How a Great Power Falls Apart
Decline Is Invisible From the Inside
This May’s general election wins for British Prime Minister David Cameron and his Conservative Party confounded opinion pollsters and surely surprised Cameron himself. Despite presiding over five years of budgetary austerity and welfare cuts, a drop in wages by over eight percent from their 2007 peak, zero growth in national productivity (which reflects the growth of part-time low-skill employment since the crisis), and missed budgetary targets, the electorate punished not Conservatives but rather their junior coalition partner, the Liberal Democrats, who lost all but eight of their 57 seats in the House of Commons. The Labour Party’s failure to improve significantly on its weak 2010 performance, paired with the quirks of the United Kingdom’s first-past-the-post electoral system, did the rest of the work needed to secure a Conservative victory.
Commentators on the right have been quick to interpret this result as a triumph for austerity politics and fiscal rigor over supposedly anticapitalist (or at least pro-Keynesian) policies advocated by former Labour Party leader Ed Miliband, who resigned following the results. The Conservatives’ political message throughout the election revolved around the “tough decisions” it had made to cut government programs in order to reduce the budget deficit left behind by the previous Labour administration. Meanwhile, on the center-left, Labour’s failure is seen as proof that it should never have abandoned Tony Blair’s “third way” strategy of socially progressive neoliberalism, which had successfully attracted aspirational middle-class voters.
A closer look at this election’s results suggests that both of these interpretations are off the mark. Although Labour gained only 700,000 votes since 2010, the true cause of the Conservatives’ success is the spectacular collapse of the Liberal Democrats. By associating with the Conservatives’ austerity policies, the Liberal Democrats forfeited some 4.5 million votes—two-thirds of its vote share. The Conservatives’ real vote share—although the party claimed that it provided Cameron with a mandate to govern—only increased by half a percent. Cameron’s party may have another five years in power, but the real winners of this year’s election were fringe parties such as the UK Independence Party, which advocates a freeze on immigration and an exit from the European Union, and the Scottish National Party, which wants Scottish independence and an end to austerity. Both of these parties took millions of votes that Labour was hoping to claim, clearing a path for Cameron’s victory despite most of the British public actively rejecting his party’s policies.
LIFE BY A THOUSAND CUTS
However, as the crisis hit in 2007, the United Kingdom had the lowest debt to GDP ratio in the G7, lower than when Labour had taken power a decade earlier.Despite Conservative spending cuts, the United Kingdom’s deficit was reduced by only half of what the party anticipated when it took office in 2010. The nation’s economy did not start to grow until late 2013, after a panicked treasury minister, George Osborne, relaxed austerity measures. The United Kingdom’s economic problems, the Conservatives maintained, were the result of Labour’s supposed profligacy in running budget deficits during the boom years of the early 2000s, leaving the economy exposed to the financial crisis. This, they argued, made draconian spending cuts inevitable.
However, as the crisis hit in 2007, the United Kingdom had the lowest debt to GDP ratio in the G7, lower than when Labour had taken power a decade earlier. And if Labour was supposedly running excessive deficits, the markets remained strangely unconcerned, with market rates on British bonds running close to pre-collapse lows. This left many wondering why the British budget exploded in 2008 and what it might say about coalition rule in the United Kingdom.
These questions, however, were strangely missing from discussion during the election. Cameron did not discuss why the United Kingdom’s outsized and overleveraged financial sector made the nation suffer disproportionately from the worst financial crisis since the 1930s. Financial deregulation and the unsustainable growth in private, not public, credit fatally exposed the United Kingdom’s banks to the United States’ subprime credit crisis. The collapse in credit growth in 2007–09 hurt the United Kingdom’s budget not because the Labour government was too deep in debt but because the national economy was more dependent on financial activity than elsewhere. By 2007, the British Exchequer was taking nearly 25 percent of total tax revenue out of the financial sector just prior to the crisis, which was a mere ten percent of the economy. With the financial crisis, these revenues plummeted, leaving the government short of cash and needing to borrow heavily.
As households and firms clamored to reduce their debt levels in the wake of the crisis, the automatic stabilizers of government deficits allowed the economy to return to growth relatively quickly by 2009–10. Government budgets—public debt—took the strain of bailing out British-based banks such as the Royal Bank of Scotland and Lloyds—sources of private debt—that would otherwise have collapsed, destroying the assets of the people who opposed bailouts in the process.
The Conservative–Liberal Democratic coalition diagnosed the nation’s woes as symptoms of Labour spending excessively on welfare and wealth redistribution. The government then set about reducing the deficit by slashing social programs and public employment. Austerity policies very quickly pushed the economy back to a near recession, averted only by slowing the pace of deficit reduction and encouraging private sector credit growth through government guarantees on home loans.
The economic crisis that hastened New Labour’s demise had nothing to do with overspending and everything to do with its uncritical acceptance of twenty-first-century financial innovation and its excesses.
The coalition’s spending cuts were never reinstated once the economy began to recover, and its austerity policies were politically selective. Health care and pensions were spared the ax—programs that disproportionately benefit older citizens who tend to vote Conservative. The government focused its cuts instead on the younger end of the working population. Spending on these groups was already lower than on the elderly, which required cuts to be deeper in order to provide substantial savings. Cash benefits and local government employment, for example, took 50 percent of the budgetary hit while almost $14 billion, around a quarter of the total government spending reduction, targeted disabled people. As a result, the poorer half of the British electorate lost heavily from changes to taxation and benefits implemented by the coalition, while the top half mostly benefited from them.
The bank rescues of 2008–09 made the government responsible for paying for the recession it created. The Labour economic system forced private debt to be the responsibility of government budget setters. The coalition government, in turn, passed its financial woes on to impoverished citizens dependent on government spending. This reality was hidden from view during the election. Instead, Miliband was pressed in TV debates to admit that Labour had overspent, and his denial provoked widespread derision.
The economic crisis that hastened New Labour’s demise had nothing to do with overspending and everything to do with its uncritical acceptance of twenty-first-century financial innovation and its excesses. Before analysts conclude that Labour has no choice but to shift to the right, we need to remember the lessons of the global financial crisis: a balanced budget will not save a government from the failures of a banking sector that is too big to bail out, and mere economic facts seldom defeat ideologies.
Why the Greek Crisis Will Not Ruin Europe’s Monetary Union