The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (60 page)

This is another sign of the pressures on British living standards, and the realisation that jobs are being prioritised instead of pay. It is a choice that has already been made in the UK car industry. Despite industrial gloom about manufacturing, British car assembly, manufacturing and exports have boomed recently. Factories that might have closed were kept open, in a series of high-wire negotiations over their future with foreign owners. ‘The unions were absolutely brilliant,’ a coalition government minister told me. Government offered the car industry R&D support and some sparse funding. The unions traded more demanding patterns of shift-working for the preservation of jobs. The argument that they urged on more hard-line worker representatives was that ‘our kids need to have access to employment in the industry’. German unions were much more inflexible and entrenched. The minister said of the conduct of the unions in the period 2010–13, ‘Whatever their rhetoric and reputation, they were pragmatic, and ultimately this is very typical of what has happened in Britain and in industry generally, and even in the public sector. The unions fought hard on pensions, but accepted the need for reform, and showed a remarkable degree of maturity on pay policy.’

Exports from the UK car industry reached a record in figures released in January 2013. But jobs in the industry were not surging. The rearguard action over factories had merely maintained the larger units, not staunched wider haemorrhaging of jobs. In fact, everywhere I film new factories in Britain there is the haunting silence of large manufacturing spaces with not many people. In Chepstow, a company famous for building Brunel’s bridges in the nineteenth century anticipated cuts to public transport budgets in the twenty-first by diversifying into green growth. Mabey Bridge invested £38 million in a facility for manufacturing highly engineered 120-metre-long steel towers for wind turbines. The 25,000-square-metre state-of-the-art factory could produce 100 towers per year. But the number of jobs worked out at a modest 240 skilled posts. The factory was highly automated. And even that number of jobs was cut as the government scaled back its support for wind power.

Robots are winning over people. Manufacturing is changing in other ways too. At the Chinese-owned MG factory in Longbridge in Birmingham, the promise is 300 jobs next-door in research, design and marketing. The sight of the process of assembly is rather sobering. A small part of an old assembly line transports ready-made car kits shipped in 80 per cent complete from a factory in Lingang, near Shanghai. The cars, already painted, glide past the several dozen stops on the line suspended on metal hooks. Each stop used to represent two or three jobs for a very specialised stage on the line. Now they are all empty, apart from the last three. At this last stage, another assembled unit containing the engine and some of the front suspension is ‘stuffed up’ into the body, some wires are connected, wheels are added, and that’s it. It would be harder for some people to assemble an Airfix model aeroplane.

Robots, competition from China, limited wage bargaining power and an underemployed army of young workers: it’s a heady cocktail and one that limits the returns to labour. Credit filled the gap during the boom. In America and in Britain, tax credits also helped bridge the gap between low-paid work and living standards. The state and especially central bankers are trying to cushion the decline now, though rather imperfectly, by boosting asset prices artificially. This cannot last. A fundamental question, therefore, is whether the state will have a larger role rather than a smaller one in the next decade. Tax credits are being pared back amid deficit worries. In the times of plenty, tax credits were focused on pensioners and families, but childless workers missed out. In more austere times the support for pensioners has been maintained, and tax credits for working families reduced. This is the reality of politics of an ageing electorate. It perhaps makes little economic sense. The minimum wage could be an important policy lever to bridge the gap. But large rises in the minimum wage could also imperil some forms of reshoring and reindustrialisation. More local discretion over minimum wage levels is probably worth exploring.

A different form of state action on living standards could be this: an all-encompassing strategy to make things cheaper: housing, education, transport, energy and food. Housing obviously has a rather bizarre status in the inflationary firmament. It is the only basic material need for which a price increase is supposed to be a cause of celebration. Why isn’t this ringing alarm bells? It is difficult to elicit an answer from a politician on the question of whether more balanced house prices are a good thing or a bad thing.

