The Economy of Great Britain
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."