Economics and Business
Chapter seven reviews the post-financial crisis period and the Coalition Government years, taking us up to 2016 and Brexit. In 2010, just as in 1979, Treasury orthodoxies and small-state politicians found a policy consensus on hacking back public expenditure. The only thing that mattered was eliminating the structural deficit. The trouble was that 2010 was not 1979. There was nothing to replace the impact of public-sector, local council and welfare cuts. There were no great state assets to sell off. The various forms of pseudo-Keynesianism in place stopped operating, as credit creation, big finance and the housing market ground to a halt. International investors (or Ponzi-scheme players) saw a busted economy and took their money elsewhere. When the muted ‘recovery’ did come it was not U but K shaped. The main government interventions – QE, ultra-low interest rates and housing market boosts – primarily benefited big corporate and wealthy asset owners. Rentier capitalism in Britain flourished.
In 2012-13, the Coalition, stuffed full of ‘posh boy’ asset owners, declared the economy was recovering. It clearly was for the bankers, property owners and big companies of London and the South-East. International investors were being tempted back too. The news media, as London-bound and small-state minded as the ministers and CEOs they reported on, were happy to agree the nation had turned a corner. But, all the while, salaries were not recovering, housing costs were shooting up, precarious working conditions were on the rise, and regional communities and economies were collapsing faster than ever. Then, came the EU Referendum. Unsurprisingly, the Remain camp’s lead argument, that the economy would tank if the UK left the EU, provoked a general ‘so what’s new?’ shrug of the shoulders. Anything the Treasury presented suddenly seemed no more or less plausible than any lie put out by the Leave side. The rest is Brexit.
The Treasury is one of Britain’s oldest, most powerful and secretive institutions. But all too frequently it has escaped public scrutiny when it comes to investigating the ups and downs of the UK economy. More often, it is depicted as a saviour, repeatedly rescuing the nation’s finances from the hands of posturing Prime Ministers, powerful special interests, and the combustions of world financial markets. It is a bedrock of government stability in times of crisis.
However, there is another side to the story. The Exchequer, more than any other institution, has shaped modern Britain’s economic system. In between the highs there have been many lows, from botched privatizations to dubious private finance initiatives, from failing to spot the great financial crisis to contributing to ever-growing regional imbalances and economic inequalities.
Davis’s book goes behind the scenes to offer an inside history of the Treasury, in the words of the chancellors, officials and civil servants themselves. It shows the failings as well as the successes, the personalities and the thinking which have shaped Britain’s economy since the 1970s. Based on interviews with over fifty key figures from the last five decades of Treasury life, it offers a fascinating, alternative insight on how and why the UK economy came to function as it does today, and why a paradigm shift and institutional rethink is long overdue.
The chapter eight postscript briefly explores the evident decline and recovery of the Exchequer. Brexit and the period after, marks several things: the collapse of four decades of economic policy consensus, the breakdown of the British Establishment, and a direct hit to Treasury power. A political credit crunch paralysed the system for three and a half years and marginalised the Exchequer. The 2019 victory of Boris Johnson’s reckless opportunists completed the delayed political and economic ‘revolution’.
Ironically, the combination of Johnson’s populism and a devastating pandemic have restored the Treasury. Both needed the institution’s crisis management and capital-raising abilities. And the Exchequer has obliged, finding hundreds of billions to hold up the economy; something we were told for ten years was impossible. Here we are back to government intervening in the economy in a way it hadn’t done since the 1970s, and the Bank of England doing what they denied was possible before, creating hundreds of billions of pounds out of thin air (MMT in all but name). What comes next, radical paradigm shift, return to an unworkable system, or decline into something worse, is anybody’s guess
The conclusion pulls together the varied findings from different chapters to give a long view perspective on the changes and continuities over the period as well as on the consequences that followed. It ends with some brief speculative proposals for change.
Chapter two begins with the crucial shocks that bludgeoned the Treasury: near bankruptcy, the 1976 IMF bailout, and the arrival of the 1979 Thatcher government. The new administration was intent on tearing things up starting with the removal of top Exchequer mandarins. But while the Thatcherites knew what they wanted to get rid of (nationalised industries, unions, Keynesianism), they weren’t so sure of how everything would happen or what would replace state economic forms of management.
That left a rapidly reconfigured Treasury to begin drawing up the map. Behind the selloffs and political battles, changes in the Exchequer were very significant. One of these was the strengthening of the institution itself, giving it considerable new powers over other Whitehall departments. Another was the rise to power of a new generation of monetarists and economic modellers within the institution, replacing the Keynesians and generalists of before.
These combined changes effectively placed economic policymaking firmly in the hands of the Treasury at the same time it was rejecting the idea of state economic management altogether. So began the long road, not simply towards free markets, but to the end of government macroeconomic policymaking. Fiscal policy was put on autopilot while monetarist policy came to be reduced to interest rate setting, a lever eventually handed over to the Bank of England. Micro became the new macro.
