British live-style: Why Britain is so poor – and will get poorer

Pic.: You Tube

The Iran war is the shock that could spark an economic firestorm in Britain, ‘New Statesman’ writes.

We cannot afford our current standard of living. We do not produce enough of what we want – or enough of what the rest of the world wants – to pay for the things we cannot produce ourselves. Add on top of that a global economic crisis, like the US-Iran war, and the economy begins to buckle. As the world scrambles to secure fuel supplies, food, fertilisers, plastics and other essentials in its wake, we will struggle to secure our own supply. Even if we do so, we will have to sell off more of our businesses, our property, our future tax revenue to pick up the bill.

We have allowed ourselves to get into this position by forgetting the iron law of international economics: every country must pay its way. Ensuring this was the goal of politicians like Jim Callaghan and Healey. This is what maintaining our balance of payments meant in practice. It is the very heart of what it means to deal with the cost of living. And it has been forgotten by our current political class.

For 40 years, this issue has been banished from politics. Our economy is based on the myth that we can enjoy, in perpetuity, a free lunch. A lunch paid for by the savings and credit provided by the rest of the world to feed our insatiable appetite for new goods and services. It is a belief in consumption without consequence. The US-Iran war is not the cause of the crisis; this naïve attitude to trade is the cause. The war is just another shock to a decrepit system.

At its simplest level, the balance of payments is the sum of all the resources that we export to the rest of the world minus all the resources that we import from the rest of the world. This includes everything among the goods and services we consume every day, from the food we eat to the films we stream. However, it also includes the money we borrow from abroad and the dividends we earn from overseas investments, as well as a host of other financial flows.

If your economy is in balance, it means that for everything you draw on from the rest of the world, you are providing something of equal value. This does not represent a like for like exchange. We need refined oil for transport, but we can export accounting services to pay for it. If your economy is in surplus, like Germany’s, it means that the rest of the world is consuming more of your resources than you require from them. What you do with that surplus is up to you. You can save it for a rainy day, repay your debts or invest in your productive capacity. General government debt in Germany has fallen from 81 per cent in 2010 to 64 per cent today. This gives Germany much more flexibility in dealing with shocks and is funding a huge rearmament programme to deal with the growing Russian threat.

If your economy is running a balance of payments deficit, like Britain, you can do two things. One is devaluation. This is why the pound is now worth a sixth less than it was before the financial crisis. This pushes up prices at home for everything that we import, particularly food and fuel, and is part of the reason we all feel so poor. The other mechanism is more insidious: selling your assets to the rest of the world. It’s why from utility companies to iconic brands, 40 per cent of British business is foreign owned. It’s why a third of all government debt is in foreign hands. Politicians who celebrate our record levels of foreign direct investment do not understand that what they are actually cheering is the destruction of British capitalism. It is like selling your home to pay for weekly shop and claiming it is financial genius.

The accepted wisdom was that the only way to pay this new world of higher oil prices was to boost our productive capacity, which would reduce oil imports and increase national income to pay for more expensive imports while reducing the impact of future shocks. They accelerated production of North Sea oil not just to meet domestic consumption but to generate export revenues to balance our trade.

The irony is that today’s Labour politicians remain trapped in the intellectual framework of Thatcherism, a philosophy they claim to reject. In her 826-page memoir, The Downing Street Years, Thatcher references the balance of payments only once. The reason why she gave it so little attention is obvious. It would have been impossible to have implemented her political programme if she had been forced to run a balanced trade policy. Rolling back the frontiers of the state required a new politics of consumer consumption fuelled by cheap debt and tax cuts to keep her core vote happy enough to ignore mass unemployment and deindustrialisation.

Speaking about the overheating economy of the late 1980s, she let the mask slip, writing that persistent balance of payments deficits “worried me because it confirmed that as a nation we were living beyond our means”. Yet, under her leadership and ever since, we have been doing exactly that.

Business investment is falling, further reducing our productive capacity. Focusing purely on green technology was a mistake. We cannot just live off green technology. We need to boost production across the board, including fossil fuels, critical raw materials, machine tools as well as high-value services. However, the principle of shifting resources away from domestic consumption towards investment was sound. The government needs to rediscover this boldness and embrace a new politics of production.

The storm clouds darken with every new global shock. Only time will tell if the lightning from this Middle Eastern war brings economic conflagration – or some much needed political illumination.

...The English author cannot identify the main reason for his country's decline.

It's not just the economic policies of many governments since Thatcher, which have led to today's results. Britain's decline is, above all, the collapse of the British colonial empire, which the English plundered for centuries, enabling London to live comfortably and prosperously.

Now that era is over, there's no one left to plunder, but the English themselves are embarrassed to remember at whose expense they lavished their fortunes in the past. And their future is bleak and unpromising...

read more in our Telegram-channel https://t.me/The_International_Affairs