Clearly, a massive programme of house-building makes sense economically and in terms of young people’s living standards. The current attempt to preserve household net worth by propping up house prices is leading to an ossified housing stock, impinging on labour and social mobility and impacting upon productivity. Housing benefit is an extraordinary cost to the state. About £24 billion a year is being spent in real terms, much of it going directly to landlords. Britain will spend a staggering £120 billion on housing benefit in the next half-decade, and that is after cuts. For context, that would pay for the construction, though not the land costs, of 1.2 million actual houses. In fact the £120 billion in real spending on housing benefits contrasts with just £40 billion spending on actual houses. Spending on housing increases jobs and growth and creates family living space. Spending on housing benefit subsidises landlords, creates poverty traps and adds nothing to the housing stock. It’s not difficult to be bewildered that successive governments prefer to fund failure rather than invest in the future.

The large number of second homes and the number of homes bought by non-Britons as investments have resulted in large swathes of the UK housing stock, particularly in the southeast, effectively being removed from the domestic housing market, and often even being unused. They’ve basically been exported. London is becoming like a giant hotel. Tracking the number of second homes, and the number of homes bought by non-Britons as investments, would help inform the government’s ambitions for new house-building. One out, one in, would make some sense.

Apart from that, ‘freedom to build’ is a great German concept, one that is good for the economy, the construction industry, the environment, living standards, living space and avoiding property bubbles. Essentially, in the German constitution, anyone can build on their property as long as there is no law against it. The burden of proof over planning changes fundamentally. Planning law in Britain is an extraordinary constraint on the ambitions of future generations. The same system was copied in Ireland and Australia, to no good effect. Without a fundamental shift in planning, young British workers face a daft dependence on their parents for access to ever smaller properties, in places they don’t want to live. The forces opposed to changes to current UK planning law are extremely powerful. This does not mean that they are right.

Housing dysfunction is compounded by the tax system. Successive governments are too scared to tax wealth and property relative to labour and other forms of consumption. In Britain, for example, the flawed council tax, the UK’s only real tax on property, has been frozen for six years, whereas VAT on sales has been hiked. Demographically, the great fiscal challenge will be paying for an ageing society. Yet wealth everywhere is concentrated in older hands. However unpopular they may be, wealth taxes across Europe are on their way in the coming decades.

Right now, austerity programmes are typified by a grand diminution of expectations for the retirement of a current generation of twenty- and thirty-somethings, set against the absolute protection of the retirement rights of a current generation of retirees. Does that make sense? Is that generationally fair? Should a government prioritise unaffordable retirement payments over investing in future productivity, and in educational opportunities that will actually yield growth and tax revenue.

Lastly, a very dark thought. The chief executive of one of Britain’s most important financial services firms, with access to millions of points of actuarial data, told me that the widespread strategy to deal with the growing retirement costs arising from lengthening life expectancy – i.e. working longer – ‘does not work’. Continuously delaying the retirement age only works for three to four years, not ten years. ‘What has driven the extension of life expectancy? It is fewer coronary accidents. It does not mean they’ll be able to work for decades longer.’ So the spread of cholesterol-controlling statins, blood-pressure-controlling antihypertensive drugs and technologies to unblock arteries, is keeping people alive for longer. But it does not necessarily follow that their health will permit them to work for longer. If he is only half right, Europe’s fiscal fate is grim indeed.

Something similar happens in healthcare. Politicians are promising every expensive healthcare development to everyone, even in state-run heath systems like the NHS. Either taxes go up, expectations of the NHS are managed, politicians rein in their promises, or some health user charges will have to be introduced.

Public-spending restraint in one form or another will be required beyond the end of this decade. In the light of this, and accepting that the British and European economies will be suffering a Japanese-style post-bubble deleveraging hangover at the same time, a change of spending priorities might make sense.

‘Brutal austerity’ in Britain was in fact far better described as patchy austerity. Overall spending went up in cash terms over three years of Mr Osborne’s chancellorship from 2010. This is nothing like the 15 per cent cash cuts in public spending in Greece and 12 per cent cash cuts in Ireland from 2009 to 2012. ‘Doing a Greece’ would have left British spending at more like £569 billion in 2012. ‘Doing an Ireland’ would have left it at £589 billion. In fact, on the like-for-like Eurostat measure, total government cash spending in the UK was 4 per cent up at £747 billion in 2012. Inflation in the UK and deflation in Ireland explains some but not all of the difference in the percentages.

