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Socialist Review Index (1993–1996) | Socialist Review 170 Contents
Socialist Review, December 1993
From Socialist Review, No. 170, December 1993.
Copyright © Socialist Review.
Copied with thanks from the Socialist Review Archive.
Marked up by Einde O’Callaghan for ETOL.
- This is Britain’s third major recession since 1970. It
has been the longest post war recession so far. In 1991 the economy
contracted by 2.2 percent and in 1992 by 0.6 percent. Although the
recession is officially over, the best estimates of current growth
are well below the estimated optimal growth of about 2.5 percent per
annum, so there is still a ‘growth recession’.
- After every recession since 1970 unemployment has bottomed
out at much higher levels than before. One estimate says that
unemployment will not fall below around 2.5 million, and that is on
the government’s fiddled figures.
- The Tories blame Britain’s economic difficulties on the
world economic recession. In fact, amongst the advanced
industrialised economies Britain and the US were first into
recession in 1990. The temporary economic boom generated in the rest
of the EC by German unification helped to offset the depths the
recession reached here. The recession in the rest of the EC is now
threatening to limit economic recovery in Britain.
- Britain’s economy has particular problems caused by
government economic policy and partly reflecting Thatcher’s
failure to reverse long term weaknesses.
- The Lawson boom, a period of high but unsustainable growth
which gave rise to the talk of an economic miracle, preceded the
recession. It was caused by tax cuts for the rich, the deregulation
of the financial sector leading to an explosion of credit, and
interest rates kept deliberately low after the stock market crash in
October 1987. The result was rising inflation and a ballooning
balance of payments deficit – the excess of imports over exports.
To attract funds to finance the surplus of imports over exports
interest rates doubled between 1988 and 1989.
- Underlying these factors was the failure of the Thatcher
government to reverse the relative decline in manufacturing
industry. Between 1979 and 1987 manufacturing output rose by 67
percent in Japan and manufacturing employment by 7 percent. In the
UK output grew by 0 percent and manufacturing employment fell
by 27 percent in the same period.
- In the recession of 1979–81 British manufacturing
industry suffered even more than during the 1930s: manufacturing
fell by as much as 19.6 percent. Between one fifth and one quarter
of the manufacturing sector’s equipment and capacity were
destroyed and 1.7 million jobs were lost.
- Net investment into manufacturing industry between 1979 and
1990 was virtually zero. On the other hand there was an explosion of
investment in financial services. The share of investment in plant
and machinery that went to financial services rose from 11.7 percent
to 29.4 percent which in turn reflected a more than threefold volume increase.
- Lack of manufacturing capacity meant the Lawson boom was
bound to be choked off by rising inflation and a balance of payments
deficit. It also means any economic recovery based on a boost to
domestic spending will be limited by the same problems, particularly
a burgeoning payments deficit. Uniquely the economy was still
running a deficit of £12 billion in the very depths of the recession.
- British membership of the Exchange Rate Mechanism of the
European Monetary System made the recession worse. Britain entered
in autumn 1990 to reassure the financial markets of the government’s
anti-inflationary resolve. But the exchange rate was too high,
depressing exports. German inflation led to the collapse of the East
German economy, an upsurge in government borrowing to try to prop it
up, higher inflation and much higher German interest rates. This
meant British interest rates had to stay even higher to peg the
pound to the Deutschmark. Very high real interest rates prolonged
- The feeble recovery of the economy is largely attributable
to yet another failure of government economic policy – the
collapse of British membership of the ERM on ‘Black Wednesday’
in September 1992. The pound fell in value boosting export
competitiveness, and interest rates fell relieving some of the
burden of debt in the economy.
- It would have been a miracle if Britain leaving the ERM had
not boosted the economy to some degree. However the economy is still
weighed down by high levels of personal and corporate debt built up
in the 1980s. A sustained consumer led recovery seems unlikely in
the near future. And if it came, lack of manufacturing capacity in
Britain would threaten an unsustainable balance of payments deficit.
- The government is clearly hoping for an export led
recovery, but 60 percent of exports now go to the EC. The EC is
hitting the depths of recession with manufacturing output collapsing
and unemployment set to exceed 20 million.
- Japan is also now suffering severe financial and economic
contraction. Britain attracted 50 percent of Japanese inward
investment into the EC in the 1980s – the one manufacturing
investment bright spot for the government. This external boost to
the British economy is unlikely to resume for the foreseeable future.
- On top of everything else the government is struggling with
a huge budget deficit – the gap between government spending and
revenues – which is likely to top £50 billion this financial
year. This is higher than every other G7 country except Italy.
- The budget deficit is the product of tax cuts for the rich,
the length and depth of the recession which has cut income from
taxes and boosted social security payments, and the more general
flair the Tories have had in slashing spending.
- The government is pledged to cut spending and raise taxes
to reduce the budget deficit. But these could backfire if they choke
off recovery, as slower or even negative growth will simply increase
the budget deficit.
- With the exception of the Japanese stock market which has
more than halved in value and shows no sign of recovery, major stock
markets have been rising quite strongly in recent months. The two
principal reasons for this are falling interest rates and the hope
of economic recovery. The US market has reached values last seen
just before the crash of 1987. But stock markets have begun to look
much shakier. In the US interest rates are on the turn as fears of
inflation rise and because there are insufficient savings to meet
government deficits in the US and elsewhere. More acute financial
instability is a strong possibility.
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