That the UK economy needed to change in the wake of the 2008 financial crisis is something that most of the policymaking community (especially, it seems, elected politicians) and academic commentators (especially, as you would expect, critical political economists) were virtually unanimous on. We now know that, in practice, any change that has occurred has been relatively superficial. Even in the one area of economic practice in which policymaking elites have apparently been prepared to instigate radical changeâpublic expenditure âthe rhetoric has often failed to match the reality. As such, we are repeatedly told that a severe reduction in public spending and borrowing is necessary, but that the most significant cuts will occur in the near (or not so near) future. This is not to downplay the significance and impact of cuts in spending (notably local government) or entitlements (i.e., social security benefits) in some areas, but rather to suggest that what is most significant about the elite agenda on fiscal policy is not what it actually entails, but the narrative employed to justify what it might entail.
The central concept of this narrative has of course been âausterity â, a concept that has been so successful in attaining the status of common sense within post-crisis political discourse that its advocates rarely use the term itself anymore. Policymakers understand that few members of the electorate relish the implications of the apparent austerity agenda, yet also that the public accepts its necessity almost unthinkingly. But given that the thing deemed necessary amounts to something quite different to what is commonly understood as austerity, this book argues that the most important implication of austerity is its success in generating the illusion of change in fiscal management, and shielding from scrutiny the considerable effort by policymakers to actually prevent change in the way that the UK economy operates. The book develops this argument by offering an analysis of several key areas of UK economic policy and associated political processes, since the establishment of the coalition government in 2010. This introductory chapter outlines the analytical context of the bookâs content by exploring the relationship between economic growth and economic policy, and then briefly discusses the political and ideological context from which the austerity agenda has emerged.
Growth and Growth Models
The theoretical basis of the bookâs analysis is that the UK political economy is characterised by a discernible âgrowth modelâ, defined as the main sources of economic growth within the economyâinsofar as they are distinguishable from other capitalist economiesâand the orientation of political and economic institutions configured to enable the associated economic activities. In positing a co-dependent and mutually constitutive relationship between the political and economic spheres, the growth model concept is inherently associated with political economy as a form of analysis, and it is thus acknowledged here that its value rests upon the perceived efficacy of political economy in general. Such contestability is unavoidable. It should also be acknowledged that there are other approaches, broadly situated within political economy, that offer similar but alternative conceptualisations. The most obvious examples are the notion of a âregime of accumulationâ, associated with the Marxist regulation school (Jessop 1990), and the notion of âvarieties of capitalism â, associated with institutionalist political economy (Hall and Soskice 2001). To simplify enormously, the former places more ontological weight on capitalist production processes (while seeking to understand how institutions âregulariseâ these processes), and the latter emphasises the role of political institutions in determining an economyâs dominant activities. The growth model concept might be conceived as falling somewhere between these two approaches; indeed, it is assumed here to be broad enough to encapsulate both. This book also contends that all of the approaches discussed here are guilty, to some extent, of underemphasising the ideational realm of political economy (Berry 2011); the greater flexibility, in ontological terms, of the notion of a growth model makes it an exception, albeit, judged by the research conducted through this lens to date, only a partial one.
The growth model evident in the UK political economy in the period immediately before the financial crisis built upon long standing traditions within the UK economy and economic policy practice, while incorporating some novel elements related, essentially, to the management of post-industrial decline in many provincial regions. The economic importance of the finance industry, traditionally the âcuckoo in the nestâ of the UK political economy, increased as the City of London (which was increasingly integrated with Wall Street in the USA) came to benefit from the liberalisation of global capital markets and the persistence of a light-touch regulatory regime. This growth typified the growth of the services sector more generally, as the manufacturing sector declined throughout the post-war period, but the vast majority of service sector jobs were located in low value-added industries. The public sector became extremely important to the UK growth model during the 2000s, especially in Wales and the North of England, by way of mitigating de-development in these areas and stimulating consumer demand through the creation of public sector jobs. Household consumption was a significantly more important dimension of the UK economy than most comparable countries, but, given the relative lack of high-paying industries, was dependent upon household indebtedness, either directly through consumer borrowing or indirectly through the withdrawal of equity from a booming housing market (boosted by low interest rates, mortgage market liberalisation, and a chronic housing undersupply).
The persistence of the UKâs non-interventionist industrial policy , openness to foreign corporations, and financialised forms of corporate governance, a reversal of employment protection laws, and relatively high immigration contributed to many of the hallmarks of the growth model during this period, such as a significant trade deficit, the vulnerability of many regions and industries to exogenous shocks, and limited earnings growth for low- and middle-income households. A conservative approach to fiscal policy, which forms the raison dâĂȘtre of HM Treasury , the most powerful part of the state apparatus, was also strongly reasserted during this period. High levels of public services investment were only made possible by increasing tax receipts from the finance sector, and an enhanced role for private finance in the public sector (Berry 2013). The growth model was underpinned ideologically by the assumptions and prescriptions of âneoliberalism â. Colin Hay (2013) describes the model as âAnglo-liberalâ to signal both the long standing influence of a classical liberal ideology, and the affinity (and integration) between the UK economy and those elsewhere in the English-speaking world. However, it is crucial to note that few of its principal stewards were self-conscious adherents to such ideological categories. When considering the role of ideational phenomena in supporting and constituting the growth model, it is more accurate to speak of a small number of core concepts that have long framed UK economic statecraft, such as a quintessential commitment to individual property rights, influenced by both a liberal valorisation of individualism and a conservative valorisation of an unequal social order. Both of these traditions also help explain the UK polityâs support for the idea of a competitive marketplace as the organising principle of capitalism, which was largely uncontested during the decades immediately prior to the financial crisis. The specific commitment to property rights above all other entitlement-based claims was an often unspoken influence on policies that impacted upon housing, or which incentivised home ownership. The UKâs long standing openness to international trade and investment activity intensified during this period, manifest as a profound commitment to and positive representation of the apparent process of âglobalisationâ. The effective institutionalisation of many of these ideational commitments served to moderate left-wing political programmes, yet it would be wrong not to recognise the integral role of some social democratic ideas on the growth model, particularly as adapted under New Labour, notably the importance of welfarism in justifying the stateâs subsidisation of stagnant private sector earnings through tax credits.
