Consciousness of Sheep
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After years of Tory neglect, a Labour government is elected on the promise of invigorating Britain’s flagging economy and changing the way things work. But months later, that same Labour government is engaging in a raft of austerity cuts forced upon it by the underlying economic realities. Not 2024, but 1964… ironically at the high point of Britain’s post-war boom.
In large part, the crisis stemmed from an example of the ‘sunk cost fallacy.’ Where other western governments (particularly Japan and West Germany) had used Marshall Aid dollars to rebuild their war-torn economies, the British Labour government chose to use the money to rebuild its military (then spent decades claiming that the UK had not received any aid from the USA). The aim being to prop up an empire that was long past its use by date and which had become an economic liability in the second half of the nineteenth century.
The Tory governments that followed repeated the mistake, throwing good money after bad propping up an unsustainable empire even as the domestic economy fell into relative decline. And the process was compounded by the post-war Bretton Woods monetary system which had fixed the UK pound at an excessive $2.85, rendering British exports ever more expensive on international markets.
In those circumstances, the post-war boom was a double-edged sword. Yes, as Harold Macmillan had famously quipped in 1957, the British people had ‘never had it so good.’ By the early 1960s, Britain had become a consumer society, with ordinary households buying up white goods like washing machines and refrigerators alongside small cars, televisions, package holidays and vacuum cleaners… a growing proportion of them imports. And there’s the rub. Because the growth in consumer affluence created a balance of payments crisis which saw the UK’s foreign reserves dwindle as British exporters struggled and failed to compete.
The incoming 1964 Labour government had promised to unleash the ‘white heat of technology’ to propel Britain back to greatness. But within months – and refusing to contemplate cutting military spending and ditching the remnants of empire – the government was forced to raise taxes and cut public spending in a desperate attempt to curb living standards in the hope of destroying demand for imported goods.
It failed. Although, remarkably, with the Tories even less popular, Labour won an even bigger majority in 1966. But they still faced the same problem… which boiled down to the pound being grossly over-valued compared to the state of the UK economy. And after years of austerity cuts, in 1967, Labour was forced to devalue the pound anyway. But only by 10 US cents, far less than the pound should have been devalued. So that the balance of payments crisis raged on for the remainder of the decade.
Things changed in August 1971, when the Nixon administration ‘temporarily’ ended the Bretton Woods system. Thereafter, currencies simply floated against each other with markets determining their relative values (although the 1974 agreement that oil would trade solely in dollars allowed the USA to maintain its ‘exorbitant privilege’ of exchanging paper for goods). And while dollar inflation gave the appearance of a rising pound, the general trend was downward.
Neither the 1970-74 Tory government nor the 1974-79 Labour government could arrest Britain’s industrial decline in the face of rising energy costs – including the 1973-74 oil shock – and growing industrial unrest. Only the arrival of North Sea oil and gas in significant volumes in the early-1980s allowed the Thatcher government to bring an end to Britain’s old industrial base and replace it (probably unplanned) with a financialised economy tied to the banking and finance corporations in the City of London.
North Sea oil and gas revenues allowed long-term unemployment to be hidden behind the facade of Incapacity Benefit (which, during the Thatcher years, acted as an early retirement pension for the over-50s) even as government could cut taxes and privatise public assets to usher in the debt-based boom of the 1990s and early-2000s. Offshoring, meanwhile, allowed British consumers to continue buying consumer goods made overseas on the understanding that the dollar returns from banking and finance would pay for it all.
If fossil fuels were infinite, this would have been the situation inherited by Keir Starmer’s Labour Party in 2024. But things have taken a downward turn since. Starting in 1999, when production in the UK sectors of the North Sea peaked, Britain has been slowly engulfed by an energy crisis. By 2005, the UK had become a net importer of oil and gas, even as growing reliance on intermittent wind and solar electricity made the country increasingly dependent on imports from its European neighbours. The concurrent economic weakness made the UK particularly vulnerable to the 2008 crisis – the saving grace being that Britain had not joined the Euro so that, despite having worse debts than Greece, it could continue to print and borrow its way out of the immediate crisis.
So long as governments didn’t do anything really stupid, like locking down the economy for two years, voluntarily disconnecting from cheap imported energy from Russia, and making the City of London unsafe by stealing private Russian assets, they might have maintained some room for manoeuvre. But, of course, the Tory government – cheered on enthusiastically by Labour – did all of those things. So that, on taking office in July 2024, Labour inherited an economy wholly incompatible with its modernisation aims.
Like its 1964 predecessor, the incoming Starmer government faced a financial problem. This time, however, it has manifested as a foreign investment/government bond crisis rather than a balance of payments (aka ‘current account’) deficit (although the UK has a growing one of those too). That is, investors no longer believe the UK is a safe place to invest for the long-term and so insist on an ever-higher interest rate. So that the government now spends a pound of every ten pounds of tax revenue just to pay the interest on the debt.
What the two governments do have in common though, is that broad GDP growth can be counterproductive. If the economy grows at a rate that allows wages to rise, then consumption will increase. In the UK’s heavily import-dependent economy, that translates into more imported goods being consumed, more inflation and so more demand for foreign currency to pay for it. That is, more government borrowing on international money markets and/or a further devaluing of the pound… especially if the government tries to print its way through the crisis.
All of this is likely to be academic by the autumn, when Trump’s energy crisis hits the UK in the form of much higher energy, fuel and food prices which will, in turn, curb demand for discretionary (mostly imported) goods anyway. But it does point to what may need to be done by a future government (i.e., after the current shower have worked out which of the Titanic’s crew is going to negotiate with the iceberg) in the event that we survive the coming energy and supply chain shock. Since the days of global complexity and just-in-time supply chains are coming to an end, a future government is going to have to both boost what remains of the UK’s export industries while simultaneously supporting import substitution… something which was tried (and largely failed in the 1970s). Because in an energy and resource-constrained future, much of what cannot be made locally is not going to be consumed at all.
As you made it to the end…
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