Britain’s Economic Miracle
In April 2002, following a budget speech that marked five years in office as Chancellor of the Exchequer, Gordon Brown was voted in a MORI poll to be the most popular Chancellor for 30 years. At the time, it was not difficult to understand why - after all, he had managed to sustain economic growth above the european average, and provide a period of the lowest unemployment figures for many years - achievements he was keen to remind people of at every opportunity.
He had also managed to keep Labour’s 1997 election promise of not raising the dreaded Income Tax (although he had raised the standard contribution rate of National Insurance, and increased the overall tax burden by several percent). These achievements were unquestionably impressive for a Chancellor who had no training or background in economics and whose education and past experience had purely been in politics until 1997.
How has Brown been so successful when other Chancellors have failed so miserably in the past? How has he managed to outshine his predecessors to such a degree? The full story of the economics involved is currently emerging on a daily basis, and the consequences of such prudent policymaking and execution are becoming ever more clear.
Many if not all of these various nuggets of information warrant delving into in greater detail, but for now we will just examine some simple measures of success that we find associated with the British economy today.
Gordon Brown and more widely the present Labour administration have been successful in achieving a very low level of unemployment throughout their term. This has been due in no small part to having spent vast sums of money on public services, resulting in the employment of a great deal more staff in various civil service organisations around the country. In fact, while during the years 1992-1998 public sector employment fell by around 800,000, Brown has reversed that trend and increased the public sector by around 100,000 staff per year every year since. This obviously helps to keep unemployment figures low but also costs the country a great deal of money, so much so that the annual deficit in the public finances has increased from 1.5% of GDP in 2002 to the present level of 3.6% in 2005, or more than double in three years.
The continued growth of the economy is another large part of the success of Gordon Brown. British people clearly feel that they are better off financially than in the past. Consumer spending has remained high enough to keep companies in business, in contrast with the seemingly long gone days of recession in which businesses were going bust left right and centre. The wealth that exists in the economy to pay for goods and services surely has been maintained, if this was not the case then what would the source of all this money be? Well the answer to that question is debt. Personal indebtedness in Britain is increasing at a rate of around 10% per year, and in April 2006 reached £1,191bn. (The main beneficiaries of this increase are, of course, the banks.) As long as the economy can remain healthy thanks to consumers borrowing more and more money, the threat of recession will be easily avoided. But debt has an unfortunate side-effect that many people in modern Britain appear to have forgotten, which is that it must, one day, be repaid.
A consumer boom, and all the luxuries it provides, has been facilitated to a large extent by cheap borrowing i.e. low interest rates. One of Gordon Brown’s first actions in 1997 when he came to office was to give the Bank of England full responsibility for setting interest rates, the percentage which determines the cost of borrowing money and hence drives the degree to which consumers are willing to take on debt that is offered to them by lenders. Brown set the Bank a target to maintain inflation at an annual rate of 2%, in order to keep at bay the traditional dangers of boom-and-bust, and instead ensure a steady and controlled long term period of economic growth. Thanks to the careful management of inflation within or around this 2% target, the Bank have been able to give us a sustained period of some of the lowest interest rates in living memory. All the time, the cost of necessities purchased by the average family has remained within this 2% annual growth target, and refrained from spiralling out of control as can often happen when a supply of borrowed money is made cheap and plentiful. In fact the supply of money (a measure commonly known as M4) is now increasing at a rate of 13.5% every year, the highest rate since 1990.
Some things, of course, have increased in price faster than others. Take, for example, council tax. Every home in the country has to pay council tax, there is no choice in the matter, and therefore it would certainly come under my definition of a necessity. Council tax has increased at an average rate of 7.7% over the past 5 years. Another example is the price of petrol. Many if not most people own cars and use them to get to and from work. But far from staying within the target level of 2% inflation, the price of petrol has actually increased by 12% in the past year. And finally we have that other favourite household bill, electricity and gas. In the past year, this has in fact increased by an average of 28.2%! That is an incredible 14 times the size of the government’s 2% inflation target.
How on earth, given these huge increase in the price of these three necessities, has the level of inflation been kept steady at around 2%? The answer is very simple. The revised measure of inflation, the Consumer Price Index, which was devised by Gordon Brown in 1997, does not include any of these items. Meanwhile, real inflation is clearly above 2%, as the ever increasing prices of oil, gas and electricity demonstrate. Wage inflation, on the other hand, remains steady at around 4%.
So the value of your savings, and the purchasing power afforded by your wages, are being eroded every day. Meanwhile, the amount of personal debt in Britain is increasing at the rate of 10% per year. These trends cannot continue, and history tells us that situations such as ours can only have one outcome. Gordon Brown has led Britain sleepwalking into a disastrous situation, carefully covered up by a combination of media spin and fiddled figures.
Welcome to Britain’s economic miracle.