On the government’s own spending measures, total spending went from £669 billion in the last years of Labour to £701 billion in 2012/13 in cash terms, although that was flat in real terms. Tax forecasts were pencilled in to go from £515 billion to £622 billion. In fact only £580 billion was raised. As with his predecessor in 11 Downing Street, Mr Osborne’s borrowing numbers were off-target and remained stubbornly high because of a sluggish tax take and moribund economy, not because of spending. Meanwhile ‘annually managed expenditure’, the other chunk of public spending on benefits, pensions and interest that is less planned, surged 20 per cent from £290 billion to £350 billion. This was brutal austerity applied in patches to spending that was not protected or ‘ring-fenced’ for political reasons. House-building was massacred, as was other infrastructure investment and regional business support funds. Spending on government investment, the best type of spending for fostering future growth, was halved from £49.5 billion to £24 billion. By the end of 2012/13 the coalition’s cuts (i.e. those implemented in 2010/11, 2011/12 and 2012/13) had taken 20p out of every £1 in investment spending, compared to 4p in every £1 of day-to-day spending. If you are going to spend money, is it better to spend it on capital or current? Houses or housing benefit?

Reflecting in 2013 on the decision to cut capital spending, Mr Osborne said it was necessary, despite the weak economy: ‘To be frank I was bequeathed some cuts by Darling, capital cuts principally. I banked those cuts because we had so much else to do. But I don’t agree it was a mistake to cut capital: we also had to raises taxes and cut current spending.’

Despite the flat economy, the chancellor remained rhetorically true to austerity. In an interview at the IMF meeting in Washington DC he went as far as to say to me: ‘When it comes to Britain, I think that argument is now completely won, in other words the argument that we had to deal with our debts. Those who say Britain should ease off on dealing with its debt, I think, are now on the margins of the debate.’ Mr Osborne made this remark at a time when his party had slumped in the polls after the disastrous 2012 Budget following the scrapping of the 50p tax rate. The poor performance of the economy, he said, was all down to the overhang of debt in the private sector, and the drawn-out ‘balance sheet recession’ that followed. So why did he follow the advice of his forecasters that the economy would be enjoying strong growth through this time? Britain was enduring the worst recovery in GDP terms on record. All of its main economic counterparts had regained the ground lost in the recession with ‘V-shaped’ recoveries. Britain’s recovery was not quite a sluggish ‘L-shape’, but had been a sunlounger-shape with a flattening footrest since 2010.

But the chancellor was also far more flexible than he would let on in public. He reacted to disappointing tax revenues by delaying the deadline for reaching his fiscal targets. He would never go as far as championing a borrowing-funded stimulus, but his targets had been designed to be extremely flexible. In fact by 2013 Gordon Brown’s plan to halve the deficit, which was passed into British law, would have been broken by Mr Osborne, had he not quietly rescinded it. It was, however, unclear what the punishment for breaking this law would have entailed. Mr Osborne did not respond to disappointing tax revenues by demanding more cuts, as happened in the Eurozone periphery, perhaps the definition of true fiscal brutality. Osborne even started to talk the language of stimulus and infrastructure spending, despite having inflicted large cuts on infrastructure. In his media interviews he was rarely seen without a hard hat or high-visibility jacket. In mid-2012, at one of his visits to a taxpayer-funded construction site, on this occasion a giant shaft for the Crossrail project near London’s Bond Street, the chancellor boasted about his capital spending record, claiming that while it included large cuts, those cuts were smaller ones than Labour had planned. With his Liberal Democrat deputy Danny Alexander by his side, he said: ‘We are the people who sat around the table eighteen months ago and gave the go-ahead to this [Crossrail] project that we are standing in today. We are actually spending more on capital investment than the Labour Party planned, more on our roads and railways than they spent in the boom years. We have had to take some very difficult decisions, but if you look at the alternative, which was to allow Britain to turn into a basket case in Europe, I think that would have been a disastrous path.’