Sunday, 27 June 2010

Leaving Fantasy Island ... and Blair & Brown's Reality

Dan Atkinson recently provided a devastating analysis of Blair's Britain* - a hollow kingdom where we make nothing, but believe anything...

We all know what the Germans are good at. They do precision engineering: all those quietly humming washing machines and sleek cars. We also know that Germany is a country in serious trouble, failing to embrace the need for flexibility in the tough new global environment. We know this because Gordon Brown has told us many times over the past ten years that the European model is washed up. Germany was so abysmally competitive last year that it ran a record trade surplus and was the biggest exporter of any country in the world.

In the palm of Blair's hands... On Fantasy Island there are booming public services, low prices and millions of jobs. But Britain plc is actually surviving on hedge funds, hairdressers and celebrities.

We also know what the Japanese excel at. In Tokyo and Nagoya there are world-beating electronics companies. We know, too, that Japan, like Germany, is a country in serious trouble, persisting with an industrial model that may have worked in the Sixties and Seventies but is an anachronism in 2007. Poor Japan ran a trade surplus of about £50 billion last year as it found a ready market in China for its exports.

And so it goes on.

The French have an ultra-competitive manufacturing base that specialises in food and drink; the Scandinavians are a dab-hand at mobile phones; the Americans do computers, aircraft and films. So what is Britain good at? That?s simple. We count the money and we do the bull****.

Ten years after Tony Blair's arrival in Downing Street, Britain is a place whose default mode for earning its crust is to employ the gift of the gab.

The Germans may have the engineers, the Japanese may know how to organise a production line, but the Brits have the barristers, the journalists, the management consultants and the men and women who think that making up jingles and slogans to flog Pot Noodles is a serious job.

It has the deal-makers in the City who make fat fees by convincing investors to launch bids for companies, and the corporate spin-doctors who say that tycoon X will make a better fist at running Ripoff plc than tycoon Y.

It has the publishers and it has the 'film development' companies, some of which have actually been known to produce a film.

The four iconic jobs in today's Britain, according to the Work Foundation think-tank, are not scientists, engineers, teachers and nurses but hairdressers, celebrities, management consultants and managers.

In fact between 1992 and 1999, our fastest-growing occupation was hairdressing.

Before he came into politics, Blair was a lawyer. Brown's sole experience of the private sector was as a TV journalist. When you get down to it, this is a country that tried to make its living from talk, talk and more talk. But how has Britain fared when it comes to paying our way in the world?

Have the city traders and Groucho Club regulars earned enough to make the UK's age-old problems with the current account a thing of the past?

Sadly not.

Britain still has a world-class pharmaceutical industry and still makes a tidy sum from selling arms, often to unsavoury regimes.

Yet the deficit in visible trade in goods - stuff we make - was more than £60 billion in 2006.

Trade in services - accountancy, insurance, banking, architecture, advertising - brings that figure down but for the past decade, the only thing that has made the deficit manageable is that Britain has been earning more money on its investments abroad than foreign investors have made here.

One way of looking at Britain is as one big off-shore hedge fund churning speculators' money while asset-strippers draw up plans for the few remaining factories to be turned into industrial theme parks.

The truth is that after ten years, Blair's Britain is a fantasy island.

Mr Blair is currently obsessed with his legacy, but it makes most sense to think of him as a dreamer, a fantasist capable of getting millions of people to fantasise along with him. This is not simply a matter of the routine duplicity practised by politicians, but of living and believing a number of literally fantastical propositions.

Even in 1997 there was a strong dose of fantasy, with Mr Blair urging us to vote New Labour because (a) exciting, radical change would follow and (b) things would stay much as they had been. This should have been a warning sign but most voters ignored it. New Labour's fantasising became even much more ambitious. It is possible to identify seven deadly daydreams that  marked Blair's period in office.


The first daydream is the debt fantasy, in which vast amounts of consumer and mortgage debt can now be racked up either because the borrowing is secured on a home that has inflated in value, or because credit-card debt can be painlessly reduced or written off entirely through Labour's 'quickie' bankruptcies.

And billions of pounds of Government borrowings can be kept off the books by claiming them as part of the private finance initiative - a sort of hugely expensive mortgage scheme for public assets.

Between January 2000 and December 2005, the total outstanding on mortgage debt rose by 94 per cent and that on consumer credit by 65.8 per cent.

So what happened to earnings during that time? They rose by just 22.4 per cent.

Perhaps it is not surprising that more and more people are declaring themselves insolvent to escape their debts. In 2000, there were 21,550 individual bankruptcies in England and Wales, and 7,978 individual voluntary arrangements (IVAs), an alternative to bankruptcy in which some of the debt is written off. In 2006, there were 62,956 bankruptcies and 44,342 IVAs, increases of 192 per cent and 456 per cent respectively. More extraordinary is the fact that they have occurred during an economic boom rather than a grinding recession.