The question was what was going to replace all that state-managed industrial activity and multiple forms of national economic investment and stimulation? All these things were still needed to keep the economy growing but who or what was going fill the gap? Chapters three, four and five provide the answers.
Britain’s railways are broken. They no longer serve the needs of passengers or the general public. Train services are unreliable, too often delayed, too expensive and complex to use, and marred by strikes. This book takes the reader on a journey to discover how years of under-funding and privatisation have deprived the public of a usable rail system. It is only through understanding how Britain’s rail system has been broken that we can know how to fix it. As it shows, fixing the railways means going beyond simple demands such as ‘renationalise the railways’ and asking instead ‘what do we want the railways to be for’? It is only by attempting to answer this question that we can rebuild the rail system into something that genuinely meets people’s needs. The answer is far from straightforward, but this book argues that, if they are to be useful, the railways must be part of the solution to the twin crises of the climate emergency and social inequality. This means significant increases in government investment, but the current state of the railways stems largely from successive governments’ unwillingness to properly fund them, mostly to protect the wealthy from tax increases. Given the uneven distribution of political power in Britain and the rigidity of public policy, those who want to see the railways fixed have no choice but to fight to take rail policy out of the hands of the political and financial elite who have led us into this mess.
Chapter three argues that one gap-filler was big finance. Successive Thatcherite Chancellors, including Nigel Lawson, John Major and Norman Lamont, as well as several junior ministers, all had pre-political careers in the London’s financial sector. The same can be found when looking into the background of Cecil Parkinson and others who managed the DTI. Thus, when looking for guiding inspiration as to how to usher in the new economy, all these individuals were very much influenced by their prior professional experiences in the City.
Ultimately, many of the nationalised industries were not simply privatized, they were handed over to the control of shareholders in the London Stock Exchange. Likewise, a series of financial regulatory changes, corporate governance reforms and tax shifts, continually benefitted the financial sector at the expense of UK industry. New Labour had their own reasons for continuing the trends. The consequences were a massive expansion of UK finance and an equally rapid contraction of manufacturing.
Chapter six focuses on the great financial crisis of 2007-08, when everything fell apart. The crash sucked in many countries, but the UK economy was hit particularly hard. The banking crisis revealed the larger problems of its Ponzi-scheme style economic model, built on growing private and public debt and reliant on an over-sized financial sector and fickle international investment. Although the Treasury was to appear the nation’s saviour, the institution was also culpable for helping shape and then shore up such an unbalanced and unstable economic system.
The key question that occupies the chapter is why no substantial paradigm shift followed. Whatever version of capitalism that had been operating in the UK was no longer working. Even the super-rich of Davos, OECD and IMF technocrats, and the Queen of England, could see that. Neoliberalism had hit its wall. Keynesians and other heterodox economists came out to cheer on the new economic revolution. And then … nothing. But for a raft of new banking regulation, arranged by mild-mannered technocrats, it was status quo as usual. Governments everywhere absorbed their failing banks, loaded up their debt, and flushed trillions in government-issue monopoly money (QE) around the failed Ponzi-scheme system.
Given the problems outlined so far, how can passengers hold the railways to account? Partly in tacit recognition of huge passenger dissatisfaction, the rail industry has introduced a range of compensation schemes for delays. However, train operating companies pocket the difference between the compensation provided to them by Network Rail and the huge amount of compensation unclaimed by passengers, and this provides little incentive for improvement. Compensation culture also encourages passengers to see the broken railways as a personal, consumer rights problem, rather than a structural problem with collective impacts. Compensation does not fix the railways. For that, collective political organisation by passengers is required. Passenger campaigns have enjoyed some success over the years, most notably in making rail line closures politically toxic. However, the more traditional campaigns tend to be characterised by voluntarism and conservatism. They bring undoubted improvements to the railways, especially in the upkeep of smaller stations, but are ineffective in forcing more fundamental change. Recently, a range of smaller movements have achieved victories, some of which have cost the rail establishment dearly. These point to strategies and approaches – such as fare strikes and integrating campaigning across public transport modes – which, on a grander scale, could start to force the rail system to be fixed.
The Introduction introduces the setting for the book – a delayed train from London Euston – and the characters the author meets on the way. Meeting the other passengers reminds the author of the key questions that Britain’s broken railways poses to passengers, which this book seeks to answer. Before delving into the answers, the book provides a whistle-stop run-through of the railways’ history, which helps set up the exposition of recent developments in the main body of the book. This considers the railways’ evolution from private steam-operated services competing with each other (principally) for freight traffic, to the consolidation of the system as rapid expansion and competition proved economically unviable, to temporary nationalisation under war governments and, later, the creation of British Rail, as the railways became a secondary, state-subsidised transport system, subservient to investment in, and use of, roads by motor traffic. The Introduction ends with the privatisation of British Railways in the mid-1990s. Throughout, it is demonstrated that all post-war governments have had a problematic relationship with railway subsidy, and the unrealistic desire to make railways operate on commercial lines has mired rail policymaking to this day, leading to a rolling and ever-increasing crisis of provision.