Britain After a Decade of Labor: No Longer Rocking
Has Labor, as it claimed it would upon taking office in 1997, succeeded in making Britain a more equal society?
February 21, 2008
The United Kingdom has just nationalized Northern Rock bank — its first nationalization since the 1970s.
The move followed the headline-grabbing bank-run on Northern Rock in late 2007, when nervous depositors rushed to the tellers to reclaim their money — the first such bank-run in well over a century.
That run was brought to an end only when the new Chancellor of the Exchequer, Alistair Darling, issued a blanket government guarantee of all deposits. He clearly valued the economic stability of the banking sector above any concerns over moral hazard.
Ironically, while the Labor government has consistently favored the United Kingdom’s bankers, it has perhaps been less beneficial for blue-collar workers. Ford has once again put Jaguar up for sale, and Rover has been dismantled and sold piecemeal to the Chinese.
Turning to the broader impact the Labor government has had on Britain over the past eight years, Labor clearly has not been the disaster for the British economy that some predicted in 1997.
For instance, Britain now has a higher GDP-per-capita than France, Germany and Italy — although surpassing this threesome in economic terms is no longer a sure sign of success.
Britain's sustained economic growth may well have been, at least in part, the result of structural reforms — which tend to yield economic benefits only with a substantial time-lag — undertaken by earlier Conservative governments.
One issue especially stands out: Has Labor, as it claimed it would upon taking office in 1997, succeeded in making Britain a more equal society?
By almost any standard, Britain became a significantly more unequal society during the 1980s — and remained so in the early 1990s. Did Labor reverse the trend towards rising income inequality that started under Margaret Thatcher and continued under John Major?
The answer is a simple "No." Labor has not made Britain a significantly more equal society. Rather, it merely managed to maintain roughly the levels seen in 1997.
Hence, Gordon Brown’s Britain remains at a level of income inequality somewhere between the U.S. and continental European averages. But to give Labor due credit, Britain has not experienced the dramatic rise in income inequality seen in the United States in recent years.
The impact of Britain’s recent fiscal expansion was muted because, unlike in the United States where excessive tax breaks were introduced, huge cash infusions went to the still largely unreformed UK public services. Much waste perhaps, but less inequality.
Surprisingly, an area where Labor undoubtedly has made a far bigger impact is in the devolution of government power. Traditionally, British government power has been a lot more centralized than in other, similarly sized countries.
This centralization of power — combined with Britain's first-past-the-pole election system, which tends to deliver large government majorities — gives British prime ministers the large power they have traditionally wielded.
Contrary to this tradition, Tony Blair oversaw a historically unprecedented decentralization of government power in Britain, primarily with the establishment of both a Welsh and a Scottish parliament, which have substantial powers — even though their taxation clout is quite limited.
It’s an entirely different question, however, whether economic power in Britain — which also has traditionally been highly centralized in England, especially London — has undergone a similar shift.
On the one hand, in 1997, the Bank of England was given the autonomy to decide interest rates by then-Chancellor Gordon Brown. At the same time, looking at regional data, it is clear that economic growth is still largely centered around London — as it was 1997.
Indeed, England increased its share of the total British economy by 0.6% to 85.6% between 1997 and 2003. Similarly, when looking at regional income discrepancies, the gap between England and Scotland, Wales and Northern Ireland has widened between 1997 and 2003.
Even more so, the data shows that it is entirely London and South East England — Kent, Hampshire, Surrey, Sussex, Berkshire, Buckinghamshire and Oxfordshire — that account for England's rapid growth.
These two regions have raised their share of the total economy by almost three percentage points to 33.7%. Meanwhile, Londoners earn more than 50% in excess of the UK average in PPP terms — an increase of more than five percent since 1997.
As of 2004, Welshmen had just half the purchasing power of Londoners. In other words, today’s Britain is just as economically dominated by London as it has always been historically.
It is little surprise, then, that the most rapidly growing sectors of the British economy between 1997 and 2005 have been transport/ telecommunications and business services/finance — both of which have traditionally been focused in and around London.
Meanwhile, as we already saw happened with the car sector, total British manufacturing output, too, has been virtually unchanged since 1997 — and hence declined as a share of the overall economy.
Also, despite many well published new government initiatives since 1997, the government's share of total output in the economy rose only at the pace of the total economy — thus maintaining its share of the economy as a whole.
In other words, Labor has not overseen an expansion of the aggregate size of British government in the economy, even as it may have changed some spending priorities and increased government's payroll and borrowing.
On the employment front, Britain has been one of Europe's few bright spots in recent years and the only big EU country to consistently present good news during the last decade.
British unemployment has stood at 5.5% in the last year, almost a full percentage above the rate in America — but around half the average eurozone unemployment rate. Between the spring of 1997 and mid-2007, almost 3 million new jobs were created in Britain.
In many ways, the British job market — when broken down into sectors — has mirrored that of the United States. British manufacturers lost about 1.29 million jobs over the period — some 30% of the industry total. In other words, Britain’s Labor government has not done better than George W. Bush’s government at protecting blue-collar workers.
Meanwhile, banking, finance and insurance gained 1,535,000 jobs, while transport and communication (223,000), distribution, hotels and restaurants (510,000), other services (377,000) and construction (473,000) all saw employment gains.
Public administration, (largely public) education and health grew by 1,342,000 jobs between 1997 and 2007 — i.e. less than the financial sectors in gross terms, and the public sector as a whole has seen its share of total employment decline slowly since mid-2005.
This shows that British job growth under Labor has not been overwhelmingly driven by the public sector, even though it played a big part.
But the majority of new jobs were private sector jobs — many of them well paying, since the sector with the biggest gains has been financial services.
On the other hand, it is likely that the notoriously cyclical construction sector will shed some of its recent job gains now that the British real estate boom is slowing down.
In summary, the economic verdict on Labor must be one of highly competent stewardship, rather than large-scale reorientation, of the British economy — not least when compared to government economic policies in the rest of Europe and the United States.
On the other hand, there is little doubt that Labor has not succeeded in its goal of creating a more egalitarian British society. It has instead maintained the broad status quo inherited from the Conservatives.
Nor has Labor succeeded in pushing its political devolution into the sphere of economics, as Britain's economy remains dominated by England — and London's financial services industry in particular.
However, most other countries would probably dearly like to have such a dynamic growth and wealth-generating industry within their borders and taxation jurisdiction.
Likewise, being able to state one's government has not made the economy any worse in the last eight years is an accomplishment that voters in most other European countries and the United States would look at with envy.
Has Labor — as it claimed it would when Tony Blair took office in 1997 — succeeded in making Britain a more equal society?
Labor has not made Britain a significantly more equal society — it merely managed to maintain roughly the levels seen in 1997.
Britain now has a higher GDP-per-capita than France, Germany and Italy — although surpassing this threesome in economic terms is no longer a sure sign of success.
The economic verdict on Labor must be one of highly competent stewardship, rather than large-scale reorientation, of the British economy.
Britain remains at a level of income inequality somewhere between the U.S. and continental European averages.
Research Associate at the Institute for International Economics Jacob Funk Kirkegaard has been a Research Associate at the Institute for International Economics since 2002. His current research focuses on European economies and reforms, offshoring and outsourcing, and the impact of information technology and service sector globalization. Before joining the Institute, Mr. Kirkegaard worked with Denmark’s […]