Scarcely less fantastical was the Government's own attitude to debt. Gordon Brown pledged that the State's budget for day-to-day spending (as opposed to investment) would be either in balance or surplus "across the economic cycle".

Given the Chancellor himself decides when the cycle begins and ends, he has been able to move it around to make the books add up. Initially, the cycle began in 1999 but then was moved back two years to allow Mr Brown to help himself in 2005 to long-spent money from the late Nineties.

When does the cycle end?

Take your pick - the Chancellor has said variously March 2006, March this year and in 2009.


The second fantasy concerns that sometime-never future, we will all work for the 'knowledge' economy, sometimes described by Ministers as the 'creative' economy.

Here, the line is that India and China may bag all the routine production work but Britain will do the clever stuff, whether investment banking, advertising, the media, law, the arts or writing witty scripts for Channel 4.

Now, it is quite true that Blair's Britain has given great importance to these lines of work. Self-promotion is the stock-in-trade of the iconic figures in our 'post-industrial' economy, whether the management consultant or the talent-free television celebrity.

But there is no good reason to believe that 'creativity' is going to close our yawning balance-of-payments deficit with the rest of the world, which has gone from being roughly zero when New Labour came to power to £43.4 billion in 2006.

France, Germany and Japan make things that people wish to buy. We do not. It is as simple as that.

Despite the beaming encouragement of a guitar-strumming Mr Blair, our cultural exports are flailing in an ultra-competitive world. In 2005, we imported more TV programmes than we exported, running a deficit of £332 million.

And what of music, a major money-spinner since the days when The Beatles conquered America?Well, the best seems to be behind us, with the U.S. market share of British acts tumbling from 32 per cent in 1986 to 0.2 per cent in the early part of this decade. The British band that attracted most attention in America last year was not Arctic Monkeys but The Who.

At home, numbers employed in advertising and design have gone down. In fact, there are three times as many people working in domestic service than in advertising, television, films, video games, the music business and design put together. Remarkably, there are about four million people 'in service'.

Britain is not a creative economy, but a cooking, cleaning and call-centre economy in which millions are toiling away in low-paid, low-skilled jobs.

Even were the state of our education system not to make the emergence of a knowledge economy seem rather less likely than an ignorance economy, it is laughable (and derogatory) to imagine that people in developing countries somehow lack our creative spark.

It is almost the mirror image of the Victorian notion of Western practicality and Eastern mysticism.


New Labour's third fantasy concerns prices and earnings. There is no doubt that, across the board, a number of previously costly items and services have fallen in price and are sometimes provided free.

This includes telephone services, clothing, home-entertainment equipment, airline travel and food.

But many of the price falls of recent years have not been quite what they seemed.

In May 2004, economist David Hillier identified a new phenomenon - "stealth inflation" - in which the quality of goods declines along with the price. Mr Hillier identified shirts, garden furniture, napkins, matches and bin liners as examples of products getting even-thinner and less durable.

He could also have cited towel rails apparently made out of silver paper, kettles and CD players that break down shortly after the guarantee expires, and dishwashers that are good at washing dishes provided the dishes have been cleaned first.

Furthermore, the next wave of price reductions may be rather less amenable for Middle Britain, focusing less on manufactured goods and more on services provided by middle-class professionals.

Law, accountancy and design could all be subjected to price-cutting, as in the proposal to let supermarkets offer legal advice.

Ministers have basked in the feelgood factor of lower prices without once bothering to explain that, ultimately, prices and earnings are likely to move up and down together.

How could it be otherwise?

It cannot, of course, other than on that holiday haven of unreality, Fantasy Island.


A fourth New Labour delusion was that the public sector had been "reformed" and that colossal increases in expenditure had been prudently spent in carefully structured, "customer-focused" services committed to "delivery".

It is true that they have spent a fortune during their ten years in power, with public spending having increased from £309.1 billion in 1996-1997 to a forecast £586.6 billion in 2007-2008, a rise of more than 89 per cent.

Mr Blair had no doubt this money had been well spent, telling his farewell party conference: "Over the past ten years Britain has invested more in our public services than any comparable nation in the world."

The key word here is "invest", with its associations of rectitude. In this pipe dream, a near doubling in spending has been matched by a near doubling (at least) in "delivery".

This fantasy seems impervious to events in the real world, in which hospitals slide into debt and announce job cuts, in which illiteracy and innumeracy run rife in State schools and in which management consultants and firms involved in private-finance deals effectively help themselves to billions of pounds of public money.


