Brian Burkitt, Pudsey CLP and University of Bradford, presents an alternative to Gordon Brown's neo-Thatcherite economic agenda.
The British economy faces two immediate problems, one international and the other domestic, both of which threaten Gordon Brown's objective of creating a stable economic environment. First, the widespread devaluations in Asia will put the UK balance of payments under pressure and, second, the increase in interest rates since the General Election will reduce investment, cripple industry and generate a higher, non-competitive exchange rate. Consequently all recent economic forecasts predict that growth will fall sharply in 1998 and 1999, possibly precipitating a recession and certainly lying below the 2.5% level at which unemployment will again begin to increase. These problems can only be resolved by a radical socialist strategy.
The meltdown of the so-called "Asian tiger" economies could affect Britain through financial contagion, whereby the loss of confidence in the currency markets of Asia spreads to those in the developed world. However, the most certain and damaging impact will be the spillover effects upon world trade and UK economic growth. This impact has yet to be felt; thousands of Asian companies will go bust and millions of Asians will lose their jobs. The collapse of incomes and currency values in Asia will cause British exports to decline in their fastest growing markets of recent years, while cut-throat competition from devalued Asian exports will hit world markets.
The key to the Asian effect is Japan, since its economy produces twice as much wealth (£2.8 trillion per annum) as the rest of Asia put together. The Japanese economy is currently in its sixth year of stagnation, but since 1995 the Japanese yen has been devalued by 50%. As a result, Britain will shortly be flooded with more Japanese goods, while our manufacturers will find increasing difficulties in selling abroad. Consequently the British balance of payments will deteriorate dramatically over the next year.
The Asian economies are squeezed between Japan's stagnation and the competition of China. China has devalued its currency by around 70% since 1993, forcing down other Pacific currencies. Thus Malaysia has devalued by 12%, the Philippines by 16%, Indonesia by 22% and Thailand by 31%. In the face of such intensified competition, the IMF has warned that the $23 billion trade surplus which western industrial economies enjoyed with East Asia in 1997 will turn into a $29 billion deficit in 1998. Britain, with an overvalued pound, is particularly defenceless in the face of cheaper Asian exports, unless the Bank of England cuts interest rates. Otherwise the spectre of deflation will haunt and hurt the UK economy in coming years.
As an election-winning ploy, the New Labour leadership pledged not to increase taxes, but failed to point out that keeping taxes down meant interest rates would be increased. So instead of implementing an economically coherent and socially just policy of tax increases upon the better-off, Labour has presided over interest rate rises that stifle investment.
The current relatively modest consumption "boom" cannot be sustained because the UK's investment lags far behind its competitors. Indeed investment actually fell between the third quarters of 1996 and 1997 (the latest figures available), while manufacturing investment dropped by 4.4% in the third quarter of 1997. The Bank of England's high interest rate policy deters investment, while lower investment reduces the long term rate of growth. In a negative double-whammy, interest rate increases push up the exchange rate of sterling, thus pricing UK exports out of world markets and sucking imports into Britain.
It was remarkable to see a Labour government, elected with a huge majority, within days relinquish power over monetary policy to an unelected quango, the Bank of England. At every stage over the last century, the Bank has pushed for high interest rates and a high exchange rate for the pound, a major factor in Britain's decline from being the workshop of the world to an economy dependent on the service sector.
Despite the widespread assumption that independent central banks generate low inflation, academic research suggests that no causal relationship can be established. However, it does show that since 1962 economies with independent central banks suffered deeper recessions on average than those without. Independence makes it hard to achieve co-ordination between fiscal and monetary policy, in addition to the risks to economic growth and the danger of an overvalued pound. People will lose their jobs unnecessarily, because Gordon Brown is abdicating responsibility for controlling inflation to the Bank of England. Given their deflationary bias, it is imperative that effective democratic accountability be imposed upon central bankers.
On their current strategy the Labour Government and the Bank of England risk turning economic slowdown into recession. The public sector borrowing requirement will rise once unemployment begins to increase, creating pressure for cuts in welfare expenditure that would reduce Labour's electoral support and deeply divide the Party. An alternative socialist policy is urgently required: its essence is to cut interest rates, while raising taxation on high incomes, dividends and profits. The resulting boost to government finances would enable an increase in welfare provision to the poorest, while meeting manifesto pledges on class sizes and NHS waiting lists. Interest rate cuts, balanced by tax rises for the wealthy, would stimulate economic growth, but more importantly, meet the labour movement's basic objectives of creating full employment, eliminating poverty and reducing inequality.
If the Labour Government could repeat the achievement of Lloyd George's 1909 "Peoples Budget", in raising the revenue needed for its economic and social policies by taxing the rich without increasing the fiscal burden on most voters, it could enjoy as long a period of rule as the Edwardian Liberals.
A socialist programme to achieve this objective entails:
As some £190 billion daily is currently traded on the London forex market, such a tax would raise considerable sums. If speculators sought to avoid the tax by moving to offshore havens, their tactics could be prevented by exempting all currency transactions not undertaken through a registered exchange from legal status. Consequently unregistered offshore debts would not be backed by the force of law.
If New Labour continues upon its current course, it will retard the economy's progress, move still further from full employment and freeze the pattern of ever greater inequality bequeathed by Tory administrations. There is, however, an alternative socialist strategy available that would increase economic growth, create jobs and meet at least some of the requirements of social justice that the labour movement was created to achieve. The choice lies with the Labour Government, but all who cherish the movement's traditions must use all the avenues open to them to influence that choice in a socialist direction.
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