The Economy of Great Britain
Little more than a century ago, Britain was ‘the workshop of the world’. It had as many merchant ships as the rest of the world put together and it led the world in most manufacturing industries. This did not last long. By 1885 one analysis reported, “We have come to occupy a position In which we are no longer progressing, but even falling bock…. We find other nations able to compete with us to such an extent as we have never before experienced.” Early in the twentieth century Britain was overtaken economically by the United States and Germany. After two world. wars and the rapid loss of its empire, Britain found it increasingly difficult to maintain its position even in Europe.
Britain struggled to find a balance between government intervention in the economy and an almost completely free-market economy such as existed in the United States. Neither system seemed to fit Britain’s needs. The former seemed compromised between two different objectives: planned economic prosperity and the means of ensuring full employment, while the latter promised greater economic prosperity at the cost of poverty and unemployment for the less able in society. Neither Labour nor the Conservatives doubted the need to find a system that suited Britain’s needs, but neither seemed able to break from the consensus based on Keynesian economics .
People seemed complacent about Britain’s decline, reluctant to make the painful adjustments that might be necessary to reverse it. Prosperity Increased during the late 1950s and in the 1960s, diverting attention from Britain’s decline relative to its main competitors. In 1973″ the Conservative Prime Minister Edward Heath warned, “The alternative to expansion is not, as some occasionally seem to suppose, an England of quiet market towns linked only by steam trains puffing slowly and peacefully through green meadows. The alternative is slums, dangerous roads, old factories, cramped schools, stunted lives.” But in the years of world-wide recession, 1974-79, Britain seemed unable to improve its performance.
By the mid 1970s both Labour and Conservative economists were beginning to recognise the need to move away from Keynesian economics, based upon stimulating demand by Injecting money into the economy. But, as described in the Introduction, it was the Conservatives who decided to break with the old economic formula completely. Returning to power in 1979, they were determined to lower taxes as an incentive to individuals and businesses to Increase productivity; to leave the labour force to regulate itself either by pricing itself out of employment or by working within the amount of money employers could afford; and, finally, to limit government spending levels and use money supply (the amount of money in circulation at any one time) as a way of controlling inflation. As Prime Minister Margaret Thatcher argued in the Commons, “If our objective is to have a prosperous and expanding economy, we must recognise that high public spending, as a proportion of GNP gross national product;, very quickly kills growth…. We have to remember that governments have no money at all. Every penny they take is from the productive sector of the economy in order to transfer it to the unproductive part of it.” She had a point: between 1961 and 1975 employment outside Industry increased by over 40 per cent relative to employment in industry.
During the 1980s the Conservatives put their new ideas into practice, income tax was reduced from a basic rate of 33 pet cent to 25 per cent. (For higher income groups the reduction was greater, at the top rate from S3 per cent to 40 per cent.) This did not lead to any loss in revenue, since at the lower rates fewer people tried to avoid tax. At the same time, however, the government doubled Value Added Tax (VAT) on goods and services to 15 per cent.
The most notable success of ‘Thatcherism’ was the privatisation of previously wholly or partly government-owned enterprises. Indeed, other countries, for example Canada, France, Italy, Japan, Malaysia and West Germany, followed the British example. The government believed that privatisation would increase efficiency, reduce government borrowing, increase economic freedom, and encourage wide share ownership. By 1990 20 per cent of the adult population were share owners, a higher proportion than in any other Western industrialised country. There was no question of taking these enterprises back into public ownership, even by a Labour government.
Despite such changes, however, by 1990 Britain’s economic problems seemed as difficult as ever. The government found that reducing public expenditure was far harder than expected and that by 1990 it still consumed about the same proportion of the GNP as it had ten years earlier. Inflation, temporarily controlled, rose to over 10 per cent and was only checked from rising further by high interest rotes which also had the side effect of discouraging economic growth. In spite of reducing the power or the trade unions, wage demands (most notably senior management salaries) rose faster than prices, indicating that a free labour market did not necessarily solve the wages problem. By 1990 the manufacturing Industry had barely recovered from the major shrinkage in the early 1980s. It was more efficient. but in the meantime Britain’s share of world trade In manufactured goods had shrunk from 8 per cent in 1979 to 6.5 per cent ten years later. Britain’s balance of payments was unhealthy too. In 1985 it had enjoyed a small surplus of £3.5 billion, but in 1990 this had changed to a deficit of £20.4 billion.
Many small businesses fail to survive, mainly as a result of poor management, but also because, compared with almost every other European Community member, Britain offers the least encouraging conditions. But such small businesses are important not only because large businesses grow from small ones, hut also because over half the new jobs in Britain are created by firms employing fewer than 100 staff.
It is not as if Britain is without industrial strength. It is one of the world leaders in the production of microprocessors. Without greater investment and government encouragement it is doubtful whether Britain will hold on to its lead in this area. However, it has already led to the creation of ‘hi-tech’ industries in three main areas, west of London along the M4 motorway or ‘Golden Corridor’, the lowlands between Edinburgh and Dundee, nicknamed ‘Silicon Glen’, and the area between London and Cambridge. In the mid 1980s Silicon Glen was producing 70 per cent of British silicon wafers containing the microchips essential for the new information technology- The Cambridge Science Park, symbolised by its Modernist Schlumberger Building, is the flagship of hi-tech Britain. Beginning in 1969, by 1986 the Park contained 322 hi-tech companies. In the words of a consultant, “The Cambridge phenomenon… represents one of the very few spontaneous growth centres in a national economy that has been depressed for all of a decade.”