Work is the focus of the fifth fantasy, the hallucination that despite us living in a tough, competitive world, we can pass huge quantities of employment regulation to make employees' lives ever more agreeable and that it is perfectly safe to expand the workforce, through immigration and other measures, far beyond the economy's likely ability to create jobs.

On Fantasy Island, the labour market catchphrase is: "From next April..." Whenever you hear this, you know that what follows will be some new set of legal entitlements for the nation's employees.

All well and good, but the same Ministers repeatedly warn us that India, China and other emerging competitors mean we have to be ever more flexible and productive.

Of course, it could be that we are looking at the issue through the wrong end of the telescope and that it is not the muddle-headed policy of trying to combine employment rights with a flexible labour force that is supposed to build a strong labour market, but the strong labour market that allows Ministers to pursue the muddle-headed policy.

On the surface, the job scene is brighter than at any time since the mid-Seventies, with unemployment well below one million, down from 1.7 million in March 1997.

But dig a little deeper and things look less cheery.

First, despite steady advances in healthcare, there are now about 2.5 million adults of working age too ill or disabled to hold down a job, four times the figure in 1979. Nor is this the only way of 'parking' people who may otherwise be counted as unemployed.

Numbers entering higher education have shot up, as has the State's own payroll - up by 600,000 people, or 13 per cent, on 1997.

Were this to be straightforward cynicism on the part of Ministers, it would be bad enough. But it seems they have fallen for their own propaganda and having caused one chunk of the workforce to disappear in a puff of smoke, have then conjured another into existence, encouraging migrants, mothers and older people into the labour market.

In their imaginings, they believed the British economy could bear any burden in terms of regulation and numbers of jobseekers and still produce millions of jobs.

Sad to say, this notion is indeed entirely imaginary.


Fantasy six involves conjuring up a military role for Britain without paying for it, of trying to fight wars on a peacetime budget. Mr Blair wanted Britain to play the part of a latter-day Prussia with military resources more suited to a latter-day West Germany.

While our troops have been despatched to Kosovo, Sierra Leone, Afghanistan and Iraq, they have gone into battle on a shoestring. In 2002-2003, total public spending at the Ministry of Defence was £35.4 billion. The planned total for the current year is £39 billion, a ten per cent rise.

Given the two per cent inflation target, the increase ought to have been at least 14 per cent. In stark contrast is the 54.8 per cent rise in spending on education in England over the same period.

Rather than spell out the costs of military grandeur in terms of either higher taxes or cuts in other types of public spending, Mr Blair preferred big-power status on the cheap.

With troops' lives at risk in Iraq and Afghanistan for want of proper equipment, this could be the most tragic of all the fantasies.


Finally, there is the illusion that protecting the environment is entirely consistent with limitless economic growth, with concreting over South-East England and with cheap air tickets. New Labour tried to spin the environment, talking the green language of "tackling climate change" while clearing the decks for a huge expansion of house-building, airport and motorway construction and out-of-town supermarkets.

The environmental agenda, it seems, applies only to the little people - they face the new rubbish tax and are banned from replacing broken windows for 'energy-saving' reasons. Big business and industry are urged to make hay while the sun shines.

New Labour's message is that there can be plenty of environmental gain for very little economic pain, a self-evident fantasy.

Indeed, behind each of the seven fantasies lurks the "Third Way" notion that those "tough choices" of which Mr Blair spoken so often about do not really have to be made - indeed, that they could be postponed indefinitely.

To be fair, millions of people have been quite happy to go along with this.

Furthermore, in the harder times that lie ahead, it will be tempting to look back fondly at the Blair years, a time of seemingly plentiful jobs and credit, of cheap flights to interesting places and new consumer gadgets such as wifi, iPods and flat-panel televisions.

The temptation ought to be resisted; the harder times to come will be a direct consequence of all the ducked decisions and economic daydreaming of the past ten years. Blair is still, just, managing to stay one step ahead of a reality that is rapidly catching up with him and with all of us. Brown effectively became his scapegoat.

All we can say about the nature of the alarm call in prospect today is that it will be a summons to restore two forgotten virtues: thrift and realism. Thrift is not a synonym for penny-pinching or for genteel poverty or for miserly behaviour. It is a synonym for realistic living.

We have nothing to fear from either thrift or realism; it is when they are abandoned that we have to put our trust in conjurors, people who can persuade us, against all the evidence, that it will be all right on the night.

Striding along the beach on one of his summer holidays in Barbados over the years, Mr Blair has prompted headlines such as Blair's Bargain Break On Fantasy Island. The real fantasy island, however, is the country he has led for ten years ... 

Blair and Brown (his partner in crime at the Treasury) have much to answer for ... and in China they would now face the death penalty ... for economic sabotage.

Fantasy Island, by Larry Elliott and Dan Atkinson, published by Constable RRP £7.99.