The growth model was severely challenged by the financial crisis which peaked in autumn 2008, followed by a severe recession and sporadic recovery. Consistent GDP growth only returned in late 2013. However, even this upturn was associated with rapid population growth (chiefly due to immigration ); GDP per capita did not recover to its pre-crisis peak until the middle of 2015. The financial crisis was triggered by debt defaults in the sub-prime mortgage market in the USA. The UK bank Northern Rock had been heavily exposed to this market, and its collapse, alongside several American lenders, in fact helped to intensify the crisis on Wall Street, which led to a significant decline in value for all mortgage-backed securities, and eventually caused the effective insolvency of the entire Anglo-American banking sector as interbank lending ceased. It is impossible to know how significantly the crisis would have affected the major UK banks were they not so heavily exposed to American capital marketsâyet this issue is clearly moot, given that Anglo-American financial integration was integral to the role of the London-based finance sector within the UK growth model. Furthermore, we can be certain that underlying demand weaknesses in the UK economy started to materialise from the mid-2000s onwards, as wage stagnation placed an unsustainable weight on debt-based household consumption to fuel growthâan arrangement further strained by the need to raise interest rates to curb inflationary pressures associated with rising oil prices.
The Labour governmentâs decision to recapitalise the UK banking sector in late 2008 was a direct response to the grave and immediate threat to the sector. But it was also a key moment in a larger story about how integral the availability of cheap credit had become to the UK growth model, and how fragile the balance sheets of the banks enabling this scenario were. The policy of quantitative easing (QE), through which the Bank of England purchases UK government bonds with new electronic money, served the dual purpose of keeping the cost of government borrowing low, but also to artificially boost the value of other assets, such as company shares, to stimulate business confidence. Clearly, QE is an extraordinary policy which contravenes the conservative form of economic statecraft that had become conventional in the pre-crisis period. The banking bailout, followed by QE, meant that the UK finance sector was preserved largely intact, and the capital markets upon which it depends were shielded from the worst effects of the downturn. Yet it was immediately clear that the sector would struggle to serve as the motor for economic growth in the short to medium term.
The identification of economic growth as the ostensible objective of the economic and political institutions of which the growth model consists marks out the concept as more than simply a conflation of the Marxist regulation school and the varieties of capitalism approach. It follows that the key finding of analysis to date of the apparent failure of the UK growth model in 2008 was that it was a crisis of growth. The finding necessarily and deliberately contradicted the view expounded by policymaking elites, particularly the ascendant Conservative Party, that the crisis was of debt, and specifically public debt . It is perhaps reasonable to suppose that, if UK economic statecraft was attuned to the delivery of growth above all else, the clear failure of the economy to grow, as its main sources of growth were impeded, should have been elitesâ primary concernâand it is reasonable therefore to speculate whether the assumptions underpinning analysis of the growth model are unsound. Yet this paradox actually demonstrates rather well the analytical force of the growth model concept. Recognising a growth crisis would have required that an alternative growth model be forged. The closest elites got to this kind of agenda was the recognition that the UK economy required ârebalancing â, although this critique proved to be a fairly tame one (Berry and Hay 2014).
Clearly, if growth models were so easily disposable, they would be unworthy of the term. Growth models house patterns of accumulation, and forms of wealth distribution, that shape the political forces that ultimately determine which individuals and groups serve as the growth modelâs principal stewards. It is in this way that growth models become âinstitutionalisedâ. To recognise that there exists a crisis of growth, even while growth is blatantly faltering according to the model-consistent formulae devised to monitor it, would be anathema to the elites that owe their status to the successful functioning of the model. It is vital that the notion that growth models are oriented towards delivering economic growth is divorced analytically from the notion that economic growth is synonymous with prosperity and progress. To reiterate, growth models are configured not to create wealth in a sustainable mannerâalthough they may achieve thisâbut rather to maintain the statistical illusion of wealth creation, so that a given distribution of wealth can be maintained. The absence of statistical growth is therefore not as fatal to growth models as we might logically assume, in part because such scenarios do not necessarily undermine the wealth of the groups that sustain the growth model, and in part because this failure can be effectively obscured through the influence of elites over the production and dissemination of knowledge about the economy.
This is not to suggest that agents and alternative ideas are incapable of challenging the structures represented by the growth modelâbut to think that they may do so, or may only do so, at times of apparent crisis would be to misunderstand the complex interaction of structure and agency, and material and ideational, and indeed overlook the possibility that a declaration of crisis may serve the interests of defending the existing gr...