lord, Lord Willetts, noted. Although the OBR reckons that our economy was growing at its maximum capacity in 2016, average earnings are forecast to be no higher in 2022 than they were in 2007, public borrowing is forecast for 2020 to be £30 billion more than was planned a year ago, and we face the prospect of austerity stretching to 2025. Our chronic current account deficit is now 5.2% of GDP. Spending per pupil on education, which is crucial to future productivity, is planned to fall by 7% in this Parliament. We have a growing precariat who know nothing of the Chancellor’s imagined “security and dignity of work”. The poor will get poorer with cuts to employment and support allowance and tax credits next month. We have huge regional disparities in prosperity and a fracturing United Kingdom. We need a new economic model, but not the ultra-neoliberal model envisaged by the Chancellor and the Prime Minister in their threat to turn Britain into an offshore haven of deregulation and low taxes.
The economic model of the last 40 years has been very nice for those with financial and property assets and high levels of skills. It has failed huge numbers of our people. Trickle down has not happened and very many of the “hard-working families” whom Ministers profess to support feel abandoned.
Governments have grovelled to attract footloose international capital. Corporation tax is due to fall again to 17% in 2020, while multinational businesses scandalously avoid paying tax. Policy has especially privileged finance, with tax rates lower on assets than on earnings. Top-rate tax relief on pension contributions, big reductions in inheritance tax and reduced capital gains tax for people selling their businesses have all benefited the wealthy while reducing resources for the public services on which most people depend. We have created a rentier economy and vast inequalities of income and wealth. Incentivising and deregulating finance has channelled savings not to productive investment, as free-market theory promised, but to an unstable, bubble economy.
The global financial crisis, under the shadow of which we continue to live, was caused not by excessive government deficits but by the recklessness of bankers let loose by the state. Bank bailouts in Britain rose to £133 billion in cash and £l trillion in guarantees and indemnities. Extreme fiscal austerity to pay down debt, easing only slightly now, has been accompanied by ultra-loose monetary policy. Low interest rates and quantitative easing have distorted the allocation of capital, apparent in the inflation of asset prices. The effect has been taken to an extreme in the housing market, exacerbated by policies of inflating demand while restricting supply. This has damaged the labour market and created misery.
It has been an illusion that the marketised state works better and costs less. Instead, we have seen administrative costs, professional demoralisation and public dissatisfaction all increase. Public functions have been handed over to commercial entities on long-term contracts, with information concealed from Parliament and the public under the spurious rubric of “commercial in confidence”, and poorly supervised by a stripped-down Civil Service. Government has become haplessly dependent on outsourcing contractors, some of which are a byword for accounting scandals and delivery failures.
Social care, the NHS and prisons alike are in crisis. The social security system is routinely operated by contractors both cruelly and inefficiently. The Chancellor intoned on Budget Day that “choice is the key to excellence in education”, defying the experience of the last 30 years that the values and dynamics of the market are no guarantee of quality in public services. What is certain is that more selective schools will mean more social division and more children left behind.
The failure of neoliberalism to create inclusive prosperity and economic justice, and the fear of parents that their children will be worse off than they are, are now generating a public revolt. Since the 1980s, citizens have abstained from voting in increasing numbers. When the Labour Party and the Liberal Democrats espoused neoliberalism, electors could see no essential difference between them and the Conservatives. Now, not just in the Brexit vote here but in the US presidential election, as in the last elections in Hungary and Poland, they have rejected the political establishment in favour of authoritarian populists. At least the referendum did not put Nigel Farage into Downing Street. Instead, as she entered Downing Street, Theresa May spoke rightly of burning injustice and her mission to make Britain a country that works for everyone. The recognition of that necessity could be the beginning of wisdom. We need radical thinking, however. Without it, both our economy and our democracy are